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Wednesday, 13 December 2017

Gathering storm

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Following a litany of missed opportunities and obfuscation, Mozambique is desperately trying to restore confidence before it is too late.

Never was Mozambique’s fear of being left out in the cold by the international donors that fund a quarter of its budget more evident. On the first day of September, the president of the Southeast African nation, Filipe Nyusi, appointed a new central bank chief, replacing Ernesto Gove, whose second five-year term had just expired.

Gove’s successor, Rogerio Lucas Zandamela, had all the right credentials. A lettered academic with a PhD from Johns Hopkins University in Baltimore, he had spent the past 28 years of his life at the International Monetary Fund, working in some of the world’s poorest countries, including Zimbabwe and Somalia.

Yet Nyusi’s decision, while pragmatic, also smacked to many of desperation – and not a little shamelessness. After all, just months before, the IMF, perturbed by soaring levels of national debt and a mounting financial scandal, had suspended hundreds of millions of dollars in funding to the country. What better way, many in the capital Maputo muttered, to butter up the IMF and woo them back than by hiring one of their own?

Mozambique’s descent from darling of the donor community and putative future energy giant to international pariah has been swift, brutal and entirely self-inflicted.

The short version of the tale is simple. Vast amounts of gas were found off the coast in 2012 – enough, some said, to transform Mozambique into the ‘Qatar of Africa’. Energy giants including Eni of Italy and US-based Anadarko rushed in, buying huge exploration blocks, while the state pledged to raise living standards and channel billions into new roads, rail lines and port facilities.

Mozambique’s energy find also increased the sovereign’s visibility to global investors. In September 2013, Credit Suisse and Russia’s VTB Group raised US$850m for a local state-owned firm, Ematum, to finance a tuna fishing fleet; slices of the debt were later repacked as loan participation notes with a yield of 8.50%, maturing 2020. Mozambique’s future was, it seemed, all but assured.

Scroll forward to this year, however, and those dreams of wealth and national advancement have become nightmares. Ematum’s loan raised eyebrows soon after it was completed, when the state firm revealed that US$500m of the proceeds would be spent on patrol boats to protect the fleet against pirates. The 24 boats it did commission from a French shipyard were ill-equipped to process and cold-store tuna, forcing fishermen to trawl for smaller, lower-margin fish.

Ematum soon found itself deeply in the red. It had originally projected revenues of US$18m in 2015, yet in the event, it generated less than US$450,000, largely through the sale of shrimp and sardines. Facing rising losses, its US$850m bond was restructured as government debt in March 2016, yielding 14.40%. The UK’s Financial Conduct Authority is investigating whether Credit Suisse and VTB misled investors when the Ematum loan was raised then restructured.

And this was just the start. A month later, under pressure from donors, the government revealed US$1.4bn in previously undisclosed borrowing by the interior ministry and two other state firms, ProIndicus and Mozambique Asset Management (MAM), much of which was used to buy military equipment. The following month, MAM, which has close ties to the nation’s intelligence services, missed a US$178m loan repayment to VTB.

Holed below the waterline

All of which was doing untold damage to the nation’s finances. Mozambique’s debt-to-GDP ratio, according to data from the IMF, jumped from 37.5% in 2011, to 86% at the end of June 2016. Fitch Ratings tips that number to pass 100% by the end of the year. The IMF warned in June that public debt had “reached a high level of distress”, with the amount the country owes foreign investors likely to pass US$10bn in the third quarter.

Fitch downgraded Mozambique’s long-term foreign and local currency issuer default ratings in April, then again in May, warning that “a default of some kind appears probable”.

In August, Moody’s said in an annual report that institutional frailty, a rapidly depreciating currency and a sharp fall in the stock of foreign reserves had increased the country’s credit risk.

“The nation’s finance are now at unsustainable levels,” said Andre Almeida Santos, principal country economist at the African Development Bank. “Mozambique needs to find a way to restructure or reduce its debts, and fast.”

Under normal circumstances, this is where the IMF would step in, armed with a stiff hug and a bailout plan. Yet this option is – for the time being – unavailable. In May, IMF managing director Christine Lagarde said the scale of Maputo’s hidden debts, and its general financial ineptitude, suggested that the state was “clearly concealing corruption” from investors, the public and its long-time donors. Within days of her comments, the IMF suspended its €263m local loan programme. The World Bank followed suit, halting US$276m in aid, with 12 other multilaterals and governments suspending financial support.

It is hard to overstate the impact that the debt revelations, first, and the actions of the international donor community, second, have had on the country’s image. International investors who until very recently viewed Mozambique as a fast growing frontier market packed with potential, now “have serious questions about whether they want to put their money to work here”, said Lamine Diop, regional treasurer, SADC, at pan-African lender Ecobank. Said Vasco Gueifao, managing director of Eaglestone Mozambique, a private equity investor with offices in Maputo, Lisbon and London: “The main priority for the government has to be to regain the confidence of global investors.”

Crisis of confidence

That will be easier said than done. Capital Economics said in a June report that the sharp loss of investor confidence was hugely “destabilising” for a country that needs “significant” capital inflows to cover its huge current account deficit, which, according to government forecasts, is set to hit 11.3% by end-March 2017. The economy is tipped by the World Bank to grow by just 3.8% in 2016, against an average of 7.1% in each of the previous five years.

Consumer prices rose 12.4% year-on-year through the first quarter of the year, while the government’s stock of foreign reserves fell to just US$1.71bn at end-May 2016, according to the central bank, or less than three months’ worth of import cover. Mozambique’s currency, the metical, lost 53% of its value against the US dollar in the current year to September 4, falling from 47.90 to 73.10. In August, domestic banks and foreign lenders with local operating licences, including Banco Único and South Africa’s Standard Bank, introduced strict new monthly limits on foreign currency withdrawals.

The government, understandably, feels assailed on all sides. Drought is forcing the country to import foodstuffs, exacerbating inflation, while the IMF’s withdrawal of financial support undermines the state’s ability to support its ailing farmers. By now, Maputo had hoped to be earning billions of dollars a year from its offshore gas fields, helping to balance its budget and to finance and camouflage its rising debts. Low global oil and gas prices have put paid to that.

Mozambique’s ability to stabilise its finances and stave off a full-blown internal economic and financial crisis now depends to a great extent on its ability to show its donors that it can be trusted again. Again, this will not be easy. In late May, the so-called Group of 14 donors – led by the IMF and the World Bank – wrote to president Nyusi, warning that his government was guilty of “serious breach of trust, poor governance and a lack of fiscal transparency”.

The donors, who have kept the country afloat for decades, begged Maputo to come clean about the true state of its debts and to permit an independent, international audit of the three state firms (ProIndicus, Ematum and MAM) at the heart of the financial scandal. President Nyusi vacillated for a full month before ignoring the request and ordering an internal inquiry, overseen jointly by parliament and attorney general Taibo Mucobora.

Not all is lost. Mozambique’s economy remains laden with potential. It boasts mile after mile of rich, untilled agricultural land, while all that gas remains intact, hidden in the silty depths of the Indian Ocean.

A seven-day trip to Maputo in late September by a team of IMF officials aimed to find common ground between a fretful government and its wounded and resentful donors. It is even possible that by appointing a former IMF official to head its central bank, Mozambique has worked its way back into the Fund’s good books. But those are distant hopes. Corruption and financial carelessness have left this country teetering on the edge and a fretful government facing a gathering storm that it may not survive.

 

To see the digital version of this special report, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

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