The recent disclosure of Mozambique’s excessive hidden debt has put a dent in investor confidence, and banks looking to lend to the country’s promising oil and gas sector are likely to approach future commitments with caution.
Following news that the country had deliberately kept the existence of loans secret from the International Monetary Fund (IMF), the organisation has cancelled the disbursement of the second tranche of a US$283mn emergency loan to Mozambique. The World Bank’s International Development Association (IDA) is also set to suspend its loans, amounting to US$419mn, to the country.
Other international financial institutions (IFI) are set to follow, says Robert Besseling, executive director of Exx Africa. “Both the IMF and the World Bank have now downgraded their assessment of Mozambique’s debt to high risk,” he tells GTR. “That denies the country eligibility status for IFI lending.”
“Because of this new high-risk debt rating, technically the World Bank, the IMF and other IFIs are no longer able to lend to Mozambique – they can only give grants. And given the huge drop in confidence and the humiliation the IFIs have suffered in Mozambique of late, it’s unlikely that they’re going to grant cash to the country,” Besseling adds.
Exx Africa warned back in December 2015 that Mozambique was at severe risk of financial collapse over the next six months “as the government runs out of foreign currency and defaults on its lending commitments” reads a media research note issued by the company.
“Mozambique’s newly-disclosed debt burden is unmanageable and it is increasingly likely that the IMF and World Bank will allow the sovereign to default on its obligations. The disclosures also throw into uncertainty the recently-concluded restructuring of the Empresa Mocambicana de Atum SA (Ematum) [Mozambique’s state-run tuna-fishing company] debt which was provided by Credit Suisse and VTB Bank. The prospect of a sovereign default by Mozambique in the next few months has now become likely,” the note says, adding that the company expects many small businesses and banks to go bankrupt in 2016, raising counterparty risks for foreign investors.
Nevertheless, the latest developments are not expected to have any direct implication for lending to the country’s burgeoning oil and gas sector – at least in the near future – as this is private financing organised by companies such as Eni and Anadarko.
“These loans have nothing to do with what the private companies themselves are gearing up to invest in the oil and gas sector and LNG development, once final investment decision is signed off,” Besseling tells GTR. But he concedes that a lot of banks that are going to be lending eventually to oil and gas and the LNG sector (for which there is still no final investment decision in place) will “think twice” before committing. “There will be a longer-term implication once these companies go to market to get financing for their projects,” he says.
Gabriel Buck, managing director of GKB Ventures, agrees that investor appetite will be knocked in the long term.
“There are other countries in Africa where Mozambique is going to be competing against for long term funding: so those investors that have appetite will have the same sort of appetite for other countries in Sub-Saharan Africa. There is a real risk that they will divert their exposure and interest into other markets,” he tells GTR.
Yet, he stresses that the fundamentals of Mozambique, including its vast natural resources, have not changed. What does change, he says, is the decision-making process and the knock-on impact with the IMF “whether these programmes are going to be delayed and whether such delay in coming on stream will have a negative impact in the flow of hard currency revenue”.
“The changes in Mozambique further demonstrate the need for local currency financing. Having for example, export credit agency financing in local currency could have helped Mozambique on two fronts. Firstly, in ensuring that the funding is used as intended and secondly helping to mitigate the FX risk when a currency devalues against the US dollar,” Buck adds.