You are using a very old browser. To get the best possible experience using our website we recommend you upgrade to a newer version or other web browser.

Mozambique | Clarity on debt issues and re-engaged investment in 2017

Mozambique | Clarity on debt issues and re-engaged investment in 2017

Amidst growing financial troubles and investor uncertainty, the Mozambique government is moving to clarify issues surrounding loans of $2 billion made to state enterprises this year.

When it comes to disclosing the real motivation behind the $2 billion in back-door loans made to three Mozambican state-owned companies, there has been no ‘big reveal’ moment to satisfy foreign donors, investors or the IMF. This is partly because the assumed profiteers behind the loans are, as one oil and gas executive told us, ‘the usual suspects’ in ruling party Frelimo. What has ground the previously promising extractives industries to a near halt and tested the patience of foreign donors and investors has been the government’s lacklustre approach to cleaning up the mess.

Damning testaments bring poor politics to light

On 9 December a report by the Mozambican Parliamentary Inquiry Commission (CPI) was leaked to the press. The report reveals a handful of damning testimonies by senior officials, including former President Guebuza, who was in charge when the loans were approved but left office in January 2015, and former finance minister Manuel Chang. Although each testimony appears to be an attempt at political self-preservation, the statements are a candid and much-needed injection of information to the largely speculative debate.

The testimonies confirm the most commonly held suspicions regarding the intended beneficiaries of the loans, namely the defence ministry. The former finance minister’s statement stated that spending the loans to create a tuna fishing fleet had been a front for the purchase of military equipment. This famously includes a handful of military vessels sitting unused on the harbour in Maputo bay. Senior intelligence official and CEO of all three state-owned companies, Anto?nio Carlos do Rosa?rio, and former President Guebuza concurred. Both cited concerns for coastal and offshore security as the primary objective.

Securing protection of north-to-south transport and the local fishing industry is a recently conceived agenda for the government, and a policy to establish this service would have been welcomed. Major companies arrange their own transit between the mining province in the north and major ports in the country. But limited cabotage options and security concerns are an obstacle to many smaller facilities companies. However, the government has failed to present any form of strategy, and cabotage contracts that they claim to have in place have been vehemently denied by companies like Vale.

The former finance minister asserted that he had felt pressure from Mozambique’s powerful intelligence services, SISE, to guarantee the loans without telling the Council of Ministers, the Bank of Mozambique or the IMF. He argued incorrectly that it is the responsibility of the lenders, not the government, to inform the IMF about added debt. The decision to withhold information of the existence of the loans is in violation of the terms of agreement that Mozambique signed when it became an IMF borrower. It is also in violation of the Mozambican constitution, which states that parliament establishes the upper limit for guarantees that may be given by the state. At the time the loans were made, the upper limit was capped at a meagre $5 million. In the light of these testimonies, the CPI report concludes that the loans constitute a transgression of the constitution and budget laws.

Frays in the Frelimo unamity

The country’s ruling party, Frelimo, is a coalition with several internal factions divided along seniority, business interests and even gender lines. Outwardly, however, the party has always maintained a unified front and internal feuds rarely play out in the public domain. As a longtime academic and scholar of Mozambican political affairs remarked in a recent article, ‘Unity helps [Frelimo] win elections, but the desire to stay together means that hard choices are not made’.

Allegiances within Frelimo’s current constellation are divided into three informal coalitions. President Nyusi is at the center of one group, together with former general Alberto Chipande, who acts as a powerful broker between his native Cabo Delgado and the country’s political centre in the south. Nyus’s recent anti-corruption speeches appear to be a maneuver to distance himself from former president Guebuza’s legacy. Nevertheless, Nyusi’s role in the debt scandal is controversial because he served as defence minister from 2008 to 2014 and would have been in a position to benefit from the former government’s military spending.

Another of the Frelimo groupings is loyal to Guebuza, who created a system of patronage by appointed close associates and confidants to central positions at all political levels. Crucially, his appointees to Mozambique’s intelligence services became pivotal in securing the loans. The third group is a coterie of the younger members of the party and a few of Frelimo’s founders, the so-called ‘old guard’, including Joaquim Chissano, the country’s second president (1986-2005). This smaller group applies a more progressive approach to their agenda and have voiced concerns over the lack of direction within the party.

Until Friday, these divisions propagated the political gridlock that has kept investigations from moving forward. Now there may be hope that government will no longer be able to prevent a fair and independent investigation. An independent due diligence investigation demanded by the IMF is scheduled to publish its findings in Q1 of 2017. In the meantime, the IMF is reportedly in talks with the government for a new package of loans to keep the country from defaulting.

For the Mozambican public whose lives are impacted most severely by the accumulated effects of the debt crisis, a political solution is urgent. Inflation has been at around 25% since September, up from 5% at the same time last year, and electricity prices were raised by more than 20% last month. Economic and social instability is prolonged by the government’s inability to act in accordance with its own policies for development.

Demonstrations have been scheduled several times, only to have a trickle of attendees or to be canceled altogether for fear of violent repercussion by the police. Investigative journalists and critics have been targeted, and some have been killed, for asking the right questions. Risk Advisory’s network of local and foreign journalists report a need for added precautions to secure their anonymity.

Cautious hope for gas

Despite current country debt levels at 130% of GDP from 40% in 2012, our contacts in the gas sector are expressing cautious optimism. The extractives sectors in Mozambique were dealt a double blow with the drop in oil and gas prices two years ago exacerbated by uncertainty about the outcome of the debt crisis. However, in a positive development for the sector, BP signed a 20 year binding sales-and-purchase deal with Eni in October 2016 on gas production from the offshore Coral South field. Eni has approved development of the field and is also finalising a deal for ExxonMobil to buy half of its stake in Area 4 of the Rovuma basin, according to our industry sources.

Crucially, the Mozambican government is aiding re-investment by facilitating agreements under the legal and contractual frameworks. In early December, Mozambique’s cabinet approved five decrees to spur the development of the two Rovuma Basin LNG projects, where Area 1 is operated by Anadarko and Area 4 by Eni. The new decrees are adapted to gas exploration, rather than oil, and allow for more flexibility on resale terms for the licence holders. To keep the positive momentum going, however, the government will have to show continued determination to solve the debt crisis, if it is to assure the export credit agencies that will supply much of the project finance.

Published: 14th December 2016
Categories: Company News