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S&P: Mozambique Faces Fiscal Pressure Until 2029 Despite LNG Revenues

S&P: Mozambique Faces Fiscal Pressure Until 2029 Despite LNG Revenues

Standard & Poor’s, the index provider and data source for independent credit ratings, has stated that revenues from liquefied natural gas (LNG) will not offset the government’s liquidity pressures until 2029.

According to the report published on the African Business portal, Mozambique should benefit significantly from large LNG projects from 2030 onwards. However, the development of this industry will not ease fiscal pressures in the short and medium term, as reported by S&P.

“Mozambique could become a major global LNG producer. However, project delays mean that production may not materially increase until late 2028 or early 2029. The government’s windfall revenues are not expected to materialise until 2030, creating fiscal policy challenges for the country. We do not believe that gas revenues will offset the government’s liquidity pressures in the short and medium term (before 2029),’ the report’s authors emphasise. Eni, TotalEnergies and Exxon Mobil’s LNG projects in Mozambique could position the country as one of the world’s leading LNG producers, according to the report.

“The long-term fiscal and economic outlook is positive. The government estimates that LNG exports could reach 5.7 billion meticals (90 billion dollars) over the life of the projects, and that the country could receive 63.5 billion meticals (1 billion dollars) a year in revenues from around 2035,’ noted the S&P report.

Meanwhile, Mozambique faces immediate fiscal challenges. The report emphasises that ‘the risks of delays in sovereign bond payments will remain high until production increases substantially’. The country is struggling with high risks of refinancing commercial debt in local currency (LC) and foreign currency (FC), significant budget deficits and delays in sovereign bond payments. ‘Public management remains weak,’ the report emphasises. ‘This has resulted in multiple commercial debt defaults and restructurings, including in 2016, 2017 and 2019 on foreign currency debt, delays in local currency debt payments in 2023 (which we considered selective defaults) and delays in the payment of some bilateral and multilateral creditors in the last 18 months.’

‘Government spending continues to outpace revenues, resulting in significantly higher budget deficits and the reaccumulation of arrears to contractors and suppliers,’ says S&P. Budget deficits and arrears to contractors and suppliers are estimated at 3 per cent of GDP in 2023. In addition, the government is still trying to resolve the ‘hidden debt’ scandal of 2016-17, having agreed to an out-of-court settlement of 33.1 billion meticals (522 million dollars) relating to the debt of state-owned ProIndicus with Credit Suisse.

Mozambique also faces some of the weakest external metrics among the sovereign countries assessed by S&P. ‘High external indebtedness, overstretched usable reserves (which cover only two months of foreign currency payments), high external financing needs and the strong appreciation of the real effective exchange rate compared to the nominal exchange rate pose risks of a sharp correction,’ S&P pointed out. ‘The risk of additional payment delays, or a distressed restructuring, remains high due to persistent liquidity pressures.’

“Fiscal reform to reduce fiscal vulnerabilities is underway, guided by an IMF programme. However, liquidity challenges have increased sharply over the past year,’ the report added.

In the long term, however, a new sovereign wealth fund could help capitalise on the benefits of the LNG industry. To effectively manage the expected gas revenues, Mozambique passed a sovereign wealth fund law in December 2023. For the first 15 years, 60 per cent of gas revenues will be allocated to the budget, while 40 per cent will go to the sovereign wealth fund for savings. After that, the split will be 50 per cent. ‘This fiscal rule is encouraging for the long-term management of gas revenues,’ concludes S&P.


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