Mozambique insurgency increases risk of public debt default

The capture of the city of Palma in the province of Cabo Delgado in northern Mozambique by Islamist militants in March burst a bubble of convenience around the development of a major LNG project. Government forces retook Palma, but the French oil major Total withdrew its personnel from the Afungi peninsula.

Fitch’s “CCC” rating on Mozambique’s sovereign debt “reflects our view that default is possible,” said Adrienne Benassy, ​​Fitch’s associate director for sovereign ratings. At the base of the notation are high budgetary and external financing needs, limited financing options and high levels of government debt, she says.

“Mozambique is running out of options to meet the existing repayment schedule – and with this Eurobond debt having already undergone a tortuous restructuring process, investor appetite for further negotiations is expected to be reduced,” said Sam Maybee, 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 contracting some $ 2 billion in opaque loans.

Debt holders have accepted a new bond of $ 900 million with a coupon of 5% until 2023, then 9% until maturity in 2031. The higher interest rate goes into effect early of LNG production in 2024 – a deadline few now expect to meet.

When gas fields were first discovered in 2010, production was due to start in a few years, explains Nathan Hayes, analyst at the Economist Intelligence Unit (EIU) in London.

Under the terms of the LNG contracts, concessionaires will recoup the majority of their capital expenditures from initial profits once production finally begins, he said. The the government will only get a small share of the revenue for the first few years projects.

Even though production somehow started in the mid-2020s, “big gains in government revenue are unlikely to occur until the mid-1930s,” Hayes said.

Many external funding channels are closed, said Hayes. Although the restructuring of the debt into Eurobonds has been accepted by bondholders, larger syndicated sovereign guaranteed loans remain in default.

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

Sunk costs

Oil companies are unlikely to permanently abandon the region, according to a research note by Gerrit van Rooyen, economist at NKC African Economics in Paarl, South Africa. Consortia led by French Total and Italian Eni have already made final investment decisions and have accumulated substantial sunk costs.

They are unlikely to withdraw unless the area becomes “completely unusable for an extended period,” van Rooyen said.

NKC expects production to start in the second half of 2025.

Public finances can weather the storm in the short term, says EIU’s Hayes. Higher security spending is already factored into the 2021 budget and state revenues are also supported by increased revenues from coal and aluminum exports, he said.

However, the investments that were financed by the sovereign fund project will be delayed, says Sam Maybee, analyst at Africa Matters in London.

“The government cannot launch a major investment program, the kind that could typically be financed by issuing Eurobonds, until it has a more sustainable revenue base,” says Maybee, whether it’s from LNG or elsewhere.

Over the medium term, default poses ‘growing risk’, says Maybee The Africa report. “Mozambique is running out of options to meet the existing repayment schedule – and with this Eurobond debt having already undergone a tortuous restructuring process, investor appetite for further negotiations is likely to wane, ”he said.

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

At the end of the line

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


Source link

Comments are closed.