Mozambique: Debt crisis threatens to sink economy

Mozambique has warned its creditors that the country will have to restructure its debts to emerge from debt distress. The southern African nation revealed on Tuesday that its debt was not sustainable and the country was unable to repay loans until gas revenues are available after 2021.

Mozambique now expects public debt to reach 130% of GDP by the end of 2016. As a result, the International Monetary Fund (IMF) has said that it is ready to assist Mozambican authorities in debt negotiations with creditors. The IMF had suspended aid to the country in April this year after evidence of $2bn worth of secret loans to the country were revealed.

The secret debt racked up by state firms was the final straw for the IMF, following previous revelations about another loan dubbed the tuna bond, which was originally a loan provided in 2013 by Swiss bank Credit Suisse and a subsidiary of Russia’s VTB to purchase a tuna-fishing fleet. Investors were shocked to learn that the money from the loan was spent on patrol vessels and other security equipment, which the government claimed were necessary to protect fishing boats.

Mozambique’s external debt burden amounts to over $10bn, which includes $1.73bn of liabilities to commercial creditors, according to a presentation posted on the Finance Ministry’s website. The government’s repayment capacity for the entirety of 2017 is around $25m, but Mozambique is expected to repay $38m in January alone, according to some analysts. And it is unlikely that the government will be able to negotiate a new deal with its creditors by the end of the year, said Chris McKeon, Africa analyst at risk consultancy Verisk Maplecroft.

“The government’s aim of securing an agreement to restructure its debts by the end of 2016 is wildly optimistic,” he said. “Creditors are extremely angry that they were misled over both the scale of Mozambique’s debt and its ability to repay. At least one creditor has promised ‘no mercy’ and renegotiation will be a long and litigation-heavy process.”

Mozambique was previously heralded as one of Africa’s star investment opportunities because of its relative stability and natural gas reserves. However, violent clashes in the north of the country, shrinking foreign investments, falling commodity prices and delays to big projects have stalled economic growth, with the annual rate halving from a peak of 7.4% in 2014, to around 3.7% this year.

The news of the debt distress comes after Mozambique and Italian oil & gas firm ENI agreed on a 20-year deal to sell liquefied natural gas to BP. ENI and the state-owned energy firm ENH will exploit a new gas field off the Mozambican coast capable of producing an estimated 3.3 million tonnes of per year.

However, the debt crisis gripping the country threatens to upend any future investment to the southern African country, said McKeon. “The alternative is to default, with little chance of obtaining debt relief from hostile private creditors,” he said. “In this scenario, Mozambique’s access to external credit will be severed and the government will face even more expensive legal action.”

Taku Dzimwasha