Debt default risk increases in Mozambique

By Thea Fourie, Senior Economist, IHS Global Insight

The inability of state-owned enterprise Mozambique Asset Management (MAM) to make a payment of $178 million to foreign private creditor VTB Bank of Russia and the government’s failure to honour its sovereign guarantee by yesterday (23 May) has increased Mozambique’s default risk quite substantially.

The MAM loan, which reportedly was acquired to construct shipyards in the capital, Maputo, and the northern port of Pemba, to service the nascent but potentially large offshore liquefied natural gas (LNG) finds in Mozambique. Formally, Mozambique is not yet in default since a grace period is normally built into such loans.

On 11 May, IHS downgraded Mozambique’s short-term sovereign risk rating quite aggressively as the International Monetary Fund (IMF) and G-14 donor aid partners suspended assistance under a cloud of debt irregularities. The inefficiency in debt acquisition under the previous presidency of Armando Guebuza (2005?15), which only recently became public, has been increasingly revealed and shows that funding was channelled towards projects that have yielded almost no economic return, benefiting only a small political elite.

The current inability of the Mozambican government to handle the crisis adds to investors’ concerns and confidence. The further debt commitments made by state-owned company Proindicus, funding that was spent on naval and radar equipment, among other things, will also fall due during 2016. The mounting debt commitments, rising arrears in public-sector spending commitments such as salaries, low foreign reserve holdings, delays in LNG development, and almost no foreign assistance from the IMF and donors have increased Mozambique’s debt default risk substantially. A downgrade in Mozambique’s medium-term sovereign risk rating also appears inevitable