By Joseph Hanlon
Government will make a presentation on 20 March in London to commercial
creditors - the holders of the $2 bn bonds and syndicated loans of the secret
debt. But the meeting is mainly for show - there will be no serious
negotiations until at least 2020 after national elections, and perhaps not
until 2023 when gas production starts.
A statement by the Ministry of Economy and Finance (MEF) on 22 February
said that the presentation will provide an "update on recent fiscal and
macroeconomic developments in Mozambique. The Government of Mozambique will
also present to creditors the key elements of debt restructuring
proposals." But the update will surely say that Mozambique remains in debt
distress and there is no chance of payments until there are gas revenues,
probably 2025 or later. Thus any restructuring would involve a major cut in the
value of the debt (known as a "haircut") and no payments for nearly a
decade.
The presentation has been forced by the IMF, which considers
"discussions with creditors" to be "essential", and
therefore had to be announced before the IMF board meets on Friday 2 March to
consider the results of the December Article IV mission to Mozambique.
Bondholders, as well as Russian bank VTB which has some of the syndicated
loans, have also been pushing for a meeting. But it is just for show - as the
phrase in Portuguese has it: "so para ingles ver", just for the
English to see. (The phrase dates from the time when Portugal continued the
slave trade but officially agreed to the British ban.)
There are four reasons no one wants to negotiate
now.
1. No one has clean hands, so any negotiation should be pushed so far into
the future that no one remembers the original misconduct. The loans are clearly
"illegitimate" but neither the Mozambicans who took the loans nor the
banks that organised them, Credit Suisse and VTB, nor the company which
received the money, want details of their roles exposed - and want to wait a
few years until it is forgotten history.
2. A better deal is probably possible when none of the guilty people are
around and when there is a serious prospect of substantial gas revenues.
3. Most lenders understand that they will be forced to accept a large
"haircut" - probably receiving only one third to one half of the
value of the loan, in part due to illegitimacy. But it appears that some feel
that, for the present, they can keep the loans on their books at a much higher
value - taking the haircut later rather than now. Bloomberg (23 Feb,
http://bloom.bg/2ovc5zm) notes that after the 22 February MEF announcement,
bonds were bought at 86% of their face value, much higher than most investors
think will be the final settlement. But that sale price allows all bondholders
to value their holding at 86%.
4. Mozambique made clear to the IMF mission in December that there will be
no changes in economic policy in the near future and the government will keep
borrowing, at least domestically, which will make the debt distress much worse.
This will continue until the October 2019 elections, and will restrict economic
growth and domestic private sector investment - but the government hopes that,
like a juggler, it can keep the balls in the air until that election. And it
has made clear that it will not meet the central IMF and donor demand - to
provide the missing information from the Kroll audit report, about where the
money went. So it will be left for the next government (headed by Nyusi or
Dhlakama) to negotiate a new programme with the IMF and bilateral donors in
2020, and no serious debt talks will occur before then.
Door left open for illegitimacy claim
The most detailed summary of Mozambique's debt situation is the Tribunal
Administrativo (TA, audit court) report of November 2017 on the state accounts
of 2016. (http://www.ta.gov.mz/Pages/RelatoriosPareceresCGE.aspx,
Capitulo XI)
The TA has been careful to ensure that in negotiations with creditors,
Mozambique can argue that the debt was "illegitimate" or
"odious" - that it should not be repaid and is the liability of the
two banks which committed misconduct when they organised the loans, Credit
Suisse and VTB. The loans contracts say that any enforcement of payment would
be made in English courts. A ruling in the English High Court on 29 March 2017
by Sir William Blair, brother of former prime minister Tony Blair, about
Ukraine debt effectively set the guidelines about when a debt could be seen as
illegitimate. It appears that Mozambique's debt fits these criteria (see this
newsletter 372, http://bit.ly/2oxHPnt) and the TA has been careful to ensure
that these guidelines are followed. Two are important: that the government
never accept the legality of the debts and that they do not go into the state
accounts.
The $2 bn loans were made to three security service controlled companies -
Ematum, MAM and Proindicus - but the money went directly to a Abu Dhabi
company, Privinvest. The structure of the loans is different, which causes
confusion.
The $761 mn Proindicus and $644 mn MAM loans are what are called syndicated
loans - the two banks, VTB and Credit Suisse, organised groups of lenders
("syndicates"). The loans were arranged in secret and Mozambique does
not know who are the lenders; it only deals with the two organising banks. The
TA notes that "in 2013 and 2014, the state issued guarantees in favour of
the companies Proindicus and Mozambique Asset Management (MAM), in amounts that
exceeded the limits established in the budget laws of those years" - thus
the TA is maintaining the position that the debts are illegal. And the loans
are carefully never included in any of the debt tables. MEF is clearly doing
the same thing in its debt statements, which led the Public Integrity Centre
(CIP) to accuse the government in a 22 February statement of "concealing
the commercial debt". (http://bit.ly/2oxhndI) But it appears that both the
TA and MEF are being careful to ensure that they can always claim that the debt
is illegitimate under the Ukraine ruling.
The $850 mn Ematum loan was different. It had the form of bonds, also
organised by Credit Suisse and VTB, but was public and the bondholders are
known. The TA notes that Ematum could not pay those bonds, so the state
nationalised the debt in 2016 and issued new government bonds. Parliament
approved the new bonds before it knew about the MAM and Proindicus loans, which
only became public later that year.
Whereas the TA does not include the MAM and Proindicus loans in any table,
the $726 mn Ematum debt to Credit Suisse is listed as a bilateral debt. This
has led the Ematum bondholders to argue that the MAM and Proindicus loans are
illegitimate and should not be repaid, and that the original Ematum bonds were
also illegitimate, but that the new government bonds are legitimate because
they were approved by parliament and must be repaid. Others, however, have
argued that the illegitimacy carries forward to the new bonds. Clearly this
will be a key point in any negotiations, but none of the lenders will want to
test this in court.
Finally, MEF and the TA have treated payments already made in a very
unusual way, apparently to also keep them off the books. In 2015-16, on the
Ematum bonds $262 mn was paid to Credit Suisse, and on the Proindicus loans,
$59 mn was paid to Credit Suisse, $8 mn to Palomar, and $1 mn to VTB. But the
TA says these payments could only be made because the Bank of Mozambique was
willing to lend the money to the government. Therefore those payments go into
the accounts as domestic loans by the Bank of Mozambique to the government.
All very obscure. For those promoting transparency, this looks like
concealment. But the loans are being hidden in the open, but not being put into
the state accounts - perhaps to allow an argument of illegitimacy in future
negotiations. jh
Other debt problems
By the end of 2017, Mozambique had failed to make debt service payments of
more than $700 mn. The largest arrears are to Brazil, notably involving the
Nacala airport, which was only built because of a bribe. In additional a total
of $94 mn is owned to Libya, Iraq, Angola, Bulgaria and Poland, some of which
is historic debt going back decades.
At the end of 2016, Mozambique largest debts were $2559 mn to the World
Bank, $1699 mn to China, $726 mn to Credit Suisse, and $633 mn to Portugal.
In addition, in 2016 the government was forced to assume some of the debts
of LAM and the Maputo Sul development (the bridge over the harbour).
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