Until six years ago, Mozambique was largely overlooked by corporates and investors apart from the agribusiness firms that come every six months to harvest cotton, sesame and tobacco.
But then gas was found in the Indian Ocean: up to 180tr cubic feet of liquid natural gas. Global energy groups, led by Texas-based Anadarko and Italy’s Eni, rushed in, keen to transform Mozambique into the Qatar of Africa.
Since then, anything that can go wrong has. The worst drought in nearly four decades is devastating the agricultural heartland, ratcheting up inflation. Gas prices have followed oil down since mid-2014, delaying or shelving crucial foreign exchange-earning projects. Economic growth has fallen in lockstep, from an average of 7.1% in the five years to end-2015, according to World Bank data, to a projected 3.8% in 2016.
But the biggest challenges Mozambique faces are of its own making. In March this year, an $850m loan disbursed in 2013 to Ematum, a state-backed fishing outfit, was restructured as government debt.
On the surface, the loan, arranged by the London offices of Credit Suisse and Russia’s VTB Bank, was a good idea. A substantial share of the world’s stocks of mature yellowfin and southern bluefin tuna swim up the Mozambican coast in spring — where they are hoovered up by Japanese, Korean and European vessels, which cold-store the valuable commodity, ship it back home and pocket the profit.
The aim was to transform Mozambique into a tuna power by grabbing around 5% of the overall global tuna industry, valued in 2015 by the Pew Charitable Trusts, a Philadelphia-based charitable institution, at $42.2bn. That would swell Mozambique’s economy by 11%.
Yet only a fraction of the loan’s proceeds were spent on fishing boats — 24 in total, all of which, authorities realised after taking receipt of the fleet, were ill-equipped to process and store bluefin tuna, which grow to up to two metres in length. Instead, as much as $500m of the loan was spent on security equipment, including patrol boats commissioned to protect the fleet against pirates.
Then in April, the government was forced to own up to the existence of a further $1.4bn in undisclosed borrowing by the interior ministry and two firms, ProIndicus and Mozambique Asset Management (MAM), which are partly or fully owned by the nation’s intelligence services. Of that, $622m was spent on military equipment, with $535m channelled into the construction of a shipyard used to service the military and commercial fishing fleets. Those loan facilities were also arranged by Credit Suisse and VTB.
DEBTS AND DELIQUENCY
That’s when the IMF got involved. For years, this poor, backward, strife-torn, yet provisionally democratic market has been a darling of the donor community. Fourteen institutions, including the World Bank and the US and UK governments, finance a quarter of the budget.
Yet now they felt compelled to speak out. In May, IMF managing director Christine Lagarde said Maputo’s lack of clarity over its debts and financial delinquency suggested the state was “clearly concealing corruption”. Within days, the IMF suspended $165m of an emergency loan facility agreed in October 2015. The World Bank has temporarily halted $276m in financial support with 12 other institutions suspending $155m in payments.
Since the IMF’s intervention, conditions have, if anything, worsened. Lamine Diop, head of treasury at Ecobank, says: “We could see some of the problems coming last year but nothing like this. The hidden debts surprised us. The IMF freezing its programme surprised us. Really, it has all come as a big shock.”
Investors, increasingly wary of Mozambique’s deteriorating financial and economic climate, have simply stayed away.
“Some have frozen or suspended their investments; others have changed their minds entirely,” says Diop. “Investors have trust issues with the government of Mozambique.”
Some observers see a financial storm brewing; others say it has already arrived. “There’s a real financial crisis brewing in Maputo,” says a London-based restructuring expert hired in mid-2016 to map out a viable strategy for the stumbling government. “Mozambique needs the IMF back and active though they are unlikely to return until they see real forward progress.”
A Maputo-based Western diplomat puts it more harshly: “They aren’t facing a financial crisis; they are already in it. And it is an entirely predictable and avoidable crisis.”
RISK OF DISTRESS
The challenges the country faces are simple to explain but rather harder to solve. Take the stock of national debt, which, according to the IMF, stood at 86% of GDP at the end of May 2016, up from just 37.5% in 2011. “Public debt is now likely to have reached a high risk of distress,” the IMF says. In total, the country owes foreign investors $9.85bn.
Downgrading the country’s long term foreign and local currency issuer default ratings in May to CC from CCC, Fitch Ratings warned that with the debt-to-GDP ratio set to pass 100% by end-2016, “a default of some kind appears probable”.
André Almeida Santos, principal country economist, Mozambique, at the African Development Bank, believes the key political and regulatory players face one of three stark options here, none particularly palatable.
“The current national debt is unsustainable,” he says. “If it remains at this level, a financial crisis is unavoidable. So the government can default, which they won’t as it means delaying the IMF’s return. They could pay, which they can’t as they don’t have enough money. Or they can restructure their debt, which assumes that the creditors will treat them benignly. And it isn’t at all clear at this point what kind of deal they’d get.”
A fourth option would be to get lucky. In July, ExxonMobil and Qatar Petroleum were reported to be teaming up to buy a stake in gas fields currently owned by Italy’s Eni. A sale would net the government a tax windfall in the hundreds of millions of dollars and help keep the wolf from the door — by paying down debt and meeting essential budgetary commitments — for a little longer.
The government is also tentatively exploring the privatisation of a host of dominant commercial state institutions including utility Electricidade de Moçambique, LAM Mozambique Airlines, mobile carrier Moçambique Celular (mCel) and fixed-line operator Telecomunicações de Moçambique. But even a partial sale would be politically sensitive, hard to complete in the near term and costly given years of under-investment.
Crises rarely happen in splendid isolation — in Mozambique, they come in swarms, with new emergencies exacerbated by endemic flaws. One of the most friable aspects of its financial economy is its sheer lack of foreign capital, an issue that has bedevilled the nation since it gained its independence from Portugal in 1975.
“It’s a very big problem,” says Ecobank’s Diop. “We have a huge lack of foreign currency. We just don’t have the capacity to generate the foreign currency we need.” A host of factors explain the economy’s brittleness. Delays to energy projects have staunched what the state hoped would by now be a rich seam of foreign capital. Mozambique also boasts huge stores of coking coal — the world’s largest untapped reserves according to some estimates, mostly found in Tete province, a wild, forested region bordering Zambia, Malawi and Zimbabwe.
Yet getting resources from mine to market is difficult, with producers forced to choose between a rickety, single track train line stretching to the second tier port at Beira or to risk human attacks on loaded trucks, which are consistently blamed by the ruling party, Frelimo, on the militant opposition movement, Renamo.
Meanwhile inflation rose 12.4% year-on-year in the first three months of 2016, according to IMF data, against an average rise of 3.1% across the previous seven quarters. According to government data, 80% of everything the nation consumes is imported, from the sugar cane used to bottle Coca-Cola to the hydropower produced in the Cahora Bassa Dam.
These systemic weaknesses are in turn undermining the value of the metical. In the year to August 24, Mozambique’s currency lost 50% of its value against the dollar, falling to 73.9 from 47.9. Some commentators are tipping it to pass the 100 mark by the time the year is over.
BANKS SHOW RESILIENCE
A lingering concern is how the banking system reacts to the nation’s wider economic travails. On August 5, Standard Bank’s local division introduced limits on foreign currency withdrawals, cutting them to $500 or €500 or R1,000 ($74.2) a month, according to data and news provider Zitamar. In turn, Millennium bim (CORR), which along with Banco Comercial e de Investimentos Moçambique (BCI) controls 60% of the banking sector, cut monthly foreign currency withdrawals to $1,000 and Banco Único to $2,500, both from $5,000.
Yet so far, banking remains one of the country’s few genuinely succesful industries.
“It has performed really well,” says Vasco Gueifão, managing director of Eaglestone Mozambique, an investment adviser and private equity investor with offices in Maputo, Johannesburg and London. “Overall, the banks are well capitalised and asset quality ratios are stable and at comfortable levels. A more challenging environment could force lenders to boost provisions but we don’t see banks posting losses and requiring capital injections.”
In March, Portugal’s Banco de Investimento Global opened a local subsidiary, taking the number of commercial lenders to 19.
Yet, notes BCI chief executive Paulo Sousa, most of the competition for corporate and retail customers is focused in the bigger cities along the eastern seaboard. “Go inland, and banking penetration levels fall sharply,” he says. “Just 24% of the populace has a bank account. Seventy administrative districts [out of a national total of 128] do not have a single bank branch. So the potential is huge.”
BCI, he says, has done its bit. “When I arrived in Maputo in 2013, we had just 563,000 customers; now that number is heading toward 1.5m.” The trick, as in so many parts of emerging Africa, is to offer mobile banking services via basic handsets. “A customer might be based in a far-flung part of the country, with no electricity, no roads, no running water, but he has a mobile phone and he can do everything through it.”
Atlas Mara, the African banking group run by former Barclays CEO Bob Diamond, is also pushing hard into Mozambique. In late August, it appointed Eduardo Mondlane Jr, son of the founding president of the Frelimo party, to run the Mozambique operations of BancABC, the Botswana-based lender Atlas Mara bought in 2014.
Meanwhile, at Banco Único, chief executive António Correia says the privately owned lender that opened its doors in 2010 aims to cover as much of the nation’s developed regions as possible. It is now present in eight cities and seven provinces and recently opened its first branch in Tete province. Deposit growth at the lender, which won an award from Euromoney, GlobalMarkets’ sister publication, for best bank in Mozambique in 2016, jumped 38% year-on-year in 2015, with loan growth rising 23%, net profit up 500% and tier one capital rising to 16% at end-2015, from 9.9% a year earlier.
For Mozambique itself, the challenges that lie ahead are numerous, painful and daunting. The government desperately misses its annual fix of donor cash. But getting it back will not be easy. In May, the so-called Group of 14 international donors warned the government in a joint statement that it was guilty of “serious breach of trust, poor governance and lack of fiscal transparency”. It asked authorities to list all the country’s existing and planned debts, to detail what the loans to the trio of state firms were intended for and to reveal the shareholding structure of MAM and ProIndicus. A month later, the IMF called for an “international and independent audit” of Ematum, ProIndicus and MAM, the three state firms at the centre of the borrowing scandal.
The government’s response was a mess. At first, assistant attorney-general Mucobora appeared to consent to the request, agreeing to welcome an international probe of both the loans raised by the trio of state firms and of the nation’s finances as a whole. But that offer was quickly nixed by President Nyusi — and for good reason.
Nyusi instead ordered an internal inquiry, carried out jointly by parliament and assistant attorney-general Mucobora. Donors were quick to express their disappointment at the decision. Nor has the government done much to quell the IMF’s fears about the state of the wider economy.
In June, IMF officials begged the government to take an axe to the federal budget in the hope of trimming the yawning deficit and keeping a check on the nation’s ballooning debt. Yet the very next month, parliament approved an amended budget of M243bn ($3.6bn), which included just M3bn in cost savings. The amended budget also tipped the deficit to reach 11.3% in the year to end-March 2017, against a previous estimate of 10.2%.
BARGAINING POSITION
Mozambique’s future remains uncertain and for so many reasons. The fallout from the debt scandal continues to spread. The UK’s Financial Conduct Authority is investigating whether Credit Suisse and VTB misled investors when the Ematum loan was raised and then restructured. Some of the world’s largest investors, including AllianceBernstein, Aberdeen Asset Management and ING hold Mozambique’s Ematum bond. Credit Suisse is also the subject of a separate investigation by Swiss regulator Finma. And MAM is under pressure having missed a May 23 deadline to complete a $178m payment to VTB on a $535m loan.
Even investors keen on Mozambique struggle to get their capital or find ways to put it to work. At a dinner in Maputo, a Portuguese property investor wearily describes how it took “four months to track down the right person in the planning ministry” and another three to secure a meeting with him. That lament, common across the country, is blamed on the widely shared fear of responsibility.
“It’s a very young country,” says a foreign banker working in Maputo. “That’s reflected in the lack of political maturity. How can they possibly deal on an equitable basis with the world’s biggest energy firms? When it comes to a bargaining contest between the government and the head of ExxonMobil, who is going to emerge with the better deal? It’s a no-contest.”
This article was first published in the September issue of Euromoney