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Tuesday, November 14, 2017 8:46 AM / BMI Research
BMI View: Limited
access to financing in the wake of Mozambique's unresolved sovereign default
will see the government's budget deficit narrow further over the coming
quarters. The country's constrained fiscal position will encourage the
government to reach a deal with its creditors in forthcoming negotiations over
its ongoing default, in the hope it will expedite re-engagement with
multilateral lenders.
Mozambique's fiscal deficit will
likely narrow further over our short-term outlook through to 2019 as limited
recourse to financing forces the government to limit expenditure. Weak or
negative revenue growth and an unsustainable debt burden has seen the
government rein-in spending over recent years, bringing its budget deficit to
6.0% of GDP in 2016, down from 10.7% in 2014.
This trend will likely continue
until the government is able to re-engage with international lenders and
multilateral support, with the deficit narrowing to 4.8% and 4.0% of GDP in
2017 and 2018 respectively. Although reducing the government's deficit is a
crucial step towards tackling its enormous debt burden (projected to reach
113.1% of GDP in 2017), the sharp pullback in spending risks an increase in
social instability and will likely undermine the government's commitment to
infrastructure development.
Commodities Will Not Fill Hole Left
By Grants
While increasing output in the
mining sector will offer some support to government revenues over the coming
quarters, this will not be enough to replace a substantial decline in foreign
grants. Foreign budget assistance has historically accounted for around 20.0%
of total revenue according to the African Development Bank, but we believe more
recent fiscal data will show this figure has fallen as donors have withdrawn
following the government's 'hidden-debt scandal'.
In Q216, the government revealed
an additional USD1.4bn in debt that had been kept hidden from international
investors and the IMF, triggering many of the country's key donors to withhold
aid.
While re-engagement is not
impossible at some point during the next two years, there have been few signs
of progress in meeting donors' key demands, namely a successful independent
audit into the government's accounts. The government employed Kroll to do so
earlier this year, but auditors published a qualified opinion, citing a lack of
full transparency into the public coffers.
We forecast revenue growth to
reach 3.0% in 2017, before accelerating to 4.0% in 2018, but given that we
expect inflation to average over 17.0% y-o-y during this period, this entails a
decline in real terms.
Pressure Building To Compromise With
Creditors
Without more substantial revenue
growth, the government will struggle to meet its commitments to infrastructure
development and social spending. Despite its default, the government persevered
with a number of small-scale infrastructure projects alongside financing from
elements of the private sector.
These projects have been largely
focused on restoring country's dilapidated transport network and help underpin
our growth forecasts. However, without recourse to financing, funding these
projects will likely come at the expense of recurrent expenditure, such as
public sector wages or social subsidies.
With the government's popularity
waning on the back of its poor track record in office, we see scope for it to
gradually move resources away from economic development and towards more
populist elements of the budget.
Fiscal Challenges Will Encourage
Compromise
Facing such a constrained fiscal
position, we believe the government will have little choice but to offer some
form of concession in its forthcoming negotiations with credits. Most notably
while the government has thus far insisted on creditor parity, we expect it
will eventually be forced to prioritise payments to eurobond holders over those
banks that issued the hidden debt that triggered the current crisis.
Indeed, the IMF has stipulated
that some evidence of goodwill towards bondholders will be a crucial step
towards its re-engagement with the country. While we expect a pullback in
spending to narrow the fiscal deficit, it will likely weigh on economic growth
and risks an uptick in social instability. This suggests that the government
will eventually give into some of its creditors' demands.
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