After Mozambique’s spending, the reckoning
In March, Mozambique will have to repay another $100m tranche of an opaque and roundly criticised bond deal. The money could have been used to build four hospitals. Instead, it will repay a wildly overinflated contract for tuna-fishing boats. In the words of the country’s former prime minister Luísa Diogo: “Something has gone wrong.”
Back in 2007, Mozambique was feted in ballrooms and boardrooms. Bankers pointed to stellar growth rates and the sound macroeconomic management that had led the fastest turnaround of a post-conflict country since Vietnam. Former president Joaquim Chissano won the inaugural Mo Ibrahim Prize for good governance that year.
Today, it seems like a rerun of Africa in the 1980s: rising debt, a pile-up of white elephant projects, murky finances and a balance-of-payments crunch requiring an International Monetary Fund (IMF) bailout.
Mozambique is not the only African country experiencing economic turbulence at the end of a commodity and credit boom, but the impact is more painful than in most after a decade of reckless spending and borrowing. Fixing the problem will mean tackling the corruption that underpins some of that recklessness.
That leaves President Filipe Nyusi on the horns on a dilemma. If he fails to act against the shady elements of his predecessor’s regime – that of the free-spending Armando Guebuza – his credibility will be undermined. Push too hard, and he risks revolt or worse from the powerful former single party, the Frente de Libertação de Moçambique (Frelimo).
Under Guebuza, president from 2004 to 2014, and finance minister Manuel Chang, the way in which Mozambique managed its finances changed fundamentally. State spending increased in the double digits almost each year, foreign aid declined and the government took on deficit financing.
Most contracts for public investment projects were untendered and sole-sourced
Capital spending rose and was covered by foreign debt. Funding gaps for the recurrent budget were financed on domestic markets, and domestic debt rose 28% per year between 2001 and 2013 to Mt30bn ($1bn).
By 2015, sovereign debt had risen more than 200% since Mozambique’s international debt relief in 2000, including a 53% increase in the last two years Guebuza was in office.
Debt will continue to rise as projects are implemented and to finance government expenditure, including a budget deficit of $1.1bn in 2015, or about 6.5% of gross domestic product (GDP). By 2020, debt is projected to double again to more than $16bn.
With debt markets drying up, this leaves little wriggle room for Mozambique’s financial planners. Various shades of austerity loom. According to Standard and Poor’s analyst Gardner Rusike, Mozambique’s case is not entirely unusual: “A number of African countries that had fast-paced growth also have expanded fiscal positions and higher debt to GDP ratios – this has not led to greater creditworthiness.”
Under Guebuza, Mozambique became a country that could increase state spending, pay higher wages and develop prestige projects that appeal to national pride. However, the government also discarded the difficult market reforms and macroeconomic stability that were the basis for growth in the post-civil-war period.
The government halted privatisations and encouraged poorly performing parastatal companies to assume ambitious nation-building roles. These companies now run substantial losses and are a growing drain on public finances. This was made possible, according to Fernando Lima, the publisher of independent newspaper Savana, “by the belief that resource riches through gas and coal were imminent and that we should not be afraid to take on debt.”
But the world-class gas deposits in the Rovuma Basin, discovered by multinationals Anadarko of the United States and Eni of Italy, are not the resource bonanza Frelimo’s leadership was hoping for, especially with the current global slump in gas prices.
Analysts forecast that production is unlikely to begin before the first half of the next decade, a longer time horizon than official estimates of 2020. Even then, revenue-sharing terms mean that foreign companies will recoup their investment costs first in the early years of production.
The chimera of gas cash also offered the ability to end restrictions on sovereignty that came through oversight in Western aid relationships. “Guebuza and his group believed that we could do whatever we wanted and didn’t need to listen to anyone. As a result, we got a confrontational relationship with donors. Friendly countries like China, Brazil, India, Vietnam and South Africa were supposed to replace the Western donors,” says Lima.
State spending then became politicised and inefficient. The largest projects include the $725m Catembe bridge over Maputo harbour to undeveloped land and a $300m Maputo ring road.
There is a new Chinese-built international airport in Maputo, new ministerial buildings and, soon, a new parliament in Catembe. Brazil financed a $144m international airport with capacity for half a million passengers in Nacala, an isolated northern city, a project that was costly and ill-conceived.
Most contracts were untendered and sole-sourced. The government often did not disclose its terms, and in some cases there are questions about inflated prices. These deals were often taken on as sovereign debt and involved commercial rather than concessional financial terms, contrary to undertakings made for debt relief through the previous international debt-relief programme.
There are also suspicions about corruption. Manuel de Araújo of the Movimento Democrático de Moçambique and mayor of Quelimane explains: “These investments could have been done on low interest rates or for lower cost, but he [Guebuza] was not interested in the economic viability of projects or rational planning. Nobody can explain why we needed a bridge to Catembe or a new parliament and why these were priorities. They were ideas that came from nowhere.”
Benefits to cronies
De Araújo argues that Guebuza was more interested in the political symbolism of projects and careless about their costs. “The interests of the ruling party were elevated over the state, and so the party was strengthened and the state weakened. Public investment projects had to be useful to the party elite. We have so many big projects now because these are the easiest way to distribute benefits,” he says.
The largest and most expensive sovereign liability is the Empresa Moçambicana de Atum (Ematum) state fishing company and related naval contract backed by a $850m commercial bond that was Mozambique’s debut on international capital markets in 2013.
The defence minister’s public dressing down shows Nyusi preparing to assert himself
Questions over a lack of transparency and alleged irregularities include that it was negotiated in secret outside of normal government channels – neither parliament or cabinet were informed – and with the involvement of close associates and family of former president Guebuza.
The bond has had disastrous consequences. Ematum is unviable as a company and cannot service its debts, which have been taken on as a public liability. With that move, Mozambique’s annual debt-service bill doubled overnight to $400m. Some donors ended budget support entirely or cut aid over concerns about corruption and fiscal irresponsibility.
The government is in talks on restructuring the loan, something Standard and Poor’s Rusike says would “mean a commercial default”. The ratings agency downgraded Mozambique in July and assigned a negative outlook, with an Ematum default being a possible catalyst for a further downgrade.
The consequences of a credit binge and years of ignoring macroeconomic advice came together in the last quarter of 2015 in an economic crisis that has still to reach its peak. In October, the authorities were forced to turn to the IMF for a $284m bailout package.
Balance of payments problems were worsened by a first, $100m, payment to Ematum bondholders in September and another is due in March. Falling foreign reserves and foreign exchange scarcity have led to a currency crash, including a 21% fall for the metical against the US dollar in one week in late November when the central bank was said to have temporarily run out of dollars.
Downhill all the way
The metical depreciated 64% in nominal terms against the dollar in 2015 – one of the worst records of any developing-market currency. Even against the South African rand, the currency of Mozambique’s dominant trade partner and also one of the weakest global currencies, the decline was 32%.
Savana publisher Lima adds: “There were voices in Frelimo questioning these policies, but they were silenced. [Guebuza’s] party leadership style created a chorus of approval around his decisions, which were celebrated, not questioned.”
Nyusi’s government, now facing mounting debt and a funding gap, is pursuing economic stabilisation with the IMF. Negotiations are under way over tough targets in the 2016 budget involving fiscal consolidation estimated at 2% of GDP.
The government has also acted to patch up relations with donors and halt the decline in foreign aid. The efforts have been well received, and early budget support commitments for 2016 at $312m are already up on the $273m of 2015.
According to one Western donor with much experience in Mozambique, the present reset with Nyusi is a final opportunity: “The country now has a window of about five years to put in place the systems and financial controls to account for resource wealth.”
The question is, should Nyusi be interested, could the slump in revenue be used as political cover for an anti-corruption drive? It is a vulnerable period for those in Guebuza’s camp.
However, it is unclear that Nyusi has control over the military, let alone the police and judiciary. Some members of his Makonde ethnicity – with a group led by Alberto Chipande – believe they are owed something for their electoral support and are pushing for spoils.
For those looking for positive signals, the public dressing down of defence minister General Atanásio Mtumuke, another Makonde, shows that Nyusi is preparing to assert himself. He will need to control Frelimo’s top body – the political commission, which is currently packed with Guebuza loyalists – before he can unpick the web of state corruption dragging the country down. ●