EUROMONEY, - Fri February 10, 2017

Africa: Mozambique runs on empty

When Mozambique struck gas in 2010, it was supposed to herald a bright, lucrative future for the poor African state. It hasn’t turned out that way. Rising debt, sluggish growth and a corrosive financial crisis have culminated in the IMF freezing payments to the struggling state. Its banking industry is one of the few brighter spots.

Ecobank’s Lamine Diop strides through the high-ceilinged lobby of the new office building in Maputo, a rueful smile on his face. “I’m sorry,” he tells Euromoney, coming to a halt in a pool of brilliant early-morning Mozambican sunlight. “I thought we were meeting next week.” The awkward silence that follows is broken by the tall, well-dressed banker, who glances down at his watch and sighs: “Well, I guess we can talk now. I don’t have anything else to do.”

It’s a common lament in Mozambique’s cozy and welcoming capital city. Until six years ago, this corner of southeastern Africa was largely overlooked by corporates and investors, bar the agribusiness firms that come every six months to harvest cotton, sesame and tobacco.

But then gas was found in the Indian Ocean: up to 180 trillion cubic feet of liquid natural gas. Global energy groups, led by Texas-based Anadarko and Italy’s Eni, rushed in, keen to transform Mozambique into the Qatar of Africa. South Africa’s Standard Bank estimated the gas find would more than triple GDP per head between 2015 and 2035, vaulting Mozambique from the world’s seventh-poorest nation to the middle ranks of frontier states, somewhere between Bangladesh and Vietnam.

Since then, anything that could go wrong, has. The worst drought in nearly four decades is devastating the agricultural heartland, ratcheting up inflation. Gas prices have followed oil down since mid-2014, delaying or shelving vital foreign exchange-earning projects. Economic growth has fallen in lockstep, from an average of 7.1% in the five years to end-2015, according to World Bank data, to a projected 3.8% in 2016. The Economist Intelligence Unit predicts growth will average 5.1% in the five years to end-2020, against 7.2% over the previous 10 years.

But the biggest challenges Mozambique faces are of its own making. In March this year, an $850 million loan disbursed in 2013 to Ematum, a state-backed fishing outfit, was restructured as government debt.

On the surface, the loan, arranged by the London offices of Credit Suisse and Russia’s VTB Bank, was a good idea. A substantial share of the world’s stocks of mature yellowfin and southern bluefin tuna swim up the Mozambican coast in spring – where they are hoovered up by Japanese, Korean and European vessels, which cold-store the valuable commodity, ship it back home and pocket the profit.

The aim, a former fisheries minister told Euromoney, was to transform Mozambique into a tuna power, by grabbing around 5% of the overall global tuna industry, valued in 2015 by the Pew Charitable Trusts, a Philadelphia-based charitable institution, at $42.2 billion. That would swell Mozambique’s economy by 11%.

Yet only a fraction of the loan’s proceeds were spent on fishing boats – 24 in total, all of which, authorities realised after taking receipt of the fleet, were ill-equipped to process and store bluefin tuna, which grow to up to two metres in length. Instead, as much as $500 million of the loan was spent on security equipment, including patrol boats commissioned to protect the fleet against pirates.

Then in April, the government was forced to own up to the existence of a further $1.4 billion in undisclosed borrowing by the interior ministry and two firms, ProIndicus and Mozambique Asset Management (MAM), which are partly or fully owned by the nation’s intelligence services. Of that, $622 million was spent on military equipment, with $535 million channelled into the construction of a shipyard used to service the military and commercial fishing fleets. Those loan facilities were also arranged by Credit Suisse and VTB.

IMF involvement

That’s when the IMF got involved. For years, this poor, backward, strife-torn, yet provisionally democratic market has been a darling of the donor community. Fourteen institutions, including the World Bank and the US and UK governments, finance a quarter of the budget.

Yet now they felt compelled to speak out. In May, IMF managing director Christine Lagarde said Maputo’s lack of clarity over its debts and financial delinquency suggested the state was “clearly concealing corruption”. Within days, the IMF suspended $165 million of an emergency-loan facility agreed in October 2015. The World Bank has temporarily halted $276 million in financial support, with 12 other institutions suspending $155 million in payments.

“The IMF is effectively saying to the government: ‘You lied to us’,” notes André Almeida Santos, principal country economist, Mozambique, at the African Development Bank. “And they are saying: ‘We’re not going to continue giving you money if we don’t know where it’s going. And: ‘By the way, we are not financing a budget when you guys just spent $2 billion on a few fishing boats.’

“It wasn’t stupidity. The government honestly thought the gas fields would be earning billions of dollars in revenues a year by the time these loans came to light.”

Since the IMF’s intervention, conditions have, if anything, worsened. Diop, the banker with time on his hands, is head of treasury at Ecobank. The pan-African lender opened its gleaming offices on Maputo’s Avenida Julius Nyerere in 2014, back when the economy, flush with foreign capital from early-stage gas development, was booming. He beams a lot – a warm, infectious smile – and pops in and out of his office a lot, but cannot hide his frustration.

“We could see some of the problems coming last year, but nothing like this,” Diop says, his face twisting into a frown. “The hidden debts surprised us. The IMF freezing its programme surprised us. Really, it has all come as a big shock.”

Investors, increasingly wary of Mozambique’s deteriorating financial and economic climate, have simply stayed away. “Some have frozen or suspended their investments; others have changed their minds entirely,” says Diop. “Investors have trust issues with the government of Mozambique.”

Some observers see a financial storm brewing; others say it has already arrived. “There’s a real financial crisis brewing in Maputo,” says a London-based restructuring expert hired in mid-2016 to map out a viable strategy for the stumbling government. “Mozambique needs the IMF back and active, though they are unlikely to return until they see real forward progress.”

A Maputo-based Western diplomat puts it more harshly: “They aren’t facing a financial crisis; they are already in it. And it is an entirely predictable and avoidable crisis.”

The immediate and medium-term challenges the country faces are simple to explain, but rather harder to solve. Take the stock of national debt, which, according to the IMF, stood at 86% of GDP at the end of May 2016, up from just 37.5% in 2011. “Public debt is now likely to have reached a high risk of distress,” the IMF says. In total, the country owes foreign investors $9.85 billion.

Downgrading the country’s long-term foreign and local-currency issuer default ratings on May 23 to double-C from triple-C, Fitch Ratings warned that with the debt-to-GDP ratio set to pass 100% by end-2016, “a default of some kind appears probable”. Moody’s followed in July, cutting the sovereign rating to Caa3 from Caa1, and assigning a negative outlook.

Ecobank’s Diop fears that national debt as a share of economic output is “on its way to 130% as it currently stands”. That would elevate Mozambique into a rarefied category of sovereigns either rich and indebted (Japan, the US) or teetering on the brink of failure (Greece, Zimbabwe).

Mozambique’s overall country risk score has tumbled by more than five points in the Euromoney Country Risk rankings to 31.32 out of 100 points in the last year, its lowest level in 14 years. This also involved a 32-place drop in the global rankings to 125th out of 186 countries. The decline reflects the survey’s expert views on the political and most notably deteriorating economic conditions in the country.

Santos at the African Development Bank believes the key political and regulatory players, including president Filipe Nyusi, premier Carlos Agostinho do Rosário, finance minister Adriano Maleiane, central bank chief Ernesto Gove, and assistant attorney general Taibo Mucobora, face one of three stark options here, none particularly palatable.

“The current national debt is unsustainable,” says Santos. “If it remains at this level, a financial crisis is unavoidable. So the government can default, which they won’t, as it means delaying the IMF’s return. They could pay, which they can’t, as they don’t have enough money. Or they can restructure their debt, which assumes that the creditors will treat them benignly. And it isn’t at all clear at this point what kind of deal they’d get.”

A fourth option would be to get lucky. That might happen. In July, ExxonMobil and Qatar Petroleum were reported to be teaming up to buy a stake in gas fields currently owned by Italy’s Eni. A sale would net the government a tax windfall in the hundreds of millions of dollars, and help keep the wolf from the door – by paying down debt and meeting essential budgetary commitments – for a little longer.

Maputo is also tentatively exploring the privatization of a host of dominant commercial state institutions, including utility Electricidade de Moçambique, LAM Mozambique Airlines, mobile carrier Moçambique Celular (mCel), and fixed-line operator Telecomunicações de Moçambique. But even a partial sale of any of these corporations would be politically sensitive, hard to complete in the near term, and costly, given years of under-investment. It would also stymie the state’s existing plans to forcibly merge the two telecoms operators.

Our aim over the next five years is not to become the biggest bank in Mozambique, but definitely to become the best
– António Correia,  Banco Único

Then there are the interlinked issues of Mozambique’s rapidly depreciating currency, the metical, and the worrying condition of the state’s stock of foreign reserves, which fell to $1.8 billion at end-May 2016, according to the IMF. That number marks a fall of $600 million in just five months, cutting reserves from five months’ worth of import cover, to well under three.

Cesar Nsolo, head of regional corporates at Ecobank Mozambique, says: “When we met the finance minister [in the first week of August], he told us: ‘This is not a problem that exists in theory but in reality. It is a problem that we need to find solutions for.”

But here, the country’s leaders run into that classic conundrum: that crises rarely happen in splendid isolation. Rather, they come in swarms, with new emergencies exacerbated by endemic flaws. In Mozambique’s case, one of the most friable aspects of its financial economy is its sheer lack of foreign capital, an issue that has bedevilled the nation since it gained its independence from Portugal in 1975.

“It’s a very big problem,” says Ecobank’s Diop. “We have a huge lack of foreign currency. We just don’t have the capacity to generate the foreign currency we need.” And that undermines the Togo-headquartered lender, which is used to helping its clients, many of which boast global or regional scale, to source liquidity wherever they go.

“We just can’t support our customers here the way we want to,” Diop says.

A host of factors explain the economy’s brittleness. Delays to energy projects have staunched what the state hoped would by now be a rich seam of foreign capital. Mozambique also boasts huge stores of coking coal – the world’s largest untapped reserves, according to some estimates, mostly found in Tete province, a wild, forested region bordering Zambia, Malawi and Zimbabwe.

Yet getting resources from mine to market is a nightmare, with producers forced to choose between a rickety, single-track train line stretching to the second-tier port at Beira, or to risk attacks on loaded trucks, which are consistently blamed by the ruling party, Frelimo, on the militant opposition movement, Renamo. That, says London based BMI Research, adds $20 to the cost of each tonne of Mozambican coal. Brazilian mining corporation Vale, which posted a loss of $212 million on its local operations in the first half of 2016, is not the only big industrial outfit to scale back production and investment.

Or consider the El Niño-induced drought that continues to wreak havoc in the country’s central and northern provinces, forcing Maputo to beg for $180 million in food aid. This is a regional, not a local, disaster, one that is also harming farmers in the likes of Malawi and Zambia, where higher rates of productivity and better infrastructure have kept yields higher and prices lower.

By contrast, in Mozambique, undermined by shoddy roads and low productivity, consumer prices rose 12.4% year-on-year in the first three months of 2016, according to IMF data, against an average rise of 3.1% across the previous seven quarters. According to government data, 80% of everything the nation consumes is imported, from the sugar cane used in Coca-Cola to the hydropower produced in the Cahora Bassa Dam – which, despite being located on Mozambican soil, is first exported into South Africa, before being rerouted north and east, to be consumed in Maputo as an imported fuel source.

These systemic weaknesses are in turn undermining the value of the metical. In the year to August 24, Mozambique’s currency lost 50% of its value against the dollar, falling to 73.9, from 47.9. Some commentators are tipping it to pass the 100 mark by the time the year is over.

“We never thought we would be in this state,” says Ecobank’s Nsolo. “There is a genuine worry about the solvency of the country. We are facing both a credibility crisis and a liquidity crisis. Everything other than fuel, wheat and prescription drugs is now considered a luxury. We have seen the impact hyperinflation has had on Zimbabwe, which used to be a net exporter of maize.”

Will that, he wonders, happen to Mozambique too?

Banking industry

A lingering concern is how the banking system reacts to the nation’s wider economic travails. On August 5, Standard Bank’s local division introduced limits on foreign currency withdrawals, cutting them to $500 or €500 or R1,000 ($74.2) a month, according to local data and news provider Zitamar. In turn, Millennium bim, which along with Banco Comercial e de Investimentos Moçambique (BCI) controls 60% of the banking sector, cut monthly foreign currency withdrawals to $1,000, and Banco Único to $2,500, both from $5,000.

Yet so far, banking remains one of the country’s few genuinely viable industries.

“It has performed really well,” says Vasco Gueifão, managing director of Eaglestone Mozambique, an investment adviser and private equity investor with offices in Maputo, Johannesburg and London. “Overall, the banks are well-capitalised, and asset-quality ratios are stable and at comfortable levels. A more challenging environment could force lenders to boost provisions, but we don’t see banks posting losses and requiring capital injections.”

In March, Portugal’s Banco de Investimento Global opened a local subsidiary, taking the number of commercial lenders to 19.

Yet, notes BCI chief executive Paulo Sousa, most of the competition for corporate and retail customers is focused in the bigger cities along the eastern seaboard. “Go inland, and banking penetration levels fall sharply,” he says. “Just 24% of the populace has a bank account. Seventy administrative districts [out of a national total of 128] do not have a single bank branch. So the potential is huge.”

BCI, he says, has done its bit. “When I arrived in Maputo in 2013, we had just 563,000 customers; now, that number is heading toward 1.5 million.” The trick, as in so many parts of emerging Africa, is to offer mobile banking services via basic handsets. “A customer might be based in a far-flung part of the country, with no electricity, no roads, no running water, but he has a mobile phone, and he can do everything through it.”

Atlas Mara, the African banking group run by former Barclays CEO Bob Diamond, is also pushing hard into Mozambique. In late August, it appointed Eduardo Mondlane Jr, son of the founding president of the Frelimo party, to run the Mozambique operations of BancABC, the Botswana-based lender Atlas Mara bought in 2014.

Meanwhile, at Banco Único, chief executive António Correia says the privately owned lender that opened its doors in 2010 aims to cover as much of the nation’s developed regions as possible. It is now present in eight cities and seven provinces, and recently opened its first branch in Tete province. Deposit growth at the lender, which won Euromoney’s award for best bank in Mozambique in 2016, jumped 38% year-on-year in 2015, with loan growth rising 23%, net profit up 500%, and tier-1 capital rising to 16% at end-2015, from 9.9% a year earlier.

The next phase in Banco Único’s development looks set to involve the sale of a majority of shares to Nedbank. The Johannesburg-based lender, which has long coveted a larger presence in sub-Saharan Africa, bought 38% in 2014 and retains the right to increase that stake to 50% plus a single share in the current financial year.

Correia, who expects that additional investment to take place, says he will use the capital to expand the balance sheet and footprint. “Our aim over the next five years is not to become the biggest bank in Mozambique, but definitely to become the best.”

For Mozambique itself, the challenges that lie ahead are numerous, painful and daunting. The government desperately misses its annual fix of donor cash. But getting it back will not be easy. In May, the so-called Group of 14 international donors warned Maputo, in a joint statement, that it was guilty of “serious breach of trust, poor governance and lack of fiscal transparency”. It asked the authorities to list all the country’s existing and planned debts, to detail what the loans to the trio of state firms were intended for, and to reveal the shareholding structure of MAM and ProIndicus. A month later, the IMF called for an “international and independent audit” of Ematum, ProIndicus, and MAM, the three state firms at the centre of the borrowing scandal.

Maputo’s response was a mess. At first, assistant attorney general Mucobora appeared to consent to the request, agreeing to welcome an international probe of both the loans raised by the trio of state firms and of the nation’s finances as a whole. But that offer was quickly nixed by president Nyusi, and for good reason.

“They can’t agree to an international audit,” said a European diplomat in Maputo. “To do that would be to admit that the bulk of this cash was handed to the military to do whatever the hell it wanted.” Nyusi instead ordered an internal inquiry, carried out jointly by parliament and assistant attorney general Mucobora.

Donors were quick to express their disappointment at the decision. Nor has the government done much to quell the IMF’s fears about the state of the wider economy. In June, IMF officials begged Maputo to take an axe to the federal budget, in the hope of trimming the yawning deficit and keeping a check on the nation’s ballooning debt. Yet the very next month, parliament approved an amended budget of M243 billion ($3.6 billion), which included just M3 billion in cost savings. The amended budget also tipped the deficit to reach 11.3% in the year to end-March 2017, against a previous estimate of 10.2%.

Fear of responsibility

Mozambique’s future remains uncertain, and for so many reasons. The fallout from the debt scandal continues to spread. The UK’s Financial Conduct Authority is investigating whether Credit Suisse and VTB misled investors when the Ematum loan was raised and then restructured. Some of the world’s largest investors, including AllianceBernstein, Aberdeen Asset Management and ING hold Mozambique’s Ematum bond. Credit Suisse is also the subject of a separate investigation by Swiss regulator Finma. And MAM is under pressure, having missed a May 23 deadline to complete a $178 million payment to VTB on a $535 million loan.

Credit Suisse and VTB were contacted for this story but declined to comment.

Even investors keen on Mozambique struggle to get their capital, or find ways to put it to work. At a dinner in Maputo, a Portuguese property investor wearily describes how it took “four months to track down the right person in the planning ministry”, and another three to secure a meeting with him. That lament, common across the country, is blamed on the widely shared fear of responsibility.

“It’s a very young country,” says a foreign banker working in Maputo. “That’s reflected in the lack of political maturity. How can they possibly deal on an equitable basis with the world’s biggest energy firms? When it comes to a bargaining contest between the government and the head of ExxonMobil, who is going to emerge with the better deal? It’s a no-contest.”

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