How to Wreck Africa’s Most Promising Economy

Mozambican President Armando Guebuza looks on during the closing ceremony of the 31st SADC (Southern African Development Community) summit on August 18, 2011 in Luanda, Angola. The two-day summit of the 15-nation Southern Africa comes on the heels of recent crack-downs on anti-government protests in Malawi and Swaziland, which join crises in Zimbabwe and Madagascar on the list of regional leaders' headaches. Southern African leaders opened the summit yesterday, but were largely silent on growing unrest in the region. AFP PHOTO / STEPHANE DE SAKUTIN (Photo credit should read STEPHANE DE SAKUTIN/AFP/Getty Images)



Even by the standards of Africa, it’s been a wild ride for Mozambique. There’s little sign it will end well. Blowing through more than $2 billion of borrowed money just as the currency and the price of commodity exports plunged has left the former Portuguese colony with near-empty coffers. Its creditors, which bought debt sold by Credit Suisse Group AG and VTB Group, may be left holding the bag. Nor does it help that the International Monetary Fund is raising questions about the government’s transparency and its finances.

“Mozambique is not in a state of development where it can maintain a credible foothold in the global financial markets,” said Jan Dehn, head of research at Ashmore Group Plc, which manages $53 billion of emerging market assets and opted not to buy Mozambican bonds. “It was more like, someone got an idea one day to issue a bond.”

That was back in 2013, when the desperately poor country was a symbol of postwar recovery and Africa’s rise. Anadarko Petroleum Corp. and Eni SpA had discovered offshore gas fields so big that Standard Bank Group said Mozambique could turn into the next Qatar. Growth since the end of a 16-year civil war in 1992 had averaged 7.4 percent.

Credit Suisse and Russia’s VTB provided financing to companies to help build the economy. The banks then went on to package and sell the debt to other investors hungry for high returns at a time when yields in the developed world were reaching record lows.

Mozambique’s borrowing produced a few surprises. A loan for $850 million, for instance, went to a new state-owned tuna-fishing company. What the offering documents didn’t say was that the government would also use some of those funds to purchase search and rescue and surveillance vessels. And two other loans from 2013 and 2014, totaling $1.4 billion, weren’t disclosed to parliament or to the IMF and were only discovered in April.

Mozambique was in much more debt than had been known, at a time when the currency was plunging, gas exploration was delayed and prices of gas, coal and aluminum exports were down.

The April disclosure of the loans caused the IMF to halt a $286 million bailout loan signed only last October. Managing Director Christine Lagarde in May accused the government of using debt for “concealing corruption.” Western donors including the U.K. and Portugal have suspended about $500 million in aid for this year.

Frozen Spending

The nation missed an interest payment and yields on its dollar bonds have almost doubled in the past year, to 18.38 percent. The government has frozen spending aside from salaries, foreign investment has plummeted and companies are laying off workers, if not shutting down. Inflation has soared to 20 percent, which raises the risk of riots over higher food prices, according to Standard Chartered Plc.

The crisis is visible on the main streets and in the shopping centers of Maputo, the capital, once a haven for wealthy expats. In Shopping 24, a multipurpose building opened in 2014, newspapers are pasted over the empty glass showcases. Many stores are vacant.

“It’s difficult to do business,” said Abdul Suleimane, whose shop sells computers, keyboards and other accessories and is suffering from the high prices of products he imports. “I don’t know how long we can hang on.”

The office of President Filipe Nyusi and the finance ministry didn’t respond to letters and emails requesting comment. Former President Armando Guebuza, in office when the borrowing began in 2013, also didn’t respond to requests for comment.

While plenty of African countries rushed to the Eurobond market in the past decade to take advantage of surging demand for emerging-market assets, few binged on debt quite like Mozambique. Its ratio of debt to gross domestic product has more than doubled from 2012 to 86 percent, the highest level among sub-Saharan dollar-bond issuers, the IMF said last month as it warned that the country was “at high risk of distress.”

The first real sign of crisis came in the middle of last year, when Finance Minister Adrian Maleiane called for restructuring the $850 million of securities for Empresa Mocambicana de Atum SA, the state tuna-fishing company known as Ematum. Originally a loan from Credit Suisse and VTB for the purchase of fishing boats, the money was repackaged into so-called loan participation notes, which can be issued more quickly than Eurobonds. They were sold to global investors and quickly became known as “tuna bonds.”

Tuna Yield

The yield of 8.5 percent was about 6 percentage points higher than what they could get on Treasuries at the time and more than 3 points above the emerging-market average.

Mozambique bought not just two dozen fishing boats but three interceptors and three patrol vessels, according to the website of France’s Constructions Mecaniques de Normandie, which built them. The prospectus had said all amounts borrowed would go toward “the purchase of fishing infrastructure,” including the fishing vessels, an operations center and related training.

The contract was one of three to “secure Mozambique’s maritime sovereignty,” according to emailed comments from a spokesman for Privinvest Group, which France’s CMN is part of. “The scope of the contracts was much wider than purely some vessels for Ematum.”

Market Access

Adam Bradbery, a spokesman for Credit Suisse in London, declined to comment, as did Alex Clelland, a spokesman for VTB. The Moscow-based bank said in an April statement the deals helped Mozambique “expand its access to capital markets and the transactions were completed in full compliance with national and international law.”

Relief seemed in sight for Ematum’s investors when Credit Suisse and VTB arranged a deal in early April for them to swap into a $727 million sovereign Eurobond with a 2023 maturity. Less than two weeks later, the IMF found out about the $1.4 billion of undisclosed government-guaranteed loans.

They were to two state companies partly owned by the intelligence services, named Proindicus and Mozambique Asset Management, or MAM. The loans breached limits on guarantees set by parliament, a spokesman for the country’s attorney general said earlier this month.

Loan Funding

VTB arranged the loan for MAM, though much has been sold off to other investors, Interfax reported. That should prevent losses, VTB Chief Executive Officer Andrey Kostin said in a June 17 interview. Credit Suisse arranged the Proindicus loan, Antoinette Sayeh, head of the IMF’s Africa department, told reporters on April 15. Credit Suisse declined to comment on the matter.

Regulators in the U.K. and Switzerland are asking questions. Switzerland’s Finma is in contact with Credit Suisse about the matter, said spokesman Tobias Lux. The U.K. Financial Conduct Authority is looking into whether Credit Suisse and VTB might have violated disclosure rules on debt financing for state-backed companies in Mozambique, the Wall Street Journal reported in June, citing people familiar with the situation. The FCA and Credit Suisse declined to comment. VTB said in the article that it was not aware of any investigations and declined last week to comment further.

Bold Move

Officials from the governing Frelimo party say that using the loans for defense or intelligence purposes was justified to protect gas infrastructure and that they had to keep them secret from former rebel group Renamo. Now the main opposition party, its supporters have been attacking government offices and railways in the center of the country. Frelimo and Renamo suspended peace talks July 25.

“The state needed to equip itself adequately to face the threats presented,” Gabriel Muthisse, the transport minister at the time the debts were issued and an ally of Guebuza, said in an e-mailed response to questions. “How to do it when our multilateral partners do not support procurement of military equipment? It had to be, of course, a bold financial engineering, which would allow the country to equip, to meet the threats of military destabilization and piracy.” Muthisse did not specify which or how many of the three loans he was referring to.

The new government last week hired Lazard Ltd. as a financial adviser and appointed White & Case LLP as a legal adviser. The two will “assist with the assessment of Mozambique’s current external debt situation,” according to a statement from the finance ministry.

Meanwhile, the currency, the metical, has lost half its value against the dollar since the start of 2015, making Mozambique’s hard-currency debt payments more expensive. The swapped Eurobond, the country’s only sovereign issue, has lost 4.2 per percent in the past six months. It’s the only one of 66 emerging markets tracked by Bloomberg whose dollar bonds have made losses in that period.

The yield soared to 19.2 percent in June. Among sovereign issuers, only those of Venezuela, mired in an economic crisis, are higher. Moody’s downgraded Mozambique two levels to Caa3 on July 8, saying it doubted the government’s willingness to honor loans at state-owned firms.

“Mozambique was a nice story,” said Victor Lopes, an analyst at Standard Chartered in London. “They had high growth and massive gas discoveries. But it’s got worse and worse.”