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Bank of Mozambique Says Sovereign Risk Remains “Severe” in 2023

Bank of Mozambique Says Sovereign Risk Remains “Severe” in 2023

The Bank of Mozambique (BoM), through its latest report on ‘Financial Stability 2023’, revealed that the country’s sovereign risk remained at the ‘severe level’ last year, due to the high dynamics of public debt over Gross Domestic Product (GDP).

‘The maintenance of sovereign risk at the severe level reflects the dynamics of the ratio of government credit to total credit and the ratio of public debt to GDP, both of which remain high,’ explained the financial institution, quoted by Lusa.

According to the central bank, the domestic public debt issued by Mozambique totalled 364.2 billion meticals (5.6 billion dollars), after growing by around 51.9 billion meticals (805.1 million dollars) in five months.

‘The domestic public debt contracted between December 2023 and May 2024, excluding that resulting from loan contracts, leases and overdue liabilities, increased by 51.9 billion meticals,’ he said.

Recently the BoM said that, overall, the debt issued domestically represented the equivalent of 23.7% of the national Gross Domestic Product (GDP) by 28 May, consisting mainly of Treasury Bills, with a stock of 99.8 billion meticals, and Treasury Bonds, which totalled 169 billion meticals, as well as 95.3 billion meticals in advances at the Bank of Mozambique.

The institution explained that Mozambique’s international reserves remain ‘at comfortable levels’, with an accumulated balance of 3.7 billion dollars, enough to cover around five months of imports of goods and services, excluding major projects.

In April, the Ministry of Economy and Finance (MEF), in a report, warned that the continued pace of growth in domestic debt could threaten the reversal process and make it unsustainable ‘in this generation’.

‘If domestic debt continues to grow at the current rate over the next five years, the breakdown of the “stock” could balance out by 2029 at 50 per cent domestic/50 per cent external, with a portfolio dominated by purely commercial instruments, a scenario that would jeopardise the chances of reversing the unsustainable debt situation in this generation,’ said the institution.

At the time, the MEF explained that as interest rates on Treasury Bills (BT, short maturities) and Treasury Operations (OT, longer maturities) have risen, the cost of domestic financing has been driving a continuous upward adjustment of the weighted average interest rate on the government’s loan portfolio.

What is sovereign risk?

Sovereign risk is the grade given to a debt-issuing country by institutions specialised in credit analysis, known as rating agencies. These agencies assess a country’s ability and willingness to honour its debt payments on time and in full.

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