Mozambique debt restructuring improves investors mood

 

In forming his new government, Mozambican President Filipe Nyusi opted for leaving in office Economy and Finance Minister Adriano Maleiane. The veteran minister’s major task will likely be to carry on with restructuring the country’s debt, particularly the US$2 billion ‘hidden debt’ deemed unconstitutional and illegal under Mozambique law. Investors have reacted positively to the efforts to reach a deal with foreign lenders.

 

The government of Mozambique recently restructured the Eurobond debt (international issuance of securities to finance state-run fishing company Ematum), which was in default, through a new issue of US$900 million, with an interest rate of 5% up to September 2023 and 9% in subsequent years.

 

Rating agencies responded by improving the country’s prospects. In early November, Fitch Ratings announced an upward revision in Mozambique’s credit rating, from RD to CCC, for long-term operations in foreign currency, and from CC to CCC, for long-term operations in national currency.

 

Two weeks later, S&P Global Ratings revised upwards their rating for Mozambique, from SD to CCC+/C, in foreign currency, and also gave a B-/B rating, for short and long-term operations in national currency. This “stable” rating in relation to its economic prospects is Mozambique’s first from S&P since 2016.

 

Better ratings mean the country can start to recover access to international financial markets. However, some risks remain in the macroeconomic context, as the country continues to present deficits in the budget balance and in the balance of payments.

 

In the budgetary field, the deficit means that the state does not have sufficient funds to fulfil its programme, having to resort to markets (probably national) to finance. This situation may have adverse impacts on the level of commercial interest rates and on the evolution of credit to the economy.

 

In the external context, it is expected that there will be an increase in the current account deficit due to the probable increase in imports by economic agents directly and/or indirectly linked to the concessionaires of gas exploration projects in the country. The impact of this evolution is limited mainly to the increase in pressures on the metical in the sense that the currency depreciates.

 

The infrastructure construction phase of the gas exploration projects starts in 2020, with a forecast of duration of about 4–5 years, when the country will register its first exports of liquefied natural gas.

 

The International Monetary Fund estimates that Mozambique’s public debt in 2019 rose to 108.8% of GDP and that it will reach 106.8% in 2020, remaining above Gross Domestic Product until 2023.

 

To further relieve its debt burden, the government is seeking the cancellation of a US$622 million debt on the grounds that it was unconstitutional and illegal under Mozambique law. In a civil case lodged at the High Court in London, Mozambique is also seeking damages which could run into the billions of dollars from Credit Suisse, Privinvest and individuals associated with the case, according to the Jubilee Debt Campaign.

 

The claims arise from three loans totalling over US$2 billion made by the London branches of Credit Suisse and Russian bank VTB to state-owned companies in Mozambique in 2013 and 2014. The loans were guaranteed by then Finance Minister Manuel Chang, but the Mozambique government claims he “did not have authority to sign the sovereign guarantees, which were unconstitutional and illegal under Mozambique law” because the Mozambique parliament did not approve the loans.

 

According to the Jubilee Debt Campaign, the complaint submitted by the government of Mozambique alleges that “the three transactions involved the payment of large bribes to government officials … including to Mr Chang.” Defendants are Credit Suisse, three former employees of Credit Suisse and five companies in the Privinvest Group. The Mozambique government alleges that “the three transactions involved a conspiracy on the part of the Defendants to injure the Republic and thereby enrich themselves at the expense of one of the poorest countries in the world.” A report in 2017 by forensic auditors Kroll found that of US$1.2 billion of the loans, around US$700 million was unaccounted for.

 

Through the case, says Jubilee Debt Campaign, Mozambique is seeking a declaration that it is not liable to pay in four areas: any debt on the US$622 million loan to the state-run security firm ProIndicus; losses covering all debt payments it has or will make that have arisen from any of the three loans (and restructured loans in the case of the Ematum bond); all fees and expenses incurred in the restructuring of the Ematum bond; and compensation for macro-economic losses as a result of the financial crisis, which followed the revelations about the loans in 2016 and loss of donor funding.

 

In total these claims amount to billions of dollars. However, for reasons not explained, the case is not being brought against the Russian state bank VTB. VTB was involved in two of the three loans (ProIndicus and Ematum) and were the only lender involved in the final loan, MAM (Mozambique Asset Management).

 

However, in late December, VTB filed its own suit against the Mozambican government in London, demanding repayment of its share of the US$2 billion hidden debt. The Russian state-owned bank says that “an agreed restructuring of the US$535 million loan remains [their] preferred outcome” but after three years with no tangible progress, they must consider “all options available.”

 

The country “almost finalised” a deal with VTB last year, according to an IMF report.

 

According to Jubilee Debt Campaign, the legal filing by VTB relates to “general commercial contracts and arrangements” but does not elaborate further on exactly what VTB are claiming from Mozambique and MAM.

 

Credit Suisse, meanwhile, filed their defence against Mozambique’s suit on 21 January. The company submitted a counter claim requesting that the court declare the guarantee binding and arguing it is entitled to seek interest and damages, mainly the money that it says it is owed.

 

“The claims against CSI and CSLB are denied in their entirety,” the papers said, referring to Credit Suisse International and its London branch. “CSI and CSLB are not liable to pay any damages, compensation or indemnity.”

 

Mozambique’s action against Credit Suisse is the only one to target the bank itself, while other court cases, spread across three continents, have focused on the individual players involved in the scheme. The three former Credit Suisse bankers named in the case have already submitted their defences.

 

Photo of Adriano Maleiane | © Lusa/Club of Mozambique

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