The ongoing unrest in Mozambique following the recent election poses risks to political stability, fiscal consolidation and economic growth, says Fitch Ratings.
Nonetheless, Fitch’s baseline assumption is that the situation will stabilise over time and that external financing disbursements from multilateral development banks will continue, limiting downside risks to the sovereign’s ‘CCC+’ rating.
Social unrest has spiked since the elections on 9 October, after official results declared Mr Daniel Chapo of the ruling Frelimo Party the winner of the presidential election, with many people reported dead in clashes between protesters and security forces. Demonstrators have disrupted activity in the capital city, Maputo, and transport networks, including links between Mozambique and South Africa.
Fiscal deficit
The unrest has increased the risk that the budget deficit will be larger than Fitch assumed when it affirmed Mozambique’s rating in August. Fitch forecast then that the deficit would fall from 4.2% of GDP in 2024 to 3.1% in 2025. For instance, revenue may underperform due to weaker economic activity, or spending could be higher due to reconstruction costs or increased security spending.
The authorities could also increase spending more broadly as part of efforts to reduce public unrest. This could lead to slippage against the fiscal deficit targets under Mozambique’s IMF programme. Underperformance would increase the sovereign’s already large financing needs amid challenging financing conditions.
Funding
Mozambique’s access to sufficient financing is an important rating sensitivity, given the country’s large external and fiscal deficits. Fitch, though, does not believe the controversy over the election or the government’s response to the unrest will lead to restrictions on Mozambique’s access to concessional lending from multilateral institutions. Fitch’s view was reinforced by the African Development Bank’s announcement on 30 October that it had approved a $54m loan for a wind farm in Mozambique.
Fitch also believes Mozambique’s three-year $456m Extended Credit Facility with the IMF, agreed in 2022, is unlikely to be significantly affected by recent developments, although the unrest could make it harder to achieve structural benchmarks and quantitative performance criteria. Slippage against programme targets could threaten the continued release of funding under the credit facility, depending on whether the IMF executive board approves further waivers for non-observance.
Fitch expected real GDP to grow by 4% in 2024 and 4.2% in 2025 when it affirmed Mozambique’s rating. The unrest will dampen growth in 2024, but the scale of the effect in 2025 and beyond will depend on its duration and whether it affects strategically important parts of the economy. The hit to growth will be more significant if the resumption in construction of some of Mozambique’s liquefied natural gas (LNG) projects is delayed or cancelled. Risks to LNG production prospects could also increase if security resources are directed away from restoring social order in the Cabo Delgado region, a prerequisite for progress on the huge Total project.