Mali, Government of -- Moody's downgrades Mali to Caa2 from Caa1; ratings on review for further downgrade

Rating Action: Moody's downgrades Mali to Caa2 from Caa1; ratings on review for further downgradeGlobal Credit Research - 04 Feb 2022New York, February 04, 2022 -- Moody's Investors Service ("Moody's") has today downgraded the long-term foreign and local currency issuer ratings of the Government of Mali to Caa2 from Caa1 and placed the ratings on review for further downgrade.The downgrade is prompted by missed payments since 28 January on commercial debt obligations issued by the Government of Mali on the West African Economic and Monetary Union (WAEMU) debt capital market. This is due to the imposition of economic and financial sanctions by the Economic Community of West African States (ECOWAS) and WAEMU on the Government of Mali in early January 2022. The sanctions follow the military-led government's proposal to extend its military rule to five years despite previous commitments to hold elections by February 2022. Moody's associates the Malian government's proposal with weaker governance and in particular an erosion in the quality of the country's legislative and executive institutions, from already weak levels. As long as the government's accounts at the regional central bank, the Central Bank of West African States (BCEAO), remain frozen due to sanctions, it will likely continue to miss payments on outstanding commercial debt obligations.The decision to place the ratings on review for further downgrade reflects Moody's view that the current political situation remains fluid and could deteriorate further if the negotiations between Mali's military-led government on the one side and ECOWAS, WAEMU and the international community on the other side, do not quickly reach an agreement regarding a transition for a timely return to civilian rule.The review period will allow Moody's to monitor the evolution of the relationship between Mali and West Africa's institutions. A rapid reconciliation and lifting of sanctions would pave the way for debt payments to resume, with likely only limited losses incurred by investors. Conversely, in case the sanctions remain in place for an extended period of time, the economic and financial repercussions may lead to more significant losses for investors. Moreover, Mali's economy and population would suffer from protracted sanctions, with potentially significantly negative consequences for the sovereign's longer-term credit standing.Concurrently, Moody's lowered the long-term local currency (LC) and foreign currency (FC) ceilings to B2 and B3, respectively, from B1 and B2, respectively. The three-notch gap between the LC ceiling and the sovereign rating reflects Moody's assessment of the small footprint of the government in the economy, low risks related to external imbalances due to Mali's membership in the WAEMU; balanced by a very weak institutional framework. The one-notch gap between the FC ceiling and LC ceiling reflects Moody's assessment of limited Transfer & Convertibility (T&C) risks due to the French Treasury guarantee of the peg between the CFA franc and the euro. RATINGS RATIONALE RATIONALE FOR THE DOWNGRADE MISSED PAYMENTS ON COMMERCIAL DEBT, ACCUMULATING WHILE SANCTIONS REMAINOn 28 January, the Government of Mali missed interest payments due on two bonds issued by the treasury on the regional capital markets (referenced ML0000001577 and ML0000001585) as a result of sanctions imposed in the wake of the military junta's decision to postpone previously promised elections and transition to civilian rule. The sanctions involve a block of all payments by Mali's government that pass through the payment systems of the Central Bank of West African States (BCEAO) and a freeze on all assets owned by the government of Mali, as well as public and parastatal enterprises, held at the BCEAO. While the BCEAO stepped in to ensure scheduled payments on Mali's outstanding debt instruments during the initial sanctions imposed in August and September 2020 following the coup d'etat, it did not do so this time.The accumulation of missed payments, including both interest and principal, on Mali's debt instruments is set to grow in coming weeks while negotiations between the military-led government, ECOWAS and the international community continue.Moody's assumes that the sovereign currently has the financial means to pay its debt obligations. If the sanctions are lifted in the near future and the debt payments are allowed again, the losses incurred by investors would likely be limited. However, the current relationship between the government and West Africa's institutions is extremely tense. A rapid resolution is in Moody's view therefore rather unlikely.CREDIT FUNDAMENTALS ERODING THE LONGER SANCTIONS REMAIN IN PLACEMali's economy is dependent on imports and aid, including for basic needs of energy, food and medical supplies. Moreover, the government runs a fiscal deficit, which Moody's estimates at around 4-5% of GDP this year. To fund its deficit, the government relies mostly on the regional debt capital market which is currently closed for Mali and the support of the official donor community which is likely to align with the current ECOWAS sanctions. While the government may be able to rely on financial reserves kept in bank accounts in Mali to meet payments of wages and supplies in the short term, the longer the sanctions remain in place, the harder hit the population and economy will be.In particular, the sanctions are also causing a reduction in international trade and investment in the country. For example, the closure of regional borders is likely to severely affect the economy, if protracted. This is because Mali is a landlocked country and thus accessing the neighboring ports of Dakar and Abidjan is essential to the whole economy. It will also impact the budget with lower levels of custom duties collected while the sanctions are in place. The mining sector which is the largest source of foreign earnings is also likely to suffer from a more prolonged interruption of trade.Therefore, protracted sanctions could have a significant and lasting negative impact on Mali's credit profile, undermining the economy, contributing to further social instability and eroding the sovereign's fiscal strength.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSMali's ESG Credit Impact Score is very highly negative (CIS-5), reflecting very high social risk, very weak governance and a moderate exposure to environmental risk. Weak governance along with very low wealth levels, reduce overall resilience to shocks.Mali's exposure to environmental risks is moderately negative as reflected in its E-3 issuer profile score, driven by high physical climate risk. The country is exposed to the agricultural sector (almost 40% of GDP) for both economic growth and employment, with close to 80% of the population depending on this sector. As a result, it is vulnerable to climate change, including droughts, deforestation, and land degradation. Rising temperatures by only a few degrees in coming decades would accelerate desertification, among other consequences.Exposure to social risks is very highly negative (S-5 issuer profile score). Mali displays very low income levels, high levels of poverty, and limited access to basic services in some areas. Close to 50% of people live on less than PPP $1.90 a day. In addition, inequality between the north and the south is one of the main root causes of long-standing conflict.Mali has a highly negative governance profile score (G-5 issuer profile score) based on weak quality of institutions and policy effectiveness. Governance has been deteriorating for years. The impasse between the military-led administration and regional and international partners is further evidence of the country's deteriorating legislative and executive institutions and, more broadly, its very weak institutions and governance strength.GDP per capita (PPP basis, US$): 2,410 (2020 Actual) (also known as Per Capita Income)Real GDP growth (% change): -1.2% (2020 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): 0.4% (2020 Actual)Gen. Gov. Financial Balance/GDP: -5.4% (2020 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: -0.2% (2020 Actual) (also known as External Balance) External debt/GDP: 34.9% Economic resiliency: b3 Default history: No default events (on bonds or loans) have been recorded since 1983.On 03 February 2022, a rating committee was called to discuss the rating of Mali, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would likely confirm the ratings at Caa2 if the review were to conclude that a credible agreement between the Malian military-led government and the ECOWAS/international community will result in an effective lift of the economic and financial sanctions that limits the losses incurred by investors due to the accumulation of arrears on commercial debt.Moody's would likely downgrade the ratings if the review was to conclude the economic and financial sanctions imposed on Mali, if protracted, are likely to lead to significant losses for investors and result in a further significant deterioration in credit fundamentals no longer consistent with a Caa2 rating. Increasing risks of a departure of the international community and the financial support it provides to the Government of Mali would also exert negative pressure on the rating.The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.The local market analyst for this rating is Aurelien Mali, +971 (423) 795-37.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Elisa Parisi-Capone Vice President - Senior Analyst Sovereign Risk Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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