Urgent to set up a sovereign wealth fund
Executives at Credit Suisse, the Swiss Bank that played a major role in the lending spree of 2013-2014 which added about 20 per cent to Mozambique’s foreign debt, are now privately expressing doubts about the deals, according to a report last week in the “Wall Street Journal” (WSJ).
Risk consultants agree. ‘You’re talking about a country with extreme health and poverty needs,’ said Anne Frühauf, head of southern Africa research at political risk consultant Teneo Intelligence, cited by the WSJ on 29 June. She believed that “if there had been a proper prioritization of public-investment needs”, then the government-guaranteed loans would not have gone ahead.
In all, there were three loans, mostly handled by Credit Suisse and the Russian Bank VTB. The one that was in the public eye, because it involved raising 850 million US dollars on the European bond market, was contracted by the Mozambique Tuna Company (EMATUM). It involved purchasing 30 vessels (24 fishing boats and six patrol boats) from a shipyard in the French port of Cherbourg.
But two other loans were kept entirely secret, both from the Mozambican public and from the country’s foreign partners, including the International Monetary Fund (IMF). One was a loan of 622 million dollars to Proindicus, a company charged with maritime security, and the other was of 535 million dollars to Mozambique Asset Management (MAM), which is building naval repair and maintenance facilities.
According to the WSJ, the top management of Credit Suisse “signed off in part because the bank had pioneered a way to lend in developing countries without taking on much risk. The bank found it could purchase sovereign-debt insurance through the Lloyd’s of London insurance market to hedge as much as 90 per cent of the loans against default. Credit Suisse charged higher interest rates on the debt than its insurance premiums, pocketing the difference mostly risk free”.
But the insurance policies Credit Suisse used only covered governments. So when Mozambique wanted to borrow the money through state or quasi-state companies, the bank required government guarantees.
Initially, all seemed to be going well. Credit Suisse, the WSJ said, collected fees and interest payment and made trading profits on debt it sold to investors. Its revenue from issuing bonds and loans around the globe jumped 18% in 2013, the year of the EMATUM bond.
‘The increase was driven by higher revenues in emerging markets, particularly in structured lending,’ Credit Suisse said in its annual report.
It was good business too for the Cherbourg shipyard, Constructions Mecaniques de Normandie (CMN). According to data from S&P Global Intelligence, cited by the WSJ, in 2014, CMN’s revenue jumped 186%, to 110 million euros (124.3 million dollars), well above the annual average of 46 million euros for the five years before the Mozambique contracts.
But the deals turned sour, when as from 2015, it became clear that none of the three companies would be able to honour the loans within the stipulated time frame. Initial optimism that Mozambique would soon be earning large sums from the enormous discoveries of natural gas in the Rovuma Basin, off the coast of the northern province of Cabo Delgado, proved misplaced.
The operators of Rovuma Basin offshore areas one and four, the US company Anadarko, and ENI of Italy, have yet to make their final investment decisions, and the date for beginning the production of Liquefied Natural Gas (LNG) has been postponed into the future. Furthermore, gas prices have fallen, which no doubt explains why Anadarko and ENI are delaying their decisions.
By 2015, the government of President Armando Guebuza that had signed the loan guarantees no longer existed. The new government under President Filipe Nyusi set about restructuring the EMATUM loan, converting it into a sovereign “bullet bond”, with a longer repayment period. This relieves the pressure on the state budget in the short term, since for the next six years only interest will be paid. But the entire remaining capital (over 700 million dollars) must be repaid at once in 2023.
Nothing similar was done with the Proindicus and MAM loans – as Prime Minister Carlos Agostinho do Rosario admitted in April this year, the government only gradually became aware of these loans. Indeed, the governor of the Bank of Mozambique, Ernesto Gove, bluntly told reporters that he had never heard of Proindicus.
It was also in April that (thanks to a report in the WSJ) the world suddenly became aware of Proindicus and MAM, and that over 1.1 billion dollars of government guaranteed debt had not been disclosed. The IMF responded by cancelling a mission that should have visited Mozambique in mid-April, and suspending the second instalment of a 282 million loan from its Standby Credit Facility (SCF). Others among Mozambique’s partners followed suit – thus the 14 donors and funding agencies that had provided direct support to the Mozambican state budget suspended their disbursements.
The first repayment of the Proindicus loan (of 24 million dollars) was made, but MAM missed the repayment of 178 million dollars to VTB which fell due on 23 May.
‘We are working on restructuring the operations, and we are optimistic of the future outcome,’ the chairperson of all three of the companies, Antonio do Rosario (no relation to the Prime Minister) told the WSJ.
The initial expectation was that Proindicus and MAM would not only pay off the loans but would make a handsome profit by selling their services to the hydrocarbon companies operating in the Rovuma Basin, and to other shipping concerns using the Mozambique Channel – but the government, briefing the Mozambican parliament, the Assembly of the Republic, last month admitted that no contracts have yet been signed.
Meanwhile, the Beirut-based Privinvest, a major shareholder in Abu Dhabi Mar, the company which owns CMN, has responded to what it calls “recent inaccurate comments in the media with regards to maritime programs executed by Privinvest for entities owned by the Government of Mozambique”.
It has not been widely reported in Mozambique, but Privinvest has been supplying technology not only for EMATUM, but also for Proindicus and MAM. The Privinvest release claims “these programs were deemed by Mozambique as necessary to build a local industry to contribute to the economic development of the country and in order to establish sovereignty over its own waters and natural resources after years of poaching and unlicensed exploitation”.
In fact the country Mozambique did not deem Proindicus and MAM necessary because it did not know about them. The guarantees for these loans were signed in complete secrecy by the Guebuza government, and only became public knowledge in April of this year.
Privinvest correctly points to the fact that only one of the 130 vessels fishing for tuna in Mozambican waters in 2013 was Mozambican-owned, and cites reports that illegal fishing and logging costs African 20 billion dollars a year.
The release says “the maritime programs were requested by the customer and then designed to deliver an integrated solution – to allow oversight and control of the country’s EEZ (exclusive economic zone), to set up a viable homemade, home-owned and self-sustaining commercial fishing industry and to set up a shipbuilding and ship maintenance industry”.
But the debates in the Mozambican parliament and the Mozambican media have not been about whether Mozambique needs maritime security, a fishing industry and ship maintenance. Nobody doubts that. Rather, the debate has been over costs and over transparency.
The Guebuza government has been accused of violating the Constitution by issuing the loan guarantees without consulting parliament, and of breaking the clauses in the 2013 and 2014 budget laws which set limits on the amount of lending that the government could guarantee.
Privinvest says “the direct users and managers of the programs delivered are extremely satisfied”. Certainly the Ematum management issued a statement to that effect.
However, the Mozambican government is not so enthusiastic and Finance Minister Adriano Maleiane has repeatedly warned that the companies must not be a drain on the state budget, and should be thinking in term of forming strategic partnerships with other investors, or even of selling their assets.Source: AIM