South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
Mozambique: Can elections and fresh finance reboot the nation?
Mozambique’s long-running debt scandal from 2014 drove the country into a financial and political crisis. As the October 2019 election approaches, voters wonder whether the nation can walk back from the brink of economic collapse.
The economic positives are forecasts of increased growth (about 3-4% in 2020 and 5-6% in 2021) coming from the International Monetary Fund (IMF) and the Economist Intelligence Unit (EIU). Mozambican President Filipe Nyusi at the Russian-Mozambican Forum earlier this month stated that talks with the IMF were making “encouraging progress” as the country aims to restore access to international financing.
Additionally, the political upside (at least in the public’s eye) is the recent decision by a court in Maputo to put on trial all 20 of the individuals allegedly involved in the Mozambican hidden-debt scandal.
- Judge Evandra Uamusse stated there was sufficient evidence to proceed to trial for all individuals and, citing flight risk, upheld the detention of those 10 currently detained since February, granted bail to one individual, and ordered the detention of the remaining nine individuals.Charges against these 20 individuals range from blackmail, corruption, and embezzlement to falsification of documents and membership in a criminal association.
The Roadshow to Respectability
All the economic and political upsides, however, will be at the mercy of an upcoming roadshow to creditors, launched by a group of Mozambican officials to shore up support among the holders of Mozambique’s $727-million 10.5% 2023 bonds.
- Only 60% of bondholders supported the preliminary restructuring agreement announced by the government in May, which is 15% short of the threshold necessary to approve the deal.
The roadshow will consolidate discussions with the holdouts and those already committed to the offer on the table, which is an exchange of the 2023 bonds into a new $900m bond, maturing on 15 September 2031. This will carry a 5% interest rate until 15 September 2023, rising to 9% thereafter, both fully paid in cash.
This offer replaces the previous proposal from November 2018, which included an upside recovery instrument entitling bondholders to a share of Mozambique’s future gas revenues. Offering a piece of the country’s future revenue, however, became a political football in Maputo, and led to the new proposal.
The 2023 bonds originally were the result of an exchange completed in 2016 when the $850m loan participation notes, tied to the state-owned fishing company Ematum, were exchanged for sovereign bonds.
- Arranged by investment banks, Credit Suisse and VTB, in 2013, the Ematum notes are one of three transactions tied to a U.S. federal case and an alleged $2-billion bribe and kickback scheme.
The other two transactions linked to the alleged scheme are the $622m loan and $525m loan to Proindicus and Mozambique Asset Management (MAM) respectively, both being state-owned entities. Much of this debt was undisclosed to the public; when Mozambique came clean about the debt, the IMF cut off support to the country, which triggered a currency collapse and ultimately led to a debt default.
The implementation of the exchange offer was to be completed by 1 September and was seen as an early gift to President Nyusi, before the October elections. However, the highest court in Mozambique—the Constitutional Council—voided “the acts inherent to the $850m loan contracted by state-owned fishing company Ematum SA in 2013 and the sovereign guarantee granted by the government that same year, with all legal consequences”. The ruling left many inside and outside the government scrambling to accommodate the ruling into the restructuring process.
- After discussions with lawyers and other advisors, the government decided to go forward with the restructuring.
The decision to proceed to the market with a restructuring proposal puts the government’s ability to reassure investors (and the larger market) at the centre of Mozambique’s short-term future. The investor tour is almost a new initial public offering (IPO) for the country, with state-owned energy company Empresa Nacional de Hidrocarbonetos (ENH) in most need of a re-engaged international market.
Yet it is not clear if the market is buying into the gas story of Mozambique (and Tanzania for that matter) or whether investors—regardless if they are private, development, or public—are willing to put their capital back into the country. Nullification of the government guarantees will likely scare off some investors.
On a side note, the country’s attorney general is proceeding in the UK courts with efforts to cancel the government guarantee on the Proindicus loan. The country also has a preliminary restructuring agreement with the MAM creditors, details of which have not been disclosed.
An Election with a Clear Frontrunner (But Many Risks)
Mozambique’s presidential election is also under the microscope as outsiders look to understand the changes in the country and path forward to 2020 and beyond. The ruling party, the Mozambique Liberation Front (Frelimo), is expected to win the election in October.
A successful debt restructuring and injection of cash into the Mozambican financial ecosystem, particularly for gas projects and power projects, would expand the Frelimo support base. Thus, we can expect more news like last week where the U.S. Export-Import Bank (EXIM Bank) disclosed its intention to vote on a $5bn direct loan for the liquefied natural gas (LNG) project in the Rovuma Basin, one of the world’s largest untapped gas reserves. Mozambican officials are said to be actively pushing for this loan.
Critics and cynics alike will be questioning the election debates and watching the election poll oversight.
- Can Ossufo Momade create a debate and broaden the economic conversation?
- Will the Mozambican National Resistance (RENAMO) lose momentum following the death of its long-term leader Afonso Dhlakama in May 2018?
- Or can Daviz Mbepo Simango, Mayor of Beira since 2003, boost the national presence and strength of the Democratic Movement of Mozambique (MDM)?
The arrival of other third-party candidates, like Maria Alice Mabota—a respected human rights activist and former president of the Mozambique Human Rights League—who will lead the Democratic Alliance Coalition (CAD party, could also help energize the political discussions and debate.
A lively debate on the future of the country will not add value, however, if it succumbs to allegations of election fraud or poor polling oversight. Opposition parties are already calling for an independent audit of voter rolls, arguing that voter registration is being pushed toward the provinces that favour the ruling party.
President Nyusi’s ability to satisfy international observers (rightfully or wrongfully) will also be a factor in the larger evaluation of the country’s honesty and favourability for investment.
- At the moment, the jury is still out (and RENAMO will do its best to influence that jury), but a decision is bound to come soon (i.e., investors will soon take a view on the country).
Looking Beyond 2019 to 2020
Google “Mozambique economy and 2020” and you will not get many profound results. We are all watching 2019 with a sense of angst and scared to take a view on the country’s long-term potential. Today, Mozambique is undervalued despite its abundance of gas reserves, youthful population demographics, and political leadership.
It is accepted that President Nyusi is aligned with former president Armando Guebuza because Nyusi served as his Minister of Defence from 2008 to 2014. There is no indication, however, that Nyusi was involved in the actions of the former finance minister Manuel Chang, which led to the hidden debt.
Bottom line: We should give the President and the country another chance and accept the guilty plea regarding the its finances. Because, if we cannot look beyond the current situation, then we must sadly conclude Mozambique will not find much to hope for in 2020.
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