Mozambique’s debt crisis tricky hurdle for investors

ALMOST three years ago, Mozambique seemed a good place for investors to place their bets. The economy showed robust growth and investors were optimistic, but its economic rise almost came to a halt following the infamous “tuna bond” scandal. It threatened to plunge one of the continent’s star economic performers into a financial crisis.

“I think the Sadc region has imploded financially over the past two or three years. There is erratic leadership in countries like Zambia and Tanzania. This makes one wonder if Mozambique could be going in the same direction as Zimbabwe or Angola,” says Dr Martyn Davies, managing director of Emerging Markets and Africa at Deloitte.

Despite a challenging 2016, the Mozambican economy is showing signs of recovery, but challenges remain.

The country’s first quarter GDP picked up to 2,9 percent, more than double the growth rate of the preceding quarter.

The currency, which had been steadily depreciating against the US dollar in the first 10 months of last year is now stable after having strengthened by 28 percent against the dollar over the last nine months.

“It’s a two-tier economy at the moment. The broader macro economy is improving and the first quarter GDP numbers showed that the economy is on the recovery side. However, the fiscal side is struggling,” said Ridle Markus, Africa Strategist at Absa Capital.

According to a World Bank report, the government’s limited payment capacity ramped up the pace of accumulation of arrears. Mozambique’s fiscal position continues to be unsustainable and the overall fiscal adjustment has been limited.

“Amounts accrued to private creditors and fuel suppliers alone in 2016 and 2017 so far are estimated at around $660 million, almost 6 percent of GDP,” the report said.

The country missed several debt payments this year and this sparked outrage among bondholders, who want to be repaid ahead of owners of the controversial loans.

Last year, the government announced it had to restructure repayments if it was to receive further assistance from the International Monetary Fund (IMF).

The IMF ordered an external forensic audit of the debt following revelations about the previously hidden loans granted to three state-owned companies in 2013 and 2014.

In an attempt to unfreeze donor funding, the government agreed to an audit last year.

The loans were initially taken out with the help of Credit Suisse and Russia’s VTB. The funds were channelled through three companies, controlled by the state security services to invest in a fishing fleet and related maritime security contracts.

New York-based investigator Kroll found that three companies - all owned by Mozambique’s intelligence agency - did very little of what was intended (setting up a state-backed tuna fishing company).

The process for providing the guarantees was inadequate, violated the country’s budget laws and may have involved conflicts of interest.

Kroll, meanwhile, has been unable to establish as to what happened to the more than $1 billion of the money raised by the companies.

In a statement, the IMF said the report summary provides useful information on how the loans were contracted and on assets purchased by the companies. However, information gaps remain, in particular in the use of the loan proceeds.

The IMF, foreign donors and Euro bond holders are waiting to see how the debt will be restructured before continuing to do business with Mozambique.

This stalemate means that the country cannot access international funds, adding to further constraints.

While policymakers deal with restructuring talks, investors have been encouraged by the completion of Kroll’s independent audit and a $7 billion project signed off by Italian energy company ENI.

“This investment by ENI following the debt scandal is positive for the country and it shows that there is some movement there,” says Markus.

Both Markus and Davies are hopeful the IMF will resume its aid package to Mozambique, adding that the prospects for the country are reasonably sound but the country has its work cut out.

Mozambique is effectively in limbo until the IMF resumes the implementation of its programme. The longer it takes, the costlier it will be for the local economy. Simply put, a full recovery will be unlikely without the IMF assistance and the return of donors.