Risk Assessment for Financial Institutions in Mozambique

Mozambique’s high-risk political and economic situation, coupled with a challenging business environment, can significantly impact corporate payment behavior, resulting in a very high corporate default probability. According to Coface, the country’s D rating reflects its difficult business climate.

Business Environment Challenges

• The business environment is rated as very difficult, with corporate financial information rarely available and often unreliable.
• The legal system makes debt collection unpredictable, and institutional framework weaknesses hinder intercompany transactions.

Strengths

• Mozambique has a favorable geographical location, significant mineral and agricultural resources, and hydroelectric potential.
• However, the country’s economy is under-diversified and dependent on commodity prices, with inadequate transport and port infrastructure constraining its ability to export commodities.

Banking System Constraints

• The banking system is constrained by government financing needs, and an unstable political and security environment contributes to a weak governance structure.
• Climate conditions are difficult, making it challenging for businesses to operate effectively.

Economic Recovery and Future Outlook

• Despite the ongoing security threat, economic activity has been recovering in recent years.
• Growth is expected to strengthen in 2022 due to the start of liquefied natural gas production at the Coral South offshore site and favorable trends in external demand for coal and aluminum.

Security Risks and Concerns

• The Islamist insurgency in Cabo Delgado region continues to pose a significant risk to private investment projects, including those led by TotalEnergies and ExxonMobil.
• The security situation also remains a concern, with attacks occurring in the northern region of Cabo Delgado.

Fiscal Consolidation Efforts and Public Debt Concerns

• Fiscal consolidation efforts are expected to resume in 2022, aimed at improving tax revenue and reducing debt payments.
• However, public debt remains a concern, and delays in gas projects could lead to a reworking of the restructuring agreement for the Eurobond that defaulted in 2017.

Current Account Deficit and Foreign Aid Concerns

• The large current account deficit is expected to continue in 2022 due to the impact of major projects on the trade deficit.
• The income deficit will also increase with repatriation of investment profits, and the country’s reliance on foreign aid and international cooperation will continue to be a concern.

Conclusion

Mozambique presents significant risks for financial institutions, including political instability, economic uncertainty, and security threats. While some strengths exist, the challenges facing the country make it essential for investors and lenders to carefully assess the risks involved before making any investment decisions.