Mozambique defaults on repaying fishy debt
Sovereign bond payment of $60m missed amid controversy over misuse of funds
THIS month, Mozambique joined Argentina, Ukraine and the Ivory Coast on the list of debt defaulters. On January 18, it missed a $60-million (about R801-million) interest payment on a sovereign bond of $727million.
Bondholders are furious and considering their legal options.
Questions are being asked in financial circles about who is ultimately responsible for a debt that smelt rotten from the first.
The bond coupon Mozambique missed is only the tip of its debt iceberg. More lay submerged, at least until April last year. The debt dates from the end of president Armando Guebuza’s term in office. Commodity prices were high and investors’ appetite for a slice of the resource-rich country was voracious.
Between 2013 and 2014, Mozambique’s secret services struck a series of deals with Lebanese shipbuilder Privinvest. While the details are sketchy, it seems those involved initially hoped to raise less than $400-million on international markets. As it turned out, they managed to raise close to $2billion with apparent ease.
Foreign banks, including Credit Suisse and Russia’s VTB, arranged the loans, which were snapped up by the market. Mozambique’s then finance minister, Manuel Chang, inked the deals (albeit without informing parliament), thus providing sovereign guarantees.
Two larger, syndicated loans (totalling $1.2-billion) taken out through secret-service-owned companies ProIndicus and Mozambique Asset Management were kept secret. The third, smaller eurobond of $850million was public. Repayment terms were tough. The money was to be repaid over seven years at an interest rate of Libor (London interbank offered rate) plus 6.5%, at the time a generous yield for a high-risk investment.
The loan was ostensibly to buy a fleet of tuna boats for a hastily created fishing company called Ematum, which has proved a loss-making enterprise. The deal (classed as “distressed” by ratings agencies) was restructured as a sovereign bond last year, maturing in 2023 with a higher interest rate of 10.5%. It is the interest on this loan that is overdue.
The IMF and foreign donors cut their funding support last April when details of the two secret syndicated deals emerged.
Testimony by Guebuza to a Mozambican parliamentary inquiry confirmed last year that the real purpose of the loans was military spending. In truth, no one knows where the bulk of the $2-billion that was raised ended up. Investigators from the US Securities and Exchange Commission as well as regulators in the UK have begun probing the deals.
UK commentator Joseph Hanlon believes that investors who bought the eurobond as well those who invested in the secret syndicated loans may be able to seek legal redress from the banks that arranged these deals.
“Banks have a responsibility, at the very least to the lenders in the syndicate, to do a ‘due diligence’ study of the loan. That would have shown that the feasibility study was wildly wrong, that much of the spending was military, that there was likely corruption, and, most important, that the government guarantee was not valid.”
Mozambique’s parliament has declared that the former finance minister acted illegally in signing the guarantees and has declared the loans unconstitutional. This opens up the possibility that the country could declare the loans illegitimate should the matter end up in a UK court.
Darias Jonker, a Londonbased analyst for Eurasia Group, said it was unlikely that Mozambique would manage to repudiate the “tuna” bond, as the issuing process had been very open. But it might be a different story for the two secret ProIndicus and MAM loans.
“It could work if there is sufficient domestic and international support to criminalise and prosecute those involved in the loans. But the risk here is that the government would need to protect senior Frelimo party members who are alleged to be involved in the loans.”
The IMF refuses to consider a new support programme for Mozambique until a forensic audit of the debt deals is com- pleted. International investigation firm Kroll has begun its work but may not complete it for six months.
The wait will be a long one in Mozambique, where the clamour for transparency about the debt is growing.
To make matters worse, the debt crisis has triggered an economic crisis. A severe foreign exchange shortage led to a close to 30% devaluation of the metical currency last year. Interest rates are rising and domestic banks are not extending credit.
“Many companies in Mozambique have closed their doors and many jobs have been lost. The business boom we had seen has been drastically curbed,” said Inocencio Paulino, president of Mozambique’s Association of Small and Medium Business.
How long before the region feels the effects of the crisis?
Mozambique ranks just behind Zimbabwe in terms of numbers of economic migrants leaving home for South Africa. “Should the socio-economic situation decline significantly, economic migrants from Mozambique to South Africa and Zimbabwe can be expected to increase,” said Jonker.
Economist Antonio Francisco, of Mozambique’s Institute of Social and Economic Studies, believes
Senior Frelimo members [are] alleged to be involved in the loans
that, since most Mozambicans depend on subsistence agriculture rather than the formal economy, the full impact of the crisis will take time to be felt.
“In the short run, I do not see that Mozambique’s continuing and deepening bankruptcy is likely to significantly affect neighbouring countries, except with regard to the flow of trade and services that Mozambicans seek mainly in South Africa,” Francisco said.
Mozambique’s central bank imposed limits on foreign currency credit card withdrawals last year.
Retailers over the South African border are feeling the effects of the Mozambican elite’s diminished spending.
In the end, Mozambique will probably have to renegotiate at least part of its debt if it is to regain credibility in financial markets. These are likely to be tough negotiations because it will have to convince its creditors to push back payment deadlines well into the next decade.
This is when the country stands a chance of reaping dividends from its natural gas reserves. Multinationals have already delayed gas projects several times. The gamble is, will they come on stream in time?