Debt-ridden Mozambique leaves China with free money but default risk remains for private creditors

In 2017, China agreed to write off four interest-free loans worth 239 million yuan $36 million owed to it by Mozambique. The Asian giant had written off $22 million in 2001 and $30 million in 2007. Together with India, China also extended the grace periods granted to the southern African country for repayment of more than $2.2 billion of debt, as revealed in April 2018. Two months later, Mozambique signed deals worth $100 million for four projects in the country. Mozambique is also currently funding the Moatize-Macuse Railway with $2.7 billion Chinese loans.

Mozambican President Filipe Nyusi is one of 53 African leaders who were in China for the 2018 Forum on China-Africa Cooperation (FOCAC) where Beijing announced $60 billion for Africa. Nyusi left China smiling, stressing that his country’s participation in the two-day event was “very positive”. He returned to Mozambique with Chinese grant of 140 million yuan (about $20.5 million) and a pardon of the country’s interest-free debt to China maturing in late 2018.

The pardons and the grants are a much-needed relief for Mozambique, a country at risk of external vulnerabilities and government liquidity risk as public debt — mostly foreign currency-denominated — continue to rise, and the government shows low willingness to repay its debts. A group of Mozambique’s international creditors had in March dismissed a debt restructuring plan the country presented as a “non-starter”.

Mozambique was considered insolvent in 2017 and was effectively cut off from international credit lines, following the addition of a secret government-guaranteed $2 billion loan to the government accounts in 2016, raising the country’s debt ratio to unsustainable levels.

Public-sector debt stood at 112 percent of GDP at the end of 2017, according to Moody’s estimates based on IMF data. The ratings service, however, noted that there is still very limited available data relating to the financials and debt of state-owned enterprises (SOEs).

“The Mozambique government doesn’t service debt to external private creditors, which makes up around 20 percent of its outstanding debt, including its 2023 Eurobond,” said Lucie Villa, a Moody’s Vice President — Senior Credit Officer in a report titled Government of Mozambique — Caa3 negative, Annual credit analysis.

“Non-payment of interest and principal on private-sector debt instruments constitutes an event of default under Moody’s definition. Whether the government reaches an agreement with private creditors on its debt restructuring or continues to default on its debt, the likely loss for private creditors under our definition remains sizable,” Villa added.

But the International Monetary Fund does not expect Mozambique to make payments for at least five more years.

Moody’s blames Mozambique’s credit challenges on its very weak institutional framework and marked shortcomings in its data reporting.

Hoping on gas
However, the ratings agency expects GDP growth to gradually recover to around 3.5 percent in 2018-19 after weakening between 2015 and 2017 due to the rapid and steep depreciation of its currency against the US dollar, falling commodity prices and reduced project implementation in the minerals sector. Progress is now being reported on the start of liquefied natural gas (LNG) project investment in the country, which could boost growth to more than 4-5 percent in 2019, depending on the scale of investment and the pace of implementation.

US oil major Anadarko Petroleum has signed a deal worth more than $30 billion for the project. It aims to build a 17,000-acre liquefaction complex from scratch to chill gas pumped from the Golfinho/Atum fields in its Area 1 deepwater block offshore. The new plant will produce 12.88 million tonnes per annum of LNG, which can be expanded to 50 mtpa.

The government says the deal could generate revenues of as much as $2.3 million a year by 2025.