Mozambique President Filipe Nyusi’s official trip to China comes as his government faces its greatest test since the end of the civil war in 1992. Undisclosed loans and debt, worsening armed conflict with the former rebel group RENAMO and bad drought in the south and centre of the country highlight the fragility of the Mozambican state.
Over the last month, six previously unacknowledged loans worth $1.482 billion have been revealed by the government. Added to a dubious $850 million loan to the EMATUM company for a tuna fishing fleet (that included $500 million worth of maritime security vessels), Mozambique has at least $2.32 billion of new commercial debt to pay back. These loans make up 17% of a foreign debt burden of $9.89 billion – up 20% a year over the last five years and now over 90% of GDP, according to the IMF. According to the Banco de Moçambique, foreign currency reserves decreased to $1.8 billion in April. Mozambique’s currency, the metical, will further decline and inflation, already at 13%, is on the rise. Ratings agencies have downgraded Mozambique and a possibility of a sovereign default in 2016 is increasing as the interest costs alone on the debts are over $200 million; the annual debt service costs are likely to be as high as $500 million.
Borrowing peaked in 2013 and 2014 during the tail end of the previous administration of Armando Guebuza. It was based on an assumption that Mozambique would quickly become a global gas exporter. The loans to EMATUM, Pro-Indicus ($622 million) and MAM ($535 million) all provided for maritime security and logistics for gas projects to private companies linked to the Mozambican intelligence agency. Nobody anticipated the dramatic slump in commodity prices and, worryingly, lessons from the global financial crisis seem not to have been learned, given the predatory lending by Credit Suisse and VTB Bank. All of these loans also broke Mozambique’s own budgetary ceilings and agreements with donors. None of Mozambique’s institutions were consulted.
The banks are not the only ones to blame. Oil and gas company Anadarko talked up their prospects of gas production by 2020, but no final investment decision (FID) has been announced. The IMF also predicted that Mozambique’s economy could grow by over 24% from 2021 because of gas – adding to the anticipation. There are also four suppliers’ credits valued at $221 million issued to an undisclosed country for military equipment from 2009 to 2014 by the Ministry of the Interior.
Belief that over $100 billion was being invested into gas prompted the country’s elites to seek to carve out their share. Promises of riches from gas, and to a lesser extent coal, also partly explain the renewed conflict with RENAMO and the fragmentation of the party of government FRELIMO. Due to the lack of credible institutions in Mozambique, personality and elite politics have got out of control. The armed conflict with RENAMO resumed in late 2015 and has seen 11,000 Mozambicans fleeing to Malawi as refugees, several hundred dead and over 500 injured – far worse than the mini-insurrection of 2013-14. Efforts to mediate or find a military solution to the conflict with RENAMO have not worked. In late 2015 the government, or factions within it, tried to humiliate at best, or even kill the RENAMO leader twice. Not surprisingly there is an acute lack of trust between both sides.
Investors are now questioning whether Mozambique should attract more of their capital. FDI fell by 24% in 2015, and 14 donors and funding agencies suspended their direct budget support in April, threatening the $467 million in aid pledged for 2016 – 12% of public expenditure. The IMF has raised its risk profile for lending to Mozambique to ‘high’ which, along with ratings agency downgrades, has made borrowing from the market much more expensive.
Mozambique’s debt burden is likely to also impact other projects, including plans for the $6 billion, 2,600-kilometre African Renaissance Pipeline from northern Mozambique to South Africa. This gas pipeline will be funded mostly by Chinese banks and officially – if unrealistically − could be operational by 2020. China is Mozambique’s largest bilateral creditor so what happens during President Nyusi’s first official visit to Beijing between 16 and 21 May is significant − more borrowing, however welcome in the short term, would make Mozambique’s total debt burden even more unsustainable.
The key challenge for Mozambique will be meeting its financial liabilities, and rebuilding trust with its international development partners and investors. Tax from any sale of gas equity or acreage may help a bit, putting further pressure on Anadarko to clarify when it will reach its FID. But new loans based on gas futures − including from China − will not be enough. The government will need to significantly cut back on its spending and consider privatizing assets, in addition to renegotiating repayment terms of the other loans.
Already facing an acute liquidity crisis, with growing uncertainty over its ability to pay its bills, and the cost of bread and other goods rising, officials are worrying about a repeat of the urban riots of 2010. President Nyusi is struggling with least-worst options. Cleaning up the bad debts of the Guebuza era is painful but achievable − coming clean on Mozambique’s current debt burden is a good start.
Further gas investments will also help. FRELIMO factions compromised in February, allowing the government to approve the plan of development for another major gas investor, ENI, for its Coral FLNG project. This is a key step towards a FID. This helped the EMATUM loan to be restructured from 2020 to paying the full principal amount in 2023, when Coral FLNG is operational.
If there are no further loan surprises and the government comes up with a credible, accountable and transparent road map for repayment of these loans, and empowers Mozambique’s institutions to ensure that this does not happen again, donor suspensions will be lifted over time and the ratings agencies will also consider upgrading Mozambique.
But many other problems will remain. Though FRELIMO factions compromised in February, uniting its leadership behind the presidency will be difficult. Ending the spiralling conflict with RENAMO, combating inequality and poverty, and action to mitigate the effects of drought are all urgently needed, but will present an even greater set of challenges.
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