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The long-awaited audit report on Mozambique’s excessive hidden debt has not – as was broadly anticipated – moved the market. So say African analysts in conversation with GTR. They believe the country’s best course of action is now to repudiate its still unaccounted for debt – a move that will be welcomed by the International Monetary Fund (IMF) and serve to shore up future funds.

The last few months have proven to be an eventful period for the East African nation: at the beginning of June, Italy’s ENI finalised its US$7bn investment in the Coral South floating LNG project – the country’s first offshore development. Lenders on the deal reportedly comprise a host of Asian state-owned banks and export credit agencies, including China’s Sinosure, Korea’s K-sure, China Development Bank, the export-import banks of China and Korea, Bank of China and ICBC, together with 17 commercial banks.

But the success story was quickly overshadowed: later the same month, corporate investigations firm Kroll published an audit report on the Ematum, Proindicus and MAM public companies and their accumulated US$2bn in loans, which they obtained in 2013 and 2014 from Credit Suisse and VTB Capital. US$500mn of these loans is currently unaccounted for – even after the audit – and is rumoured to have gone to weapons (and not to the purchase of fishing and patrol vessels, as originally claimed).

The concealed borrowing was confirmed by the Mozambican government in April last year, causing the IMF and international donors to halt direct budget support: the independent audit was a key condition for talks with the government to resume. But because the report failed to comprehensively explain how all the funds were spent, and without any apportioning of blame, it is not yet clear what the IMF’s next move will be in terms of future support.

The IMF concluded a nine-day staff visit to Mozambique on July 19 “to discuss the results of the audit with the authorities and possible follow-up actions; including working with the authorities to address concerns related to the management of public resources”.

In a press release issued after the visit, Michel Lazare, who led IMF staff on the trip, says: “The team welcomed the publication of the detailed summary of the Kroll audit report by the public prosecutor’s office as an important step towards greater transparency regarding the borrowing undertaken by the Ematum, Proindicus and MAM public companies. However… while the report summary provides useful information on how the loans were contracted and on assets purchased by the companies, critical information gaps remain unaddressed regarding the use of loans proceeds. The team urged the government to take steps to fill the information gaps and to enhance its action plan to strengthen transparency, improve governance, and ensure accountability.”

The team noted some improvements in the Mozambique economy since last year, but Lazare says that the “overall outlook remains challenging”.

While some experts have criticised the lack of transparency in government dealings revealed by the Kroll report, GTR spoke with experts who say the lack of transparency is “nothing new” for Mozambique, and that the country will be able to patch up relations with the IMF and World Bank.

 

What did the Kroll report find?

Celeste Fauconnier, Africa analyst at Rand Merchant Bank, explains: “Although the information on how the loans were constructed and assets purchased by the companies is thorough, there were inconsistencies on how US$500mn earmarked for the state-owned tuna-fishing company, Ematum, was spent. One government explanation is that those funds were integrated into the national budget and used to purchase military equipment. The Mozambican attorney general’s office acknowledged the situation and said it would work with all stakeholders to resolve the issues.”

Fauconnier tells GTR that other audit findings include:

  • Credit Suisse and VTB Capital — lead arrangers for the loans — received US$200mn in fees (this finding is being disputed by Credit Suisse).
  • There is no evidence that any assessment took place before the signing of three government guarantees, highlighting the possibility of a potential conflict of interest.
  • The companies that borrowed the money are not operational; the audit identified their lack of compliance with contract obligations.
  • The involved state-owned companies lack some of the basic infrastructure necessary for operations.

Gabriel Buck, managing director of GKB Ventures, tells GTR that “given the secrecy, it’s highly unlikely the Mozambicans will ever get all the facts as to how the money was used, where the funds went, and what the real purpose was”.

 Speaking to GTR to clarify its position on the loans, the VTB press office says that the bank did not provide Mozambique with “secret” loans, but that the transactions in question were made in accordance with all applicable laws and approvals, including from the Mozambican Central Bank.

“Moreover, the government of Mozambique confirmed to us that they were following the necessary internal and external legislation and that comprehensive information on the transactions was disclosed to creditors and investors,” it adds.

The bank’s press office also notes that the information on the amount of fees VTB received for arranging the transactions “is misleading”.

“Regarding the loan to MAM, the economics, structure of the transaction, and over-all yield including the fees were in line with market pricing for a large underwritten bilateral financing in Sub-Saharan Africa and similar to the eurobond issued by the republic of Mozambique.”

 

How can Mozambique effectively deal with this situation?

The only way out of all of this is for the country to repudiate its debt, explains Robert Besseling, executive director of specialist intelligence company EXX Africa. “In other words, it needs to declare the debt to those three state-owned companies unconstitutional, based on the evidence by Kroll. That would allow Mozambique to not have to service those debts, and to prosecute various people in the country who were are the forefront of possible embezzlement. It would also allow the IMF and the World Bank to start with Mozambique on a clean slate,” he tells GTR.

The country’s bondholders, various political influence groups and even the Mozambican Catholic church have been stepping up support for the loans to be declared unconstitutional, and Besseling reckons that it is the most likely outcome. The only stumbling block at this point is political in nature, as the move would implicate the previous government under former President Armando Guebuza, because the loans were granted on the back of guarantees issued while he was in power.

 

Will this impact infrastructure projects in the country?

Mozambique’s much-lauded gas projects, which will see the country become the world’s third-largest gas exporter, are going ahead: they’re simply too big and too important to fail.

“Despite ongoing credit issues, investors remain confident to raise funding and continue with projects,” says Fauconnier.

“There’s always been a transparency issue in Mozambique: this [the debt situation] is nothing new. But this wasn’t the biggest reason for infrastructure projects to be cancelled or postponed – it’s more the commodity price factor and the lack of growth – and not specifically just one political event.”

There is a view, however, that any projects or transactions requiring a government guarantee of any nature in the near future will be delayed as a result of demands for higher levels of due diligence.

“This whole issue is going to put those projects back years,” says Buck at GKB Ventures. “It doesn’t stop private sector projects happening, but there will be some contagion – one would be foolish to think there might not be. No one is going to make a decision unless everyone approves – which could mean no decision is made.”

Nevertheless, throughout the debt crisis, none of the current private project negotiations have ceased, and GTR has learned from market sources that the US’ Anadarko onshore portion of the gas projects is moving towards final investment decision in Q2 of next year.

 

What is the overall economic outlook for Mozambique?

Fauconnier explains that although she expects growth to remain subdued in 2017 due to fiscal constraints and political uncertainty, she anticipates 2018 – and especially 2019 – levels to increase noticeably. This view is driven by various developments, including the country’s growing construction sectors, particularly in roads and bridges infrastructure; the expected increase of coal exports, at competitive prices; and the anticipated release of funding from donors, including the IMF.

“It’s generally looking as if the economy might take a bit of an upturn through the course of this year,” agrees EXX Africa’s Besseling. He believes that although confusion is likely to reign for the next few months, by the end of the year the government will be keen – and able – to show some kind of improvement in its finances (already bolstered by export growth and an improving currency) and real progress on its negotiations with the IMF.

“You’re looking at an economy that’s going to step into the limelight that Qatar has enjoyed for the last 10 to 15 years,” he says. “Or, at least that’s the dream.”