Standard & Poor's (S&P) has downgraded Mozambique's sovereign credit rating from CCC+ to CCC, worsening the perceived risk surrounding the country's ability to meet its financial obligations. The decision has also intensified concerns over a potential restructuring of the Eurobond that emerged from the EMATUM debt restructuring in 2019, currently valued at US$900 million and maturing in 2031.
The revision comes against a backdrop of severe pressure on public finances, a scarcity of foreign exchange, and constrained access to financing. As reported previously by Diário Económico, S&P considers that the probability of Mozambique proceeding with a restructuring of its Eurobond has increased, given liquidity difficulties and the approaching start of principal repayments, scheduled for March 2028.
The agency lowered the long-term foreign-currency sovereign rating from CCC+ to CCC, maintaining a negative outlook. The long-term local-currency rating remained at SD, or selective default, due to delays in debt servicing and debt-exchange operations that S&P regards as equivalent to default events.
Against this backdrop, Diário Económico spoke with economists Moisés Nhanombe, a former researcher at the Konrad Adenauer Research Department of the Catholic University of Mozambique, and Firmino Chirrime, an economist, consultant, and commentator, to assess what the downgrade to CCC means and what effects it could have on state financing, investment, businesses, employment, and households.
For Moisés Nhanombe, the downgrade represents "a signal of worsening financial vulnerability for Mozambique", reflecting the state's difficulties in generating sufficient liquidity to meet its obligations in the short and medium term.
The economist argues that the situation should not be assessed solely on the basis of the volume of debt, but also on the state's repayment capacity and the availability of financial resources. He nonetheless stresses that the current fragility does not eliminate the country's economic potential, particularly in connection with natural gas projects.
"The great challenge is to bridge today's financial needs and the revenues that these resources could generate tomorrow," Nhanombe said.
Tighter Financing Threatens Investment and Employment
The rating downgrade comes at a moment when Mozambique faces restrictions on access to international markets, a shortage of foreign exchange, and high domestic financing costs. For businesses, the deterioration in sovereign risk could translate into more expensive credit, reduced financing availability, and the deferral of investment decisions.
Nhanombe warns that these difficulties could feed a cycle of lower investment and weaker economic growth, making debt stabilisation more difficult.
"For businesses, the rating downgrade means above all a worsening of a constraint Mozambique already faces: access to financing," he explained, adding that a lack of capital could limit business expansion and workforce hiring.
The economist also draws attention to pressure on the labour market. More than 500,000 young people enter the Mozambican labour market each year, while job creation remains insufficient. In this context, he argues that the challenge goes beyond recovering the credit rating and extends to creating the conditions to convert financing into productive investment and employment.
Firmino Chirrime equally considers that the deterioration of sovereign risk could affect the private sector through higher costs of capital and a reduction in the number of investors willing to finance the economy.
The economist also flags the risk of the state absorbing a growing share of liquidity from the domestic banking system to finance its needs, reducing resources available to businesses. This phenomenon, known as crowding out, could hinder access to credit and constrain investment decisions.
Households May Feel the Effects Through Prices and Public Services
Although the rating downgrade does not have a direct impact on consumers, its consequences could reach households through prices, employment, and the state's capacity to finance essential services.
"The ordinary citizen does not feel the rating directly. They feel its effects through the economy," Nhanombe observed, noting that financing difficulties and a shortage of foreign exchange could put upward pressure on prices of imported goods and reduce investment.
Chirrime explains that a lack of foreign currency could hamper the importation of fuel, food, medicines, and intermediate goods. Should the metical depreciate, higher import costs could feed through to domestic prices and erode households' purchasing power.
Pressure on public finances constitutes another risk. When a larger share of government revenues is directed towards debt servicing, the margin available to fund sectors such as health, education, infrastructure, and social protection diminishes.
For Chirrime, fiscal adjustment must therefore be managed in a way that prevents financial stabilisation from compromising essential services and investments with the greatest economic and social returns.
Eurobond Increases Financial Pressure From 2028
The growing probability of a Eurobond restructuring is one of the principal factors that led S&P to lower the foreign-currency rating. The bond, which resulted from the 2019 restructuring of debt associated with EMATUM, carries a face value of US$900 million, an annual coupon of 9%, and matures in September 2031.
The Eurobond entails annual interest payments of US$81 million and will begin amortising in March 2028, with payments of US$225 million per year between 2028 and 2031.
This repayment schedule places additional pressure on public finances because it precedes the expected onset of material benefits from the large natural gas projects. S&P itself estimates that the material effects of these projects on public and external accounts are unlikely to materialise until after 2030.
A potential restructuring could allow the state to reorganise repayment timelines and ease immediate liquidity pressure. Depending on the terms agreed, however, it could entail losses or less favourable conditions for creditors and damage investor confidence, constraining future access to financing.
Nhanombe argues that any such operation must be accompanied by reforms that restore debt sustainability, rather than simply deferring the difficulties.
Economists Call for Reforms and Social Protection
To restore market confidence, Moisés Nhanombe considers it necessary to improve debt management, regularise payments in arrears, strengthen the transparency of public accounts, and reduce dependence on expensive domestic financing.
The economist also argues that future revenues from natural resources should be channelled into sectors capable of increasing the country's productive capacity, such as energy, infrastructure, agriculture, industry, and human capital.
Firmino Chirrime points to the need for a coordinated programme of fiscal consolidation, active debt management, reinforcement of external liquidity, and development of the domestic financial market. For the specialist, the recovery of credibility will also depend on institutional quality, transparency, and the predictability of economic policies.
Both economists warn of the need to reconcile fiscal stabilisation with the protection of the most vulnerable segments of the population. The priority, according to Nhanombe, should not simply be to recover the rating, but to create conditions for financing to translate into investment, economic diversification, and employment.
The challenge, therefore, lies in managing financial obligations over the coming years without compromising investment and public services, as Mozambique seeks to transform the potential of its natural resources into a sustainable source of economic growth.
Source: Diário Económico
Original article: https://www.diarioeconomico.co.mz/?p=548768
