In the wake of massive undisclosed loan agreements, the potential of international investigations into the banks and government looms and a sovereign default now seems almost inevitable, while sources report that there could be more undisclosed debts.
On 18 May, Finance Minister Adriano Maleiane confirmed during a parliamentary hearing that the government would make a US$ 134 million payment on 23 May on behalf of state-controlled entity Mozambique Asset Management (MAM). Maleiane also said that MAM would be unlikely to be able to make the loan repayment.
In 2014, MAM borrowed $535 million for the construction of shipyards as part of a set of loan agreements that had previously been undisclosed to international financial institutions and other creditors. However, Maleiane also indicated that the government would not be able to make regular payments to honor its various debt guarantees. A sovereign default now seems almost inevitable, as creditors seem unlikely to be willing to restructure the debt or impose a grace period.
VTB Bank, whose largest shareholder is the Russian government, seems particularly aggressive and insistent that the Mozambican government must respect its obligations. Our well-placed sources in Maputo report that the government is strongly considering declaring default on the various debts, as it needs to prioritize public spending and salary payments, rather than debt servicing.
On 28 April, Mozambique’s Prime Minister Carlos Agostinho do Rosario acknowledged for the first time that the government had guaranteed additional debts for state holding companies ProIndicus and Mozambique Asset Management (MAM) totaling $1.16 billion in addition to the EMATUM bonds. The bulk of the proceeds of the three bonds were used for coastal defense equipment and investments in shipyards at the Pemba Logistics Base. The EMATUM bonds were restructured in March, which ratings agency Standard & Poor’s have stated was tantamount to default and triggered the agency’s own downgrade of Mozambique’s debt rating. The ratings agencies’ new debt sustainability estimations are in line with EXX Africa’s long-standing forecasts that Mozambique will face financial collapse in 2016 and is nearing sovereign default.
Since the disclosure of the additional loan guarantees, pressure has increased on the government to launch a forensic audit of the proceeds of the loans and the various private and public entities involved in the loans, as well as the banks who lend at terms far above market rates. It is unlikely that any eventual Mozambican investigation would succeed in uncovering further details on the loans and initiate prosecutions, given the heavy involvement of the country’s state security and intelligence organisation, Serviço de Informação e Segurança do Estado (SISE).
Risk implications: The most likely scenario is that the US takes de facto jurisdiction since the loan agreements were denominated in US dollar currency and a US Justice Department investigation could be confirmed within weeks. The UK will most likely have jurisdiction to probe the international banks involved, Credit Suisse and Russia’s VTB, as the loans were concluded through the banks’ London offices. Moreover, major foreign donors have either suspended disbursements or are currently reviewing the programs. The US is due to review $400 million of yearly aid, while most European aid disbursements and grants have been suspended or cancelled.
Crucially, the central bank holds less than $1.7 billion in reserves after it spent over $1.5 billion to buffer the metical currency and service the country’s debts. Yet accusations are flying that central bank governor Ernesto Gove is hiding the actual reserve levels, which could be substantially lower. The debt to GDP ratio could soon reach 100% while the metical continues to depreciate. As further details on debt servicing are confirmed, a timeline on Mozambique’s looming sovereign default will become clearer. Meanwhile, the prospect of riots across major cities will increase.
Robert Besseling is the founder and executive director of EXX AFRICA, a specialist intelligence company that reports on African political and economic risk to businesses. He holds an MA (Hons.) in History from the University of St. Andrews in Scotland. He also has an MBA and a PhD in African political and economic history.
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