Mozambique’s $726m “tuna bond” slid to a new record low after the government admitted it would have to restructure its debts to emerge from “debt distress” and win succour from the International Monetary Fund.
The heavily indebted nation was until recently considered one of Africa’s star economic performers. However, shrinking foreign investments, falling commodity prices and delays to big projects have abruptly halted an economic boom, halving the annual growth rate from its 2014 peak to an estimated 3.7 per cent this year.
But controversial government borrowing has been the biggest cause of distress in one of the world’s poorest countries. Earlier this year Mozambique admitted to $1.4bn of previously undisclosed loans, worsening its financial predicament and leading the IMF and other donors to suspend aid programmes that accounted for about a quarter of the budget.
The revelations about the undisclosed loans came after another scandal involving $850m of state-backed loans — dubbed the “tuna bond” — that were ostensibly used to set up a tuna fishing company. However, the bulk of the funds was used for naval vessels and other security equipment.
To regain the IMF’s support, the government said on Tuesday it had appointed Lazard and White & Case to advise it on a restructuring, and asked its creditors to form committees for negotiations so it could resolve its “debt distress”.
“A collaborative process is of paramount importance to engage in a constructive dialogue with creditors with a view to restore Mozambique’s debt sustainability in the medium to long term and ensure the resumption of an IMF financed program,” the finance ministry said in a presentation to creditors published on its website.
As a result, Mozambique’s “tuna bond” maturing in 2023 collapsed from 81.2 cents on the dollar on Monday to a low of 66.6 cents late on Tuesday, according to Bloomberg data, which is equal to an annual yield of over 20 per cent.
The debt restructuring has been simmering for some time amid fears of a sovereign default.
The metical, Mozambique’s currency, has lost more than half its value over the past two years, raising the cost of its debt service in local terms, while government reserves have tumbled from $3.1bn at the end of 2014 to $1.7bn. That constitutes less than two months’ worth of imports — well below the level the IMF considers a bare minimum.
In April, the government, which was already under pressure from donors angered by the tuna loans, swapped the $850m bond, which was issued by a state-owned company called Ematum, for a longer-dated government bond.
But the country’s finances and its credibility with creditors took another blow when the government subsequently revealed $1.4bn of previously undisclosed debts linked to two other state-affiliated companies.
Each loan breached Mozambique’s own budgetary ceilings, as well as its arrangements with donors.
The finance ministry presentation said Mozambique failed all five of the IMF’s debt sustainability indicators, which meant it would have to restructure its bonds to regain the organisation’s financial help.
In September, Michel Lazare, the IMF’s mission head, said: “A solid track record of implementation of sound macroeconomic policies and an effective initiation of the audit process in the near term would help to create the conditions for a possible resumption of program discussions with the IMF.”
Lazard has a long pedigree of sovereign debt restructuring work, and Michele Lamarche, the Lazard banker hired to advise Mozambique, also advised Greece on its mammoth €200bn debt restructuring in 2012.
Aside from a brief 2011 default by the Ivory Coast in the wake of post-election turmoil, and a mysterious default by the Republic of Congo earlier this year — which was swiftly “cured” — Mozambique will become the first African country to renege on its debts since the Seychelles in 2008.
Sample the FT’s top stories for a week
You select the topic, we deliver the news.