Mozambique has added a new chapter to the sorry tale of its involvement in the international capital markets after telling creditors that its debt levels are not sustainable.
The country is working to regain the support of the IMF.
It met creditors in London on October 25, not long after Alexei Yakovitsky, chief executive of VTB Capital, a bank that has worked closely with Mozambique on its debt issuance, struck a positive note on the country’s debt prospects.
Yakovitsky told Euromoney on October 12, that there was no reason to believe that state-owned Mozambique Asset Management, which had missed a $178 million payment on a $535 million loan provided by VTB, would not work things out.
“The story is not over yet,” he said, upbeat.
The story has indeed developed, and sooner than most analysts expected, but the development is hardly a positive one.
Though the country’s debt has a “dismal rating”, as one financier active in Mozambique puts it, investors were surprised by the October announcement.
The sovereign’s bond quickly lost value in secondary trading, and analysts wondered if this latest event would harm the country’s prospects of regaining IMF funding.
|
Stuart Culverhouse, |
Stuart Culverhouse, global head of research at Exotix, says Mozambique’s announcement and the timing of it may have something to do with the discussions the country has been having with the IMF, as well as an upcoming coupon payment.
Why wait?
“In the context of the recent discussions,” he says, “and with the coupon coming in January, maybe it’s accelerated their view about where they are and therefore why wait any longer, if they’re up against it now?”
The IMF pulled its budget support for Mozambique earlier this year, when it emerged that it had misinformed the fund about the size of its debts, hiding $1.4 billion of loans for its interior ministry and two state-controlled firms – among them, the $535 million VTB loan.
These revelations follow a scandal over the misuse of $850 million of notes issued by a state-owned company, Ematum. Investors thought they were lending the money for the purchase of a tuna-fishing fleet, when in fact the proceeds were being used for military purposes.
The IMF’s withdrawal “seriously hurt” the government’s accounts, Mozambique told investors, adding that its “primary objective is to resume relations with the IMF to stabilize the economy and restore the confidence of the international community”.
Gross public debt has reached 130% of GDP, from just 38% five years ago, according to IMF data.
Help at hand
But the situation is not all bad for Mozambique. Help from the IMF may yet materialize. An IMF delegation visited the country in June and September, ahead of possible formal negotiations toward renewing involvement with it.
Two conditions would have to be met for the IMF to agree a new loan: first, Mozambique’s debt must no longer be unsustainable, or it would at least have to be on a path to sustainability; second, an audit into the tuna bond would have to be launched.
From the apparent woes of Mozambique’s debt pile – the country itself says it is in “debt distress” – as well as from the country’s aura of secrecy – the undisclosed loan and misappropriated tuna bond are prime examples – one might be excused for thinking neither condition will be met.
Prospects could be better than they appear, however. Mozambique is looking to restructure its debt, which would make it more sustainable. And the country has already appointed Kroll to audit Ematum. The audit could begin within weeks.
Macroeconomic conditions are starting to look up, too. In recent weeks, the exchange rate has been quite stable in nominal terms. The rise in the price of coal, to $300 a tonne, is also a positive for the country, as it has much of that natural resource.
Arduous
For Mozambique, negotiations are likely to be arduous on all fronts in the coming months – with bondholders, the IMF and VTB.
Since the bond investors may not agree to a restructuring until the IMF releases funds, the IMF and bondholder discussions may have to happen in parallel, so that neither side feels that it has agreed to a settlement without the support of the other. If that all goes ahead, Mozambique may yet put its finances in order.
Still, the situation is tense, and emotions are running high.
VTB sent a combative statement out after the October 25 meeting, saying: “We have properly executed these deals and are absolutely sure of our legal position. It remains unclear to us why Mozambique, as it turned out, didn’t disclose the correct amount of debt to the IMF.”
And it added: “Essentially, the government misled us.”