Ratings agency Fitch Ratings has downgraded Mozambique's long-term foreign and local currency Issuer Default Ratings to CC from CCC, it said in a statement on Tuesday.

The disclosure of hidden public debt revealed significant short-term repayment obligations, which could precipitate a near-term credit event.

In May, the Mozambican government had admitted to the existence of $1.4-billion in undisclosed loans to the Interior Ministry and State-owned security companies Proindicus and Mozambique Asset Management (MAM).

A first payment of $25-million related to Proindicus' debt was made in March, while a first payment of $178-million related to MAM’s debt was scheduled to be made on Tuesday.

Fitch now estimated yearly public debt service costs to have almost doubled to around 4.5% of gross domestic product owing to the hidden loans.

Uncertainty had also arisen over MAM's ability to service its debt and whether the government would step in to honour the obligations.

Mozambique's fiscal and external positions continued to deteriorate, in part owing to the decision of donors and multilateral organisations to halt programmed budget support until the debt debacle is resolved.

This aid amounted to around $300-million, in addition to the $165-million in suspended funds from the International Monetary Fund (IMF).

Meanwhile, foreign reserves fell to $41.75-billion in mid-May as exports continued to struggle.

Although government could tap reserves to pay for the upcoming MAM amortisation, this would put severe strains on reserves and could add to external and foreign exchange pressures.

An alternative was to search for other sources of external funding, primarily bilateral loans, which could help stave off short-term macroeconomic imbalances but would compound risks to debt sustainability.

Mozambique’s government also announced a potential restructuring of the MAM debt; however, the timing and terms remained uncertain.

“Even if the authorities are able to make scheduled repayments of the sovereign-guaranteed debt of State-owned companies in the near term, the potential restructuring of the MAM debt being considered by the government could precipitate a credit event as defined under Fitch's Distressed Debt Exchange (DDE) criteria,” Fitch said. 

Should that occur, the ratings agency would downgrade the Mozambique sovereign rating to RD.

Developments that could result in a downgrade included confirmation of an imminent or actual credit event, including nonpayment beyond relevant grace periods, redenomination and distressed debt exchange of sovereign or sovereign-guaranteed debt obligations.

Evidence of effective resolution of potential default risks from the newly discovered debt, normalisation of donor support relationships and fiscal consolidation that result in a decline in government debt, could, however, lead to a ratings increase.