The Mozambican government’s failure to pay interest of almost 60 million US dollars on the bonds originally issued by the Mozambique Tuna Company (Ematum), which fell due this week, comes as no surprise, the resident representative of the International Monetary Fund (IMF), Ari Aisen, told reporters on Thursday.
Speaking at a reception given by President Filipe Nyusi to the diplomatic corps, Aisen recalled that the default was in line with the warning given by the Minister of Economy and Finance, Adriano Maleiane, at a meeting with creditors in London on 25 October.
“The government’s position seems to be consistent from the start, when the Minister went to London and indicated the fiscal difficulties the country is facing”, he said. “So it seems natural that Mozambique has not been able to make this payment”.
The default on the Ematum debt would have consequences, Aisen continued, cited by the independent daily “O Pais”, but he hoped they would not be serious.
“The implications will become clear over time”, he said. “What is important is that discussions between the creditors and the Mozambican government can lead to a solution in which the Mozambican debt becomes sustainable”.
Aisen’s words echo those of a statement issued on Monday by the Ministry of Economy and Finance, and addressed to the bondholders. “The deteriorating macroeconomic and fiscal situation of the Republic has severely affected the country’s public finances”, said the Monday statement. “The resulting debt payment capacity of the Republic is therefore extremely limited in 2017, and does not allow the Republic room to make the scheduled interest payment”.
The Government told the bondholders that it “is actively working with the IMF to establish the conditions necessary for an early resumption of its financial assistance to Mozambique. Financial support from the IMF, underpinning an ambitious program of reforms to be agreed, will play a critical role in improving the Republic’s public finances and stabilizing its macroeconomic situation”.
That, however, cannot happen, the statement pointed out, unless measures are agreed with creditors “to put the country’s debt on a sustainable path”.
The Ematum bonds were for 850 million US dollars. They were issued in 2013, via European banks, notably Credit Suisse and VTB of Russia. The repayment terms were extremely tough – the money was to be repaid over seven years, with a two year grace period, and at an interest rate of LIBOR (London Inter-Bank Offered Rate) plus 6.5 per cent.
The Ematum bonds were converted into sovereign government bonds with a longer repayment time, but at a higher interest rate under a deal reached with bondholders in April 2016. What remained of the Ematum bonds were swapped for government bonds maturing in 2023. The interest rate, however, shot up to 10.5 per cent.
The new arrangement was a bullet bond – that is, the government would not have to repay the capital until 2023. Until then it would only be obliged to make annual interest payments. The government’s assumption was that by 2023 revenue will be flowing in from the vast natural gas fields in the Rovuma Basin, off the coast of the northern province of Cabo Delgado.
Shortly after the deal was reached with the bondholders, it became public knowledge that there were other loans (also contracted from Credit Suisse and VTB) for the security related companies Proindicus and MAM (Mozambique Asset Management).
These loans all dated from 2013-2014, and had been illicitly guaranteed by the government of the time, under President Armando Guebuza, in violation of the budget law and of the constitution. In total the loans amounted to slightly more than two billion dollars, and made Mozambique’s total foreign debt unsustainable.
The Proindicus and MAM loans had been hidden from the Mozambican public and from the country’s international partners. This led the IMF to suspend its programme with Mozambique. This included suspending the second instalment of a loan for 282 million dollars from the fund’s Standby Credit Facility.
Aisen said the IMF is still waiting for a full explanation of the Ematum, Proindicus and MAM loans. The government agreed to an independent, international audit of the three companies to ascertain exactly what happened to the two billion dollars. That audit, by the US company Kroll, is now under way.
Aisen said the IMF wants to support Mozambique, but the country’s debt situation must become sustainable. “We want to help the Mozambican government so that it can really bring the country’s debt to a sustainable level”, he said. “We have a good relationship with the government at all levels. We have been in contact very day and, as partners, we want to help the country maintain macro-economic stability, and enjoy inclusive growth which benefits the entire population”.