Fitch cuts Mozambique’s rating to 6-year low, flags probable bond default

Fitch Ratings has downgraded Mozambique’s foreign-currency debt rating by one notch to CC, warning that a restructuring of the country’s sole outstanding Eurobond has become increasingly likely.

The latest action marks the East African nation’s lowest rating level since April 2020, when the global agency cut it to CC from CCC, according to BusinessDay analysis.

The downgrade comes ahead of Fitch’s next scheduled review on July 24, with the agency citing recent developments that warranted earlier intervention. Authorities have indicated plans to engage creditors on debt operations, raising the likelihood of a distressed debt exchange.

“The downgrade reflects Fitch’s assessment that a restructuring of Mozambique’s sole outstanding Eurobond has become probable over the rating horizon,” the agency said in a statement, noting that any material change to bond terms—such as maturity extensions—would likely qualify as a distressed exchange.

It added that even without this signal, the risk of a credit event remains elevated, either through an IMF-linked restructuring programme or an outright default if such efforts fail to materialise.

Weak fundamentals keep pressure on credit profile

Mozambique’s credit profile continues to reflect severe financing constraints, persistent fiscal deficits, rising debt levels and mounting arrears.

Debt service arrears reached about 1.3 percent of GDP at the end of 2025, including obligations on short-term domestic debt, underscoring growing liquidity pressures across the public sector. Domestic debt markets have also come under strain, with switch auctions conducted last year pointing to acute funding stress.

The government remains heavily reliant on central bank financing and expensive short-term domestic borrowing, in the absence of an active International Monetary Fund programme.

Fitch estimates the fiscal deficit at 4.6 percent of GDP in 2025 (2.2 percent on a cash basis), above the peer median of 3.4 percent, with the gap largely reflecting accumulated arrears. Revenue collection has weakened amid post-election disruptions, while expenditure remains rigid, with wages accounting for nearly half of total spending.

Debt burden to remain elevated

Government debt is projected to stay above 90 percent of GDP through 2026–2027, higher than the peer median of 68.7 percent. The composition of debt is also shifting, with domestic debt expected to rise to nearly 40 percent of total debt by end-2026, up from 24 percent in 2023, following reduced access to external financing.

This shift is increasing borrowing costs and shortening maturities, thereby heightening refinancing and liquidity risks.

Fitch also flagged uncertainty around the country’s early repayment of about $700 million to the IMF in March, particularly regarding the funding source and its implications for the sovereign balance sheet.

External pressures mount despite LNG upside

The country’s external position is deteriorating, with the current account deficit estimated to have widened to 17 percent of GDP in 2025. Fitch expects it to expand further this year as imports linked to Liquefied Natural Gas (LNG) projects accelerate.

Foreign exchange shortages and the risk of prolonged high energy prices—amid global geopolitical tensions—could further strain the balance of payments. While Foreign Direct Investment inflows will provide some support, international reserves are expected to decline significantly over the next two years.

Despite these pressures, Mozambique’s medium-term outlook is supported by its LNG development prospects, with production expected to begin from 2028, alongside improved political stability and stronger FDI inflows.

Growth recovery remains fragile

Last year, the economy contracted by 0.5 percent, reflecting broader macroeconomic challenges. Growth is projected to recover modestly to one percent, before accelerating from 2027 as LNG construction intensifies and production begins.

However, execution risks remain elevated, particularly due to ongoing security concerns in the Cabo Delgado region, which could delay project timelines and weigh on investor confidence.

While political stability improved in 2025—following agreements on judicial and electoral reforms that enabled parliamentary backing for the budget—structural challenges persist, including weak governance, high youth unemployment and climate vulnerability.