(The following statement was released by the rating agency)

July 20 - Fitch Ratings has revised the Outlook on Mozambique's Long-term foreign currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the rating at 'B'. Fitch has simultaneously affirmed Mozambique's Long-term local currency IDR at 'B+' with a Stable Outlook and the Short-term IDR at 'B' and Country Ceiling at 'B'. The revision of Mozambique's Outlook to Positive reflects the country's track record over the past decade of prudent economic policies and strong economic growth, coupled with prospects for accelerated growth supported by natural resource development. The economy appears set for a further period of robust growth, supported by new coal mines. Production began at the end of 2011 and could eventually see Mozambique becoming one of Africa's largest coal producers. The expansion of the mining industry will not only provide an important new source of government revenue, but will also help diversify the export base and attract significant foreign direct investment. A material improvement in government and export revenues stemming from increased mineral output would have a positive impact on the country's rating. However, quantitative assessments of the impact of coal on the economy are currently lacking. Recent massive natural gas discoveries also promise to transform public and external finances in the long term but are beyond Fitch's current rating horizon. The agency highlights that progress on macroeconomic management and strong growth need to be complemented with further improvements to the business environment as well as a continued focus on poverty alleviation and human development. Expanding the infrastructure network, in order to improve the ease of doing business and allowing Mozambique to fully exploit its natural resources is also critical for sustained long-term growth. Mozambique's economic performance has been quite impressive over the past five years, with growth averaging 7% and per capita income rising by 70% over the same period. The economy's strong performance was sustained in 2011, with the economy expanding by 7.3% as a result of a good harvest and a booming mining sector. Growth is likely to slow slightly in 2012 due to the impact of the global slowdown, but the country has space for counter-cyclical monetary and fiscal policies to temper the slowdown. Mining's contribution to GDP is expected to increase to around 10% from 3% in the medium term, due to the rapid expansion of the coal sector. Mozambique is estimated to have 23 billion tonnes of coal, compared with South Africa's proven reserves of 30 billion tonnes - a figure which could increase as exploration continues. The agency notes that the government's ability to successfully leverage its mineral resources depends on its ability to upgrade the infrastructure sufficiently quickly in order to facilitate the development of coal mining. It is also critical that the government gets the right balance of taxation and regulation while creating a favourable policy environment for investors. Outside the mining sector, the authorities have undertaken a number of measures, including reforms to the agricultural sector, extensive investment in infrastructure, as well as continued social and human development, and the expansion of an affordable social protection scheme. The fiscal deficit is forecast to remain elevated around 6% of GDP over the next three years, due to increased capital and social spending. However, revenue from coal, which has not been included in the current budget figures, could see revenue rising sharply, helping to narrow the deficit. Mozambique is also looking to revise the exemptions granted to mining companies, which could improve revenues significantly. The authorities estimate that this sector could add USD1.5bn (around 1% of GDP annually) to tax revenue over the next 10 years. Fitch notes that a trend reduction in donor support poses a modest risk to government finances and will test the government's ability to transition from being heavily aid dependent to a greater reliance on domestic revenue sources. Furthermore, donor funds are increasingly being tied to specific projects rather than for general budget support. Mozambique has made progress in increasing the domestic tax base and it is important that this continues. As concessional funding and donor support declines, the government's ability to take on non-concessional loans without harming debt sustainability is important. Public debt is currently in line with peers but is creeping up. The government will need to strengthen debt management, investment planning as well as public financial management and ensure that non-concessional lending is channelled towards projects with a high economic return in order to ensure continued debt sustainability. Fitch requires greater clarity on the extent of the positive impact that coal exports are likely to have on output, the balance of payments, and government finances. If the improvement is material, it would exert upward pressure on Mozambique's rating. Evidence that the government is using these resources to improve human and capital infrastructure as well as improving the health of government finances will also strengthen creditworthiness. Low per capita income and human development indicators remain a major constraint on the rating and rating progression will depend critically on rapidly improving per capita income, improving governance as well as a marked improvement in key social indicators. Downward pressure on the rating is most likely to come from an unexpected decline in donor support, which would put government finances under stress, or a prolonged commodity price shock. (Caryn Trokie, New York Ratings Unit)