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Mozambique’s insurgency raises risk of government debt default

By David Whitehouse
Posted on Thursday, 15 April 2021 16:07

The receding chances of onshore liquid natural gas (LNG) production starting on time in northern Mozambique will leave a hole in public finances and increase the danger of a debt default.

The seizure of the town of Palma in Mozambique’s northern Cabo Delgado province by Islamist militants in March burst a bubble of complacency surrounding a major LNG project development. Government forces retook Palma, but French oil major Total withdrew staff from the Afungi Peninsula.

Fitch’s ‘CCC’ rating on Mozambique’s sovereign debt “reflects our view that a default is possible,” says Adrienne Benassy, Fitch associate director for sovereign ratings. Underpinning the rating are high fiscal and external financing needs, scarce funding options and high levels of general government debt, she says.

“Mozambique is short of options to meet the existing repayment schedule – and with this eurobond debt having already undergone a tortuous restructuring process, investor appetite for further negotiation is likely to be muted,” says Sam Maybee, an analyst at Africa Matters in London.

In October 2019, Mozambique restructured its only eurobond which had been in default since January 2017. The government defaulted after taking out some $2bn in opaque loans.

Debt holders accepted a new $900m bond with a coupon of 5% until 2023 and then 9% until maturity in 2031. The higher interest rate kicks in at the assumed start of LNG production in 2024 – a timeframe that few now expect to be met.

When gas deposits were first discovered in 2010, production was expected to begin in just a few years, says Nathan Hayes, an analyst at the Economist Intelligence Unit (EIU) in London.

Under the terms of the LNG contracts, the concessionaires will recoup the majority of their capital expenditure costs from the initial earnings once production finally starts, he says. The government will get only a small share of the revenue for the first few years of the projects.

Even if production was somehow started in the mid 2020s, “significant gains to government revenue will probably occur only from the mid-2030s onwards,” Hayes says.

Many avenues for external finance are closed off, says Hayes. Although the restructuring of eurobond debt was accepted by bondholders, larger sovereign-guaranteed syndicated loans remain in default.

“This will continue to severely limit Mozambique’s access to international debt markets,” Hayes says.

Sunk costs

Oil companies are unlikely to abandon the region permanently, according to a research note from Gerrit van Rooyen, an economist at NKC African Economics in Paarl, South Africa. Consortiums led by France’s Total and Italy’s Eni have already made final investment decisions and have built up substantial sunk costs.

They are unlikely to pull out unless the area becomes “completely inoperable for an extended time period,” van Rooyen says.

NKC predicts that production is likely to start in the second half of 2025.

Government finances can weather the storm in the short term, says Hayes at the EIU. Higher security spending is already factored into the 2021 budget and state income is also supported by increased revenue from coal and aluminium exports, he says.

Still, investments which were be funded by the country’s proposed sovereign wealth fund will be delayed, says Sam Maybee, an analyst at Africa Matters in London.

“The government can’t launch a major investment programme, of the sort that might typically be funded by eurobond issuance, until it has a more sustainable revenue base,” Maybee says, whether from LNG or elsewhere.

In the medium term, default poses a “growing risk,” Maybee tells The Africa Report. “Mozambique is short of options to meet the existing repayment schedule – and with this eurobond debt having already undergone a tortuous restructuring process, investor appetite for further negotiation is likely to be muted,” he says.

The higher interest due from 2024 on the restructured debt “is likely to be the key flashpoint,” Maybee says.

Bottom line

The government’s debt pressure makes finding a solution to insecurity in Mozambique all the more urgent if it is to avoid another default and economic downward spiral.

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