Moody's predicts further losses for Mozambique's creditors - AIM report
Parliament effectively legalised the remainder of the $2 bn secret loans and accepted them as legitimate government debt when it approved the state accounts for 2015 on Wednesday 26 April. This ends any attempt to refuse to pay on the grounds that the loans were illegitimate, and blocks any prosecution of those who signed the original illegal guarantees, according to Mozambican lawyers.
The vote was taken before the forensic audit by Kroll was completed, and thus accepted government responsibility for loans which are likely, in part at least, to be considered dubious.
Legal advice to this newsletter and the view of the Public Integrity Centre, CIP, is that by approving the accounts in this form, parliament legalised the previous illegal and unconstitutional debt guarantees, and that comments to the contrary made to parliament by Prime Minister Carlos Agostinho do Rosario on 13 April were not correct.
In 2013 two bond issues for $850 mn were made for Ematum and in 2013 and 2014 three secret syndicated loans were made for $1187 mn for MAM and ProIndicus. All three were new private companies controlled by the security services, SISE. The loans and bonds were to the private companies, but had state guarantees signed by the Finance Minister or Treasury Director. Both the auditor general (Tribunal Administrativo) and a parliamentary commission ruled that the guarantees were illegal and unconstitutional, because only parliament can guarantee loans.
In March 2016 parliament approved the issue of new government bonds replacing the Ematum bonds, accepting state responsibility for the Ematum debt. Only afterwards did the three secret MAM and Proindicus loans become publicly known, leading to a cut off of both the IMF programme and donor budget support, precipitating a financial crisis. The three loans were included in the 2015 state accounts presented to parliament, and parliamentary approval of the accounts had the effect of retrospectively approving and legalising the guarantees.
In presenting the accounts to parliament, Prime Minister Carlos Agostinho do Rosario said that mentioning the loans and guarantees in the accounts did not commit the government to anything, and that inclusion of information on the guarantees in the accounts “was necessary to guarantee control and monitoring of the guarantees by the auditor general (Tribunal Administrativo)”. This view was also taken in Newsletter 367. But Mozambican lawyers advise us that the Prime Minister was not correct. Saying in the accounts that the original decision was illegal did not reserve the matter for future consideration, and instead it did just the opposite, and asked parliament to rectify this by retrospectively legalising the guarantees. This has now been done. This is also the position taken by CIP:
Furthermore, this severely limits legal action against those responsible. Because the debt guarantees are no longer illegal, those responsible for signing the guarantees can no longer be called to account. Action can only be taken where it can be proven that people acted with intent to defraud the state and or if money went into their personal accounts.
The 2015 state accounts were approved by the Frelimo majority. Renamo boycotted the vote and MDM voted against. MDM pointed out that the 2015 accounts legalised another illegal loan made that year, $200 mn for the Chimuara-Nacala electricity line which had never been approved by parliament. For Renamo, Ivone Soares said “it is unacceptable that the Mozambican state accepts private debts that all Mozambicans are now obliged to pay.”
Kroll delayed again – to 12 May
The independent audit of the $2 bn secret debt has been delayed for the third time, this time until 12 May. The audit is formally commissioned by the Attorney-General’s office (Procuradoria-Geral da Republica – PGR). The appointment of Kroll, one of the world’s best known international forensic auditors, was announced on 4 November and the audit was to take only 90 days. The selection was agreed by the IMF, which demanded the audit, and by Sweden, which is paying for it. Even at the time, 90 days was seen as too short, and it was predicted that double the time would be necessary; after three delays this will be the case.
The most recent deadline was Friday 28 April, but on Wednesday Kroll told the PRG it could not meet the deadline and said it would hand in the report on 12 May. The PRG had no choice but to accept, and said the extra time was needed for “reverification works and a competent translation into Portuguese.” (AIM Pt 27 Apr)
The report will be in three versions. A summary will be released quickly. The PRG has 90 days to launch further investigations and any prosecutions, and it is only required to release a redacted version (without names) within 90 days – by 11 August. The full version, with names and bank account details, will remain secret, but is widely expected to be leaked.
At the AGM of Credit Suisse Friday 28 April in Geneva, Thomas Kesselring of shareholder group ACTARES made a statement criticizing the bank’s role in the secret Mozambique loans. Chair Urs Rohner defended the Ematum bonds as of benefit to Mozambique and declined to comment on the ProIndicus syndicated loan due to commercial secrecy. There is a recoding of the shareholders meeting on
Kesselring’s intervention starts after 2 hours, 17 minutes and the discussion lasts 11 minutes. The video is in German, but there is an option for an English translation.
Harder debt talks
Accepting the entire $2 bn debt as legal and the responsibility of the Mozambican government will make debt negotiations much more difficult. Repayment has already stopped, and payments are unlikely in the near future. Gas production will not start until 2023 at the earliest and there will be little money until then. So negotiations are essential, although serious talks may not take place until next year.
Creditors will probably aim to reschedule the entire debt repayment. They would accept more money over a longer period – perhaps over 25 years with no repayments for the first 10 years. Creditors will want government bonds with the same value (technically called “net present value”, NPV) as the current bonds and loans.
Mozambique will want bondholders and lenders to accept some reduction in the value, and to take some responsibility. Bondholders and lenders will have signed what are colloquially known as “big boy clauses” – that they are “big boys” and professional lenders who know what they are doing, and in particular did their own research, known as “due diligence”. Any proper due diligence investigation would have shown that the guarantees were unconstitutional and that income projections unrealistic and there was no chance of the loans and bonds being repaid by the companies. Bondholders, in turn, will say they trusted the banks, VTB and Credit Suisse, which must take some responsibility.
Mozambique would have been in a stronger position if the government had continued to not accept liability, and said that these were only loans to three private companies. But it can still argue that bondholders and lenders took a risk and must take a loss, known as a “haircut”. The banks, in private, will make the political response – that the Frelimo leaders were personally compromised by the loans and thus would be forced to accept them, and thus the risk was not great. And, as expected by the banks, party leaders ordered Frelimo in parliament to do so last week.
Mozambique will continue to argue for a reduction in the value of the loan, and probably will gain some small concessions. But it does seem likely that long after the current Frelimo leadership has retired, part of the gas money will be paying the debt rather than developing Mozambique.
By Joseph HanlonSource: News reports & clippings