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Mozambique: Narrowing Deficit Belies Constrained Fiscal Position

Global Market	3938 VIEWS
Global Market
3938 VIEWS

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to the African Development Bank, but we believe more recent fiscal data will show this figure has fallen as donors have withdrawn following the government's 'hidden-debt scandal'.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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