assessments

Feb 3, 2017 | 09:15 GMT

6 mins read

Cleaning Up Mozambique's Financial Mess

Mozambique's financial quagmire could jeopardize the reign of the Mozambique Liberation Front (Frelimo) or President Filipe Nyusi (C).
(GIANLUIGI GUERCIA/AFP/Getty Images)
Forecast Highlights

  • Mozambique's government will have to restructure its debts to bondholders before it can access much-needed loans from the International Monetary Fund.
  • Mozambique's financial crunch will strain the patronage networks of the ruling Mozambique Liberation Front, known as Frelimo, and could divide the party as a new generation of leaders rises to power within it.
  • Sustained financial and political uncertainty will hamper investment in the country's burgeoning natural gas sector, slowing Mozambique's emergence as an energy producer.

Once hailed as an economic success story in East Africa, Mozambique has suffered a reversal of fortune over the past four years. In 2013, renewed hostilities between the central government and the opposition Mozambique National Resistance Movement, widely known as Renamo, hurt the country's economy, and the global drop in commodity prices dealt it another blow the following year. More recently, Mozambique defaulted on a $59.8 million bond payment that was due in mid-January. This was just the latest symptom of a financial crisis that will challenge the ruling party's hold on power and delay development of the country's substantial natural gas resources.

From Bad to Worse

Mozambique's financial difficulties intensified when investigations revealed that proceeds from the sale of $850 million in bonds issued in 2013 to finance tuna fishing were instead used to buy military equipment, unleashing criticism from international investors. Then in April 2016, the government in Maputo admitted that it had secretly taken out almost $1.4 billion in loans and that much of that sum had been siphoned off. The revelation prompted donors such as the International Monetary Fund to halt assistance to Mozambique, pushing the country's public debt level to an unmanageable 130 percent of its gross domestic product in 2016 and sending its currency tumbling. The crushing debt dropped Mozambique's bond ratings into the same category as those of Venezuela, which is battling massive financial problems of its own. To make matters worse, the U.S. Securities and Exchange Commission opened an investigation into the 2013 bond sale in late December, putting the country's debt deals under further scrutiny.

Now, the government has found itself in a pressing predicament: To get much-needed assistance from the IMF, it must first restructure its debts. Until an agreement can be reached with bondholders and Mozambique's debt status stabilizes, the IMF will not discuss a new loan package. But many of the country's bondholders reportedly see the recent default as more of a strategic choice on Maputo's part than a matter of economic necessity. Their mistrust will complicate negotiations to restructure the debt. If Mozambique takes a hard line in the talks to try to get better terms, it will risk jeopardizing the IMF loans that it needs to get its financial house in order.

Eventually, Maputo will work out its differences with its bondholders, and the IMF will likely cut it a deal. But securing support from the organization and other former backers will be just the beginning of a long process to get Mozambique out of debt. To realize its economic growth potential, the country will need to implement prudent economic and fiscal policies.

All Politics Is Local

For the ruling Mozambique Liberation Front party, known as Frelimo, a long-term financial crunch could jeopardize its position. Since taking power in Mozambique after its independence from Portugal in 1975, Frelimo has built patronage networks that it will struggle to expand or maybe even maintain in the country's current financial situation. Meanwhile, the party officials who helped win Mozambique's decadeslong civil war in 1992 and established Frelimo as the dominant party have been retiring or dying. As younger party leaders who do not share a connection to the civil war rise to power, deteriorating patronage networks may cause divisions in Frelimo. The country's financial turmoil could also lead to a party revolt and challenge President Filipe Nyusi's hold on power.

Mozambique's money troubles, however, are unlikely to disrupt the government's ability to rein in Renamo, which has waged a sporadic rebellion from its bases in the center of the country. (A cease-fire that took effect in late December is still holding, but it will likely give way to violence, as past truces have.) Though budget constraints could prevent the government from buying expensive hardware or training additional troops, Mozambique's military has resources enough to counter Renamo. After all, the rebel group has access to few resources and has not had an outside sponsor since the end of the Cold War. Renamo is more a nuisance for Maputo than an existential threat, and the country's financial problems will keep it that way.

It's a Gas

In addition to the political uncertainty that Mozambique's financial problems could introduce, they could hinder the development of its considerable natural gas resources. The country's offshore natural gas reserves could attract more than $31 billion in investment over the next five years by some estimates. One exploration block holds at least 2.1 trillion cubic meters of recoverable natural gas that could add more than $28 billion to the country's GDP over the next two decades. (Its 2014 GDP, by comparison, was just over half that sum.) If the country can develop these resources, production from that block and others — not to mention possible undiscovered reserves — could put Mozambique on a similar footing with other energy producers in Africa, such as Angola.

Because Mozambique lacks the money and expertise to exploit its massive natural gas resources on its own, its future production depends on foreign energy companies. Anadarko Petroleum Corp., Eni and ExxonMobil have already invested there, and Mozambique's burgeoning energy industry could begin producing significant amounts of natural gas in the next few years. Projected global oversupplies of natural gas around the same time would probably keep prices for Mozambique's exports down at first, limiting the revenue available to help restore the country's financial health. The oil companies' need to recoup investment costs, moreover, will temporarily reduce revenue to the country under their production-sharing contracts. But once the initial growing pains are past, the country's natural gas reserves stand to fuel massive economic growth in Mozambique. An influx of energy revenues would pad Frelimo's coffers and almost certainly ensure the party's unity and dominance for years to come. It would also enhance the government's ability to assert its control over the country, much to the detriment of Renamo and minority factions in Frelimo. And in the long term, the newfound wealth could give Mozambique greater influence in East Africa. Nevertheless, the country is still in the development phase, and if its emerging corruption scandals lead to further financial and political instability, foreign energy companies may be reluctant to keep doing production deals with Maputo.

In the meantime, Mozambique must prevent further delays in its debt renegotiations to pave the way for talks with the IMF and, in turn, renewed financial assistance. After its loan disbursements have resumed, Maputo can start trying to reckon with the financial mess it has gotten itself into. Its future as an energy producer depends on it.

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