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Fitch Confirms Mozambique’s IDR at ‘CCC+’. What Does it Mean?

Fitch Confirms Mozambique’s IDR at ‘CCC+’. What Does it Mean?

Fitch Ratings has affirmed Mozambique’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC+’, three levels above default, but still below investment recommendation, considering that “substantial credit risks” continue to exist. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

The analysts write in the note that Mozambique’s rating “reflects high levels of public debt, weak public finance management, low GDP per capita, weak external finances, poor governance indicators and a challenging security situation”.

In its announcement of the decision, Fitch Ratings writes, on the other hand, that “the robust medium-term growth prospects, supported by the development of the liquefied natural gas sector, the 456 million dollar (423 million euro) agreement with the International Monetary Fund (IMF) in 2022 and the concessional nature of the external public debt, with low debt service costs, provide some support for the creditworthiness”.

Fitch does not assign an outlook for the evolution of the economy, known as an outlook, to countries that have a CCC rating, the third above Financial Default, or default.

In its analysis, Fitch says it expects economic growth to be “strong relative to peers” with the same rating, anticipating an average of 4.5 per cent this year and next, compared to an expansion of 5.9 per cent last year.

“The strong growth in 2023 was driven by the expansion of production at Eni’s Coral Sul floating platform, which began production at the end of 2022 and reached 90 per cent of capacity in the third quarter of last year,” explains Fitch, adding that the return of TotalEnergies to Cabo Delgado will have a positive effect on the growth of the Mozambican economy this year.

What are ratings and what are they used for?

Ratings are an assessment of credit risk assigned by financial rating agencies – known as rating agencies – and they assess the risk of countries and companies, influencing world economies in a decisive way.

As they are decisive in investor decision-making, it is important to know what they are, what they are for and what their impact is.

When assessing the credit risk of a country, a company or a financial product, a rating is assigned to assess the ability of an organisation issuing debt to pay back the amount it has borrowed, plus interest.

In practice, what is being done is to inform investors of the risk of their investment and, above all, the likelihood of them getting their money back.

As this is an assessment, the worse the rating, the greater the risk associated with the investment and, for this reason, the greater the remuneration investors will want to receive in return. In practical terms, the lower the rating, the higher the interest rate and the costs a country or company will have to pay to finance itself.

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In this sense, the rating has a direct relationship with the interest rates at which a country or a company is able to obtain financing, so its impact, in terms of public debt and the financing of a country’s or company’s economy, is very great.

Rating agencies

These credit risk assessments are given by rating agencies. The main ones are the American Fitch, Moody’s, Standard & Poor’s and the Canadian DBRS.

Public finances, social and political stability, financial indicators, management capacity and internal organisation are some of the parameters analysed by the agencies in the process of assigning their ratings.

Although each rating agency has its own scale, all ratings are given in the form of letters which may or may not be accompanied by signs (+ and -), and an outlook is also given. Although there is a timetable, this is merely indicative, since the agencies can choose not to make a statement on the dates set or even go ahead with an unscheduled assessment.

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