Mozambique flirts with default

Mozambique is coming close to defaulting on its debt after missing a US$60 million interest payment, which was due to bondholders on January 18, 2017.  The government has a 15-day grace period in which to pay. The missed interest payment is illustrative of how Mozambique’s fiscal position has become increasingly precarious since the withdrawal of support from the IMF and donor nations in 2016. So far the country’s bondholders have refused to negotiate with the government, demanding payment in full, and the IMF is not likely to provide a rescue package.  Barring an eleventh hour reengagement in negotiations by bondholders with the government, Mozambique is set to enter into a potentially disorderly default. MNCs should prepare for a deterioration in operating conditions that could present substantial challenges for their businesses in Mozambique.

What would be the immediate impact on MNCs?

Immediately after a default the metical would depreciate sharply, reversing gains made by the currency toward the end of 2016. Capital flight would likely force the central bank to impose capital controls, preventing MNCs from repatriating funds and exposing them to losses associated with rapid depreciation. The banking sector, which is already under pressure following a government bailout of lender Moza Banco in late 2016, will likely become increasingly distressed over time, with a greater chance of additional banks requiring a bailout. Interest rates—already very high at 23.25%—are set to increase further, adding to the cost of borrowing for distributors. Some distributors could lose access to working capital, causing disruptions and delays in payments to MNCs.

Long-term market attractiveness will be undermined

A default would result in a deterioration in the macroeconomic climate in Mozambique in 2017, notably dampening GDP growth. Inflation, currently at around 25% YOY, will accelerate, causing abrupt drops in demand and prompting MNCs to reassess their pricing strategies as they weigh maintaining profit margins against protecting market share.

Higher inflation will also squeeze consumers, pressuring them to change behavior by trading down to cheaper goods or cutting back on certain products—especially luxury items—altogether. As weeks turn into months, the government will be forced to cut spending, which will likely translate into lower public sector wages, adding further downward pressure to consumer confidence and spending.

The default may improve the short-term outlook for MNCs selling to the government or awaiting payment from the government, as debt repayments will no longer be weighing on Mozambique’s budget. However, future demand will be severely curtailed as the government will be shut out of international markets for years.

In the near-term, MNCs should focus on how they can repatriate earnings from the country while assessing the impact of the default on their local partners and operations. While the country retains long-term appeal stemming from the potentially transformative impact of natural gas exports beginning around 2021, MNCs should reassess their strategic priorities and goals in order to determine how best to adapt their operations in Mozambique in the intervening period. 

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