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Moody's Investors Service has downgraded Mozambique's issuer and senior unsecured debt ratings to Caa3 from Caa1, thereby concluding its review for downgrade initiated on 20 May 2016. The outlook is negative.


The downgrade reflects the following key drivers:


(i) The ongoing negotiations over the restructuring of a state-owned company's loan, which carries a government guarantee, indicates a weaker government willingness to honour its debt-related obligations when faced with liquidity pressures. This restructuring will likely result in a loss for the lender(s) relative to the original promise and in a default of the government on its debt guarantee, under Moody's definition.


(ii) Despite the positive impact of this restructuring on the government's cash flow, strong liquidity pressures will remain. In particular, Moody's expects that some of the aid disbursements that had been suspended will not resume in the foreseeable future, outweighing the liquidity relief anticipated by the restructuring.

The negative outlook reflects rising litigation risks that could ultimately result in government defaults beyond debt guarantees to other classes of debt under Moody's definition, with potentially large losses for creditors. Litigation risks stem from the existence of cross-acceleration clauses in debt documents and the former disclosure of $1.4 billion in public external debt, which was previously not reported by the authorities.


Moody's has concurrently lowered the foreign-currency deposit ceiling by one notch to Caa3 from Caa2, and the foreign-currency bond ceiling by two notches to Caa2 from B3. Moreover, the local-currency country ceiling has been lowered by two notches to Caa1 from B2.


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