The IMF announced it had reached staff-level agreement on a new three year Extended Credit Facility (ECF) for Mozambique yesterday. The programme is for an amount of US$470mn (150% of quota). The agreement is subject to Board approval which is expected in the coming weeks. There was no indication of any pending prior actions.
The authorities' interest in an IMF programme is not a surprise. The agreement comes after the IMF confirmed in its end-of-mission statement in December that discussions on a Fund-supported programme were set to begin soon. Discussions subsequently began earlier this year.
But the programme request does mark a U-turn compared to a year ago, when it seemed the authorities had dropped their interest in a programme after a formal request was made in early 2020, before the pandemic really struck. Interest in a Fund programme continued throughout 2020, only to fade away, as the near-term financing situation improved and the sense of urgency waned.
There are reasons why the authorities may have changed their minds. The IMF's short statement noted that the Mozambique economy had been hit by a series of severe shocks in recent years that risk intensifying vulnerabilities and worsening socioeconomic conditions. These include the Covid pandemic, climate-change related cyclones and the terrorist attacks in the north of the country, which have delayed the development of liquefied natural gas (LNG) projects and displaced more than 800,000 people. The IMF noted that the government has managed to stabilise the security situation with assistance from bilateral and regional partners.
In particular, it seems that the situation had deteriorated markedly by the end of last year. The IMF noted in its December statement acute fiscal pressures, in the face of additional spending demands, along with tight financing constraints given the decline in concessional financing and high debt (public debt was projected at 134% of GDP in 2021 in the IMF's October WEO – although it is assessed by the Fund to be sustainable over the longer term on the back of the expected gas revenues).
This had forced greater reliance on domestic financing from banks, although this was reaching its limits and domestic arrears were emerging. Despite intended spending cuts in the 2022 Budget, and use of the SDR allocation, the statement noted "additional financing would still be required" – hence the call to the IMF. We expect IMF financing will also help catalyse additional donor support (IMF involvement will provide comfort to those donors that are still scarred by Mozambique's hidden debt crisis).
In addition, as elsewhere, inflation may also present a threat to macro-stability. While inflation in Mozambique has so far been fairly well contained, compared to other countries in SSA, recorded at 6.8% yoy in February, global pressures are intensifying.
The IMF programme, in tandem with the government's own medium-term economic programme, focuses on growth, fiscal sustainability, and reforms in public financial management and governance, as well as the management of public resources (including the establishment of a sovereign wealth fund). The IMF statement yesterday noted that the programme balances providing financing with moderate adjustment that will rebuild policy space and reduce debt and financing vulnerabilities. Agreed measures include reforms to tax administration and VAT policy. On the spending side, the IMF noted that the government had already recently approved public sector wage bill reform.
We maintain our Buy on MOZAM 5% 2031, with a yield of 10.9% (price US$85.1) as of cob 28 March on Bloomberg (mid-price basis). The bonds rose 1.5pts yesterday (yield -35bps), likely on the IMF news, and have displayed some amount of resilience this year in an otherwise challenging external environment. Mozambique (Caa2/CCC+/CCC) has seen a total return of 1.5% ytd, outperforming the index (-10.4% on the Bloomberg EM Aggregate Index), and the bonds have largely recovered from the declines seen since Russia's invasion of Ukraine (when the bond fell about 8pts).
We have long argued that an IMF programme would add to the investment case for Mozambique, even as the government's interest in a programme see-sawed, as it would give the seal of approval to the sound policies that the government has already been pursuing and provide a catalyst for other official sector financing, after the reputational damage left by the hidden debt crisis. It may also provide some reassurance to ESG-focused investors.
In the meantime, the expected onset of LNG production and low debt service on the bonds, comprising interest only until 2028, when amortisation then begins, have been the main features of the investment case, in our view. Interest 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.
However, there are still some concerns. Better visibility over the LNG timeline may be needed to support the bonds and, of course, the security situation remains fragile. In addition, an IMF programme could be seen by some investors as a double-edged sword if it is a precursor to a Common Framework treatment, although the authorities have sought to allay such concerns in the past.