Thea Fourie: Mozambique’s mounting debt. Default risk on the rise

Are things about to get messy in Mozambique’s backyard? This after the country’s state-owned asset manager reportedly defaulted on payments to a Russian private creditor, while the government failed to honour its sovereign guarantee.

The International Monetary Fund and G-14 donor partners have also suspended assistance under a cloud of debt irregularities. Which is fuelling investor concerns and denting confidence. Senior economist Thea Fourie takes a closer look. There is also a Reuters factbox below which shows exactly how much Mozambique owes. – Stuart Lowman

By Thea Fourie*

The inability of state-owned enterprise Mozambique Asset Management (MAM) to make a payment of $178m to foreign private creditor VTB Bank of Russia and the government’s failure to honour its sovereign guarantee by yesterday (23 May) has increased Mozambique’s default risk quite substantially.

The MAM loan, which reportedly was acquired to construct shipyards in the capital, Maputo, and the northern port of Pemba, to service the nascent but potentially large offshore liquefied natural gas (LNG) finds in Mozambique. Formally, Mozambique is not yet in default since a grace period is normally built into such loans.

On 11 May, IHS downgraded Mozambique’s short-term sovereign risk rating quite aggressively as the International Monetary Fund (IMF) and G-14 donor aid partners suspended assistance under a cloud of debt irregularities.

The inefficiency in debt acquisition under the previous presidency of Armando Guebuza (2005 to 2015), which only recently became public, has been increasingly revealed and shows that funding was channelled towards projects that have yielded almost no economic return, benefiting only a small political elite.

Read also: Sasol furthers hydrocarbon resources as Mozambique project gets green light

The current inability of the Mozambican government to handle the crisis adds to investors’ concerns and confidence. The further debt commitments made by state-owned company Proindicus, funding that was spent on naval and radar equipment, among other things, will also fall due during 2016.

The mounting debt commitments, rising arrears in public-sector spending commitments such as salaries, low foreign reserve holdings, delays in LNG development, and almost no foreign assistance from the IMF and donors have increased Mozambique’s debt default risk substantially. A downgrade in Mozambique’s medium-term sovereign risk rating also appears inevitable.

• Thea Fourie, Senior Economist, IHS Global Insight.

What Mozambique owes, and to whom

By Ed Cropley

Johannesburg (Reuters) – Mozambique is in a deep foreign debt crisis that analysts say could lead to social unrest if it continues to hammer the economy and currency, fuelling inflation and making it harder for the government to pay civil servants.

This week, it missed a deadline for a scheduled repayment on a $535m loan organised by Russia’s VTB Bank, according to a finance ministry source, putting the war-scarred southern African nation on course for default.

An $850m Eurobond launched in 2013 was rescheduled in late March after the government again struggled to make a repayment. Ratings agency Standard & Poor’s classified it as a “selective default”.

Foreign debt – including $2bn of commercial borrowing arranged without consulting parliament, as required – has ballooned in the last four years, largely due to expectations Mozambique was about to become a major natural gas producer.

Those expectations are now being shown to be wildly premature, leaving the country with a foreign debt burden equal to $400 per head, only a fraction below the International Monetary Fund’s (IMF) $435 annual per capita GDP estimate.

The debt crisis has pegged back growth and sent the currency, the metical, to a record low of 59 against the dollar. A year ago, it was at 35.

In a bid to slow the currency’s decline, the central bank has been ploughing through foreign reserves, which have dropped from $2.4bn at the end of last year to $1.8bn, below the IMF’s recommended threshold of three-months import cover.

Furious at being kept in the dark over the clandestine borrowing, donors, including the IMF, have suspended aid, exacerbating the foreign currency crunch.

Speaking on BBC radio last week, IMF Managing Director Christine Lagarde said the government’s action was “clearly concealing corruption”. Numerous calls to finance minister Adrian Maleiane’s mobile phone this week went unanswered.

The government says it has now come clean on all its outstanding debt. Donors and the IMF are waiting to see whether that is true.

Following is a summary of what is known about Mozambique’s debt:

Total debt – $11.64bn

– Foreign debt stood at $9.89bn in April, Prime Minister Carlos Agostinho do Rosario was quoted as saying in state media.

This is equal to 79% of GDP, based on 2016 IMF forecasts. The proportion has more than doubled in the last four years.

– Mozambique has an additional $1.75bn of domestic debt, do Rosario said.

Commercial debt – $2.01bn

– Mozambique Asset Management. The state-owned company took out a $535m loan, arranged by VTB, to build shipyards in Maputo and the northern city of Pemba, according to an IMF source and media reports. The shipyards have not materialised.

VTB has not commented on the loan. Analysts say it is likely to have been syndicated out to other banks and investors.

– Proindicus. The state-owned firm, owned by the defence and interior ministries and state security service, borrowed $622m for maritime security projects.

VTB arranged $118m of the loan and Credit Suisse the remaining $504m, according to an IMF source.

Neither bank has commented on the loan. Again, it is almost certain to have been farmed out to other parties.

– Ematum. The state tuna company, also partially owned by the security services, issued a government-guaranteed $850m bond in 2013 to build a fishing fleet. The project has been a fiasco, and the boats are now rusting in Maputo harbour.

The oustanding $697m on that bond was restructured in March after the government struggled to meet repayments.

Ownership data for the restructured bond is not yet available.
Bilateral/concessional debt – $5.96bn

– At the end of 2014, Mozambique owed $5.96bn to “official creditors”, according to the Economist Intelligence Unit (EIU).

– Of that, $2.79bn was due to bilateral creditors, most of whom will be Western donor nations. The remaining $3.20bn is owed to multilateral institutions such as the IMF, World Bank and African Development Bank, the EIU said.

– This latest figure tallies broadly with World Bank and IMF data. The World Bank says Mozambique has $2.57bn of outstanding concessional debt under 78 separate aid projects.

According to a table of IMF loans granted since 1987, Mozambique still owes the Fund $257m.

Which leaves $1.92bn outstanding…

– Analysts say the remaining $1.92bn is almost certainly debt from foreign governments such as Russia and China which prefer not to publish overseas aid and investment figures but which are both active in the Mozambique economy.

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