Fitch Ratings, the international credit rating agency, has downgraded Mozambique’s long-term foreign-currency issuer default rating from ‘CCC’ to ‘CC’—levels that indicate a very high risk of default, with ‘CC’ being even closer to an actual failure to meet financial obligations.
The agency explained that it typically does not assign outlooks to countries rated ‘CCC+’ or below, and confirmed that the full list of rating actions is included in its report, in line with standard credit rating agency disclosure rules.
According to Fitch, the downgrade reflects the assessment that a restructuring of Mozambique’s only outstanding eurobond (an international debt security issued in external markets) has become likely over the rating horizon, given deteriorating financial conditions and the country’s current public debt trajectory.
Mozambican authorities communicated earlier this month their intention to engage creditors in discussions on debt operations that could amount to distressed debt exchanges (restructuring involving losses for investors), particularly if they involve substantial changes in terms such as maturity extensions or reduced returns for bondholders.
Debt pressures and default risk
Even without this signal, Fitch considers there to be a high risk of a credit event, either through a restructuring linked to an International Monetary Fund (IMF) programme aimed at restoring debt sustainability, or outright default if such a programme does not materialise or is not implemented successfully.
Mozambique’s rating continues to reflect severe financing difficulties, with persistent fiscal deficits well above peer averages, high public debt levels, and the accumulation of arrears on debt servicing—factors that are weighing heavily on the state’s financial credibility.
These pressures are partly offset by the transformative long-term prospects of liquefied natural gas (LNG) development from 2028 onwards, reduced political instability in recent periods, and strong foreign direct investment inflows that continue to enter the country.
Fitch also justified breaking from its normal review schedule (originally set for 24 July 2026), citing a material change in the sovereign’s credit quality and deeming it inappropriate to wait given the recent evolution of risks.
Key risk factors identified
Fitch highlights that debt restructuring is now likely, given the IMF’s assessment that public debt is unsustainable under the current trajectory, even before recent external shocks, reinforcing the need for significant adjustments.
The agency also warns of increased default risk in the absence of an IMF programme, noting that without securing or meeting IMF conditions, lack of multilateral support and restricted market access could further worsen Mozambique’s financial position.
Financing difficulties have intensified, with debt service arrears reaching around 1.3% of GDP at the end of 2025, including short-term domestic obligations—reflecting growing liquidity pressures across the public sector and weaknesses in treasury management.
Fiscal deficits remain high, estimated at 4.6% of GDP in 2025, above the 3.4% median for similarly rated countries. Revenue collection has underperformed expectations due to post-election disruptions beginning in 2024 and rigid public spending structures.
High debt, external pressures, and structural factors
Fitch projects that public debt will remain above 90% of GDP in 2026–2027, significantly above peer medians, driven by persistent deficits and moderate economic growth, alongside a rising share of domestic debt.
Domestic debt is expected to reach nearly 40% of total debt by the end of 2026, up from 24% in 2023, due to reduced external financing. This shift implies higher borrowing costs and shorter maturities, increasing liquidity and sustainability risks.
External pressures also remain strong, with the current account deficit estimated at 17% of GDP in 2025, expected to widen in 2026 as LNG-related imports grow, while international reserves may decline significantly.
Despite these challenges, Fitch acknowledged reduced political tensions in 2025, a gradual economic recovery following a 0.5% contraction, and growth acceleration prospects from 2027 onwards—though risks linked to project execution and security remain.
Source: Reuters
