We retain Mozambique in our Top 5, with a Buy on the MOZAM 5% 2031 at a yield of 15.9% (price US$66.6) as of cob 18 July on Bloomberg (mid price basis).
Although we still like Mozambique, having it as one of our Top Picks for 2022, we recognise the bonds have fallen by c20pts this year, although most of this decline has occurred since June. Until then, Mozambique had been one of the best performers in the Bloomberg index – justifying our pick. It has now suffered a total return of -19.2% ytd, roughly in line with the index.
We reiterated our positive view on Mozambique following the IMF/World Bank Spring Meetings in April. This came after the IMF announced staff-level agreement on a new programme in March – a US$456mn (150% of quota) three-year extended credit facility (ECF) was subsequently approved on 9 May – and our discussions at the Spring Meetings served to underline our positive view on the authorities’ strong ownership of the intended programme and its reform commitment.
Our positive view on the bonds is based on the expected onset of LNG production (first gas is due in H2 from the ENI FLNG project) and strong ability to pay, given low debt service on the bonds (and little supply risk in the near term), together with the government's prudent approach to macro-management. Interest on the bonds is only US$45mn per annum until 2023 (although it then increases to US$81mn when the coupon steps up from 5% to 9% in 2024), so Mozambique shouldn’t be defaulting on this in the near term, and risk further jeopardising its LNG projects, while reserves (gross basis) were US$3.5bn at end-2021. The lower public debt burden is also a positive (projected by the IMF at 101% of GDP this year, although we still await the publication of the staff report for more detail). The IMF programme, which improves the outlook for donor funding (and should ensure Mozambique is fully funded over the programme period), is the icing on the cake.
Nonetheless, there are risks, primarily the fragile security situation (mainly in the north), possible social pressures (including arising from higher food and fuel prices), risks from higher inflation (10.8% yoy in June) and currency devaluation (with concomitant risks to the debt burden given some four-fifths is external), the timing of LNG production, governance and capacity, and climate vulnerabilities.