International rating agency Moody’s has downgraded Mozambique from B3 to Caa1, almost entirely because of the handling of the EMATUM (Mozambique Tuna Company) bonds.

With the consent of more than 85 per cent of the bondholders, the government swapped the EMATUM bonds for sovereign government bonds, which mature two years later, but carry a much higher interest rate at 10.5 per cent.

This looks an extremely good deal for the bondholders, who will receive much more money from Mozambique, albeit over a longer period. Nonetheless, Moody’s regards the arrangement as equivalent to a default.

The “key driver behind the downgrade”, according a to a Moody’s media statement received here Monday “is the recent debt exchange orchestrated by the Mozambique government on EMATUM notes, which Moody’s considers to be a distressed exchange and therefore a default on government-guaranteed debt”.

Despite assurances to the contrary by Finance Minister Adriano Maleiane, Moody’s views the swap “as a sign of diminished willingness on the part of the government to honour future debt obligations”.

“This outweighs the positive impact that the debt exchange has on external liquidity via the improvement, in the medium-term, of the government external debt amortisation profile,” it adds.

Moody’s admits that the exchange “has a positive net impact on the balance of payments and on government financing requirements over the medium-term”.

As well as implying a diminished obligation relative to the original promise, the exchange has allowed the government to defer a range of payment obligations over the coming years to the maturity of the bonds in 2023.

In doing so, the exchange has helped to alleviate pressures that Mozambique experiences on its external position, it notes.

Nonetheless, Moody’s insists that the debt exchange is “distressed” and thus “indicates a diminished willingness on the part of the government to service future debt obligations relative to the original promise”.

The underlying factors putting pressure on the Mozambican economy are low commodity prices and fast growing imports. The Moody’s statement says these are likely to persist in the coming years.

Moody’s says it expects the pace of depletion of the country’s foreign exchange reserves to diminish, but the reserves level is likely to continue to fall. It claims that the government’s willingness to orchestrate a default to cope with those pressures now assumes a greater significance and as such supports the rating downgrade to Caa1.

The statement adds that Moody’s “would consider upgrading the rating if external imbalances were to diminish, lowering the risk that pressures persist over the rating horizon and therefore the significance of the recent distressed exchange. In particular, a sustained stabilisation and replenishment of foreign exchange reserves could lead to an upgrade. A track record of government debt service payment would also put upward pressure on the rating over the longer-term”.

In Moody’s methodology, obligations rated Caa “are judged to be speculative, of poor standing and are subject to very high credit risk”.

This follows the downgrade by a second rating agency, Standard and Poor’s, a fortnight ago. S&P downgraded Mozambique’s long- and short-term foreign currency sovereign credit ratings to “SD” (selective default), solely because of the EMATUM debt exchange.