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Impact of the Pandemic on Credit Quality of Banks in Mozambique

Impact of the Pandemic on Credit Quality of Banks in Mozambique

According to World Bank data, Mozambique registered an average economic growth above 7% between 2001 and 2015. This trend slowed from 2016 to 2021 with growth rates ranging between -1.2% and 3.8%, with the lowest recorded in 2020.

The main causes of this economic slowdown were the political and military instability in the central region of the country, the suspension of external support and, finally, the containment measures adopted by several governments/countries in order to contain the outbreak of covid-19 and prevent the collapse of health systems.

The restrictive measures had direct impacts on distribution and production chains, the restriction of travel and the cancellation of several events, with direct impact on restaurants and tourism.

The covid-19 pandemic and credit quality

The performance of the main sectors of economic activity is a relevant indicator to assess the ability of borrowers to settle their obligations with their lenders, which, in turn, directly impacts the quality of credit granted by Banks.

Since its declaration as a pandemic on 11 March 2020, covid-19 has put to the test the performance of the main sectors of the economy, from manufacturing to services. The most affected in 2020, according to the National Institute of Statistics, were the Hospitality and Tourism and Extractive Industry sectors whose retractions were 22% and 15% respectively.

However, in 2021, despite a reversal of this trend in a significant part of the activity sectors, the Hospitality and Tourism and Extractive Industry sectors remained in negative positions of 1% and 0.6%, respectively.

What was the impact of the covid-19 pandemic on the financial sector, namely on banks’ impairments?

Companies, in general, when preparing their financial statements, should estimate the recoverable amounts of their assets and if these are lower than the amounts recorded in the accounts, the differentials should be recognised as an impairment loss, impacting their respective asset positions.

“The Covid-19 pandemic brought uncertainties about the reliability of some indicators that were used for the determination of impairment losses…”

International Financial Reporting Standard 9 (IFRS9) brought a new approach to recognising these “impairment losses”. This approach, contrary to International Accounting Standard 39 (IAS39), in which impairment losses were recognised when incurred, establishes that they must be recognised in a future perspective, using weightings that incorporate the respective risks of occurrence of a default.

The covid-19 pandemic brought uncertainties as to the reliability of some indicators that were used to determine impairment losses, obliging many institutions to calibrate their impairment calculation models to incorporate additional risk factors brought about by the pandemic. To minimize its impact, namely on the deterioration of the quality of the credit granted, the banking institutions granted moratoriums that consisted in the extension of the payment period, grace periods in the payment of the financed capital, as well as interest rate reductions. For example, in March 2020 the Bank of Mozambique made a US$500 million line of credit available to commercial banks to finance the acquisition of primary goods to reduce the social impacts caused by the pandemic.

At the same time, the Mozambican government launched a line of credit to combat the pandemic to the tune of one billion meticais to support micro, small and medium-sized companies affected, or those that, even if they are not affected, could contribute to increased production and job creation.

The graph below summarises, in aggregate form, information from the five largest banks in the country (Millennium bim, Banco Comercial e de Investimentos, Standard Bank, Moza Banco and Absa Bank), whose volume of assets represents a market share that exceeds 80% in 2021.

As can be seen, in the three year period under review, the volume of loans to customers increased by approximately 17 billion meticais (+8.6%), whilst the level of impairment losses recognised remained stable, showing slight growth of approximately 400 million meticais (+2%).

With this evolution of loans granted and impairments recorded, the coverage ratio “improves” slightly, from 9% in 2019 to 8.5% in 2021.

See Also

In terms of the European market, “loans and advances to customers” and “impairment losses”, over the three years from 2019 to 2021, behaved differently from the Mozambican reality.

As can be confirmed in the table below, despite 15% growth in “loans and advances to customers”, “impairment losses” increased significantly more (around +93%), showing a clear deterioration in credit and prudence in recovery expectations.

Comparing the two markets, it is noted that the indicators under analysis did not suffer a significant degradation in Mozambique. The resilience of the Mozambican financial sector is visible, mainly due to the distance from the most impacted areas (and consequent lower risk of contagion and exposure), less restrictive containment measures, low exposure to the logistics and tourism sectors and, finally, the initiatives of the regulator and the banks aimed at finding points of balance between the financial situation of borrowers and the repayment of credit instalments. In this context, it can be concluded that the pandemic did not have very expressive impacts on the credit quality of banks in Mozambique.

Future Expectations

Despite the improvement in the health situation, caused by the covid-19 pandemic, and the prospects for Mozambique’s economic growth in the coming years, driven by the start of gas extraction in the Rovuma Basin, some recent events have arisen, namely the military conflict opposing Russia to Ukraine and the military instability in the Cabo Delgado region in northern Mozambique, which bring some uncertainty to the future performance of the Mozambican economy. Given this particular context, there must be continuous monitoring, especially of the potential effects that these events may have on the production chain, distribution channels, commodity price variation (e.g. cereals) and on the reduction of trade transactions with the countries involved in the conflict, particularly impacting the ability of borrowers to honour their commitments and, consequently, the quality of credit.

1 Obtained through the quotient between “loans granted to customers” and “impairment losses

2 Obtained through the quotient between “non-performing loans” and “loans granted to customers.

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