13 November 2017

Mozambique: FBI Investigating U.S.$2 Billion Secret Debt

Photo: World Bank
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The U.S. Justice Department and Federal Bureau of Investigation are investigating the role of three banks in the $2 bn Mozambique secret debt, the Wall Street Journal reported (WSJ 6 Nov). They are the Swiss bank, Credit Suisse, and the Russian Bank, VTB, which together organised the syndicated loans and bonds, the French Bank BNP Paribas, which was involved in the loan syndication. The FBI is looking at whether the banks facilitated improper payments to senior Mozambican officials, and the Justice Department is also examining whether the banks helped Mozambican officials borrow more debt than the country’s economy could reasonably repay, the WSJ said. The investigation has been going on for more than a year, and the FBI was in Maputo in June 2016.

Authorities in the US, UK and Switzerland are also investigating possible security law violations and possible money laundering.

The WSJ reports: "Credit Suisse became involved in the deals in 2012, when the lender began discussions with defense contractor Iskandar Safa, who negotiated a deal to supply Mozambique with military and surveillance equipment through his company Privinvest Group. Mr. Safa asked Credit Suisse to help Mozambique borrow money to pay for the contracts."

"From 2013 to 2014, the Swiss bank, VTB and BNP raised $2 billion in bonds and loans for companies owned by Mozambique’s Defense Ministry, which contracted to buy equipment and services from Privinvest. About $1.2 billion of the debt wasn’t publicly disclosed and, in an unusual twist, proceeds from the deals went straight from the banks to Privinvest rather than going first to the state-owned companies that borrowed the money."

Credit Suisse under its new CEO Tidjane Thiam has been trying to rehabilitate its international image for more than a year and recently restructured the investment banking unit that handled the Mozambican deals. But so far CS has made no move to accept responsibility for its Mozambique fiasco.

Bondholders maintain hard line

Bondholders, with an increasing representation of vulture funds, continue to take a hard line. In a statement last week to Lusa (11 Nov), Thomas Laryea for the Global Group of Mozambique Bondholders said the group was ready for negotiations with the government. But he stressed that "the only basis for discussions" is that the bondholders are treated preferentially and separately from other private creditors.

Mozambique's $2 bn private debt was originally a package to three state-owned private companies - $622 mn in secret syndicated loans in 2013 to ProIndicus, $535 in secret syndicated loans in 2014 to MAM, and an $850 mn Eurobond in 2013 to Ematum which was public. In early 2016, while the $1,157 syndicated loans were still secret, the government agreed to nationalize the  Ematum loan by issuing $726 mn in government bonds, to be repaid as a single payment in 2023, with annual interest payment of $78 mn (a very high 10.7% interest rate for government US dollar bonds). No interest payments have been made, however.

The bondholders maintain that all of the original loans were illegal and improper, but that by nationalizing the Ematum bond, the government made legal the initial illegal and improper bonds. Therefore, they say, bondholders should be paid but not the syndicated loan holders. And they will not talk of government as part of any negotiation that involves the holders of the illegal syndicated loans.

At the Financial Times Mozambique Investment Summit in Maputo on 9 November (tickets $1599 each) Prime Minister Carlos Agostinho do Rosario said he was optimistic and believed economic growth is picking up. The IMF predicts growth in 2017 will be 4.7%. “The dynamism in our economy leads us to forecast that, as from 2019, we shall resume annual growth levels of six to seven per cent”, do Rosario said. Inflation next year will be 12%, he predicted.

This optimistic prediction and the build up of international reserves has led bondholders to say the economy is doing so well that they can now be paid.

Michele Lamarche of Lazard Freres, who has been advising the government on debt, told the FT conference that the position with the bondholders was "evolving" but she stressed she wanted to talk with both bondholders and syndicated loan holders, and was "pretty confident" about a restructing next year. But Zitamar (10 Nov) expressed the common view that "given the creditor intransigency thus far, that sounds optimistic."

"Frelimo believes that the debt issue will die over time, donors will forget, and sooner or later we will return to have 'business as usual', but I think that negotiations with creditors will only start in 2020," after the 2019 elections, economist Roberto Tibana told Lusa (6 Nov). The agency concludes that "financial analysts who accompany the Mozambican economy converge on the idea that the government wants to avoid external aid and that negotiations with creditors will be complex and time-consuming, making economic recovery difficult."

There was an FT supplement "Investing in Mozambique" on 9 November to correspond with the conference.

Government has improved the management of the public debt because of the crisis, a rueful Prime Minister Carlos Agostinho do Rosario told the FT conference. With the support of the IMF, the government has set up a Risk Management Office to analyse financial and fiscal risks, including those risks arising from the public companies, and to monitor the evolution of the public debt portfolio. (AIM 10 Nov)

Conference in Basel, Switzerland, Saturday 18 November on the Mozambique debt. Speakers Jürgen Kaiser, Joseph Hanlon, Carlos Nuno Castel-Branco.

IMF mission this month, but no prospect of new programme

An IMF mission will come this month but not to negotiate a new programme. It is what is known as an "article 4 consultation," where a team of IMF economists visits to discuss the country's economic and financial policies. The last article 4 mission to Mozambique was in October 2015. (O Pais Economico 10 Nov, Notiicas 13 Nov)

Mozambique remains a member of the IMF, and Economy and Finance Minister Adriano Maleiane, at the FT conference, told the FT Africa Editor David Pilling, that Mozambique "urgently" needed an IMF programme and donor aid. Maleiane said he hoped that reforms now under way would lead to a resumption of the IMF programme and donor support to government.

But IMF representative Ari Aisen made clear that this was not enough, and resumption of the IMF programme and aid can only happen when Mozambique satisfies the demands for information on what happened to the money from the $2 bn secret debt.

Government needs $1 bn to restructure state companies, and $300 mn to sort out the government pension fund, Maleiane told the FT meeting. "We need to reform and strengthen the National Institute of Social Welfare (Instituto Nacional de Providencia Social) which today … depends on the government's current expenses budget. This process requires something like $ 300 mn to fund and pay past liabilities," the minister said.

Crisis cut imports 38% in 2016.

With no money to pay, imports fell 38%, from $7.4 bn in 2015 to $4.5 bn in 2016 (excluding foreign funded mega projects), according to trade data published on 8 November by the National Statistics Institute (INE). Vehicle imports fell 74%, food 31%, and clothing 31%. South Africa remains the largest supplier, with 31% of imports, but imports from that country dropped 45% in 2016. Imports from China fell 40%.

Exports remained steady, falling only 2.5%, from $3.4 bn in 2015 to $3.3 bn in 2016. Mozambique has become a resource economy, with coal, electricity, aluminium and gas the main exports. Tobacco is the only major agricultural export.

Government's delay in paying for road maintenance is causing many contractors to abandon works, even after they have started, Daniel Machaieie, the delegate of the Sofala National Road Administration, told Canalmoz (7 Nov) Dozens of projects have been stopped or not started, he said.

Construction ground to a halt with the economic crisis last year, and losses are mounting at companies who are still paying salaries and maintaining their equipment without getting any work, according to Manuel Pereira of the construction industry federation, the FME. The exuberance that followed the gas discoveries led to overcapacity in commercial real estate, and the government’s budget squeeze caused cancellation of public sector projects. (Zitamar, Savana 10 Nov)

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