Mozambique assumes financial failure and seeks to restructure debt

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Mozambique assumes financial failure and seeks to restructure debt

1:47 CAT | 26 Oct 2016

Lusa (File photo) / Finance Minister of Mozambique Adriano Maleiane

The Government of Mozambique officially admitted yesterday its inability to pay the next installments of the debts of the public companies with the so-called hidden loans, proposing restructuring of payments and a new financial aid package from the International Monetary Fund (IMF).

“Mozambique’s external public and publicly guaranteed (PPG) debt profile is not sustainable,” reads a Ministry of Finance presentation to investors yesterday that Lusa had access to.

Twenty pages of text admit the inability to pay the debts of companies that contracted the undisclosed loans, recognise that the gross public debt (including liabilities under MAM and ProIndicus loans) is expected to reach 130.0% of GDP by end 2016, and take the opportunity to revise downwards the economic growth forecast to 3.7 percent, also stating bluntly that debt metrics are unsustainable.

“The local currency depreciation has exacerbated the increase of the debt stock and its servicing costs, The level of public and publicly guaranteed external debt to GDP is expected to exceed 100% of GDP in 2017, total normal PPG external debt servicing costs (including arrears) are projected at US$826 million on average over the period 2017-2021, i.e. approximately 6.9% of GDP per year,” the presentation reads.

According to IMF rules, financial assistance may not be given to a country with ‘debt distress’ that is, with debt stress or problems, and the IMF uses five different debt burden indicators to assess the country’s debt repayment capacity.

“Currently, all thresholds have been breached and Mozambique is likely to remain in breach of most of the IMF thresholds in the medium term,” the document says, proposing a series of meetings with creditors of Mozambique state-owned enterprises Mozambique Asset Management (MAM) and Proindicus.

In addition to the technical issue of ‘debt distress’, Mozambique also has a political credibility problem with the IMF and international creditors, after having concealed debts amounting to EUR 1.28 billion contracted in recent years, leading international creditors to demand the completion of an external audit as a precondition to talks about resuming financial assistance.

The Finance Ministry said that there was already “considerable progress in the drafting of the audit terms of reference” and confirmed that “the audit will focus on Ematum, Proindicus and MAM”.

The primary objective now is “to resume relations with the IMF in order to stabilize the economy and restore confidence of the international community,” but the government assumes that “discussions can only resume if Mozambique is no longer in “debt distress” category, which entails putting the government of Mozambique’s public and publicly guaranteed debt on a sustainable path”.

Defining the sustainable path and renegotiating the terms of debt repayment are the government’s intentions, and it has hired British Lazard Frères (financial advisors) and White & Case LLP (legal advisors) to represent the government to creditors.

Mozambique hopes to meet creditors this month, so that it can discuss the restructuring of debts in November to reach an agreement in December to begin payments in January, in time to start negotiations with the IMF on a financial aid package at the beginning of next year.

Source: Lusa