The African fairy tale took a jolt earlier this year when Mozambique defaulted on Sh6 billion ($60 million) interest on a Sh70 billion ($700 million) Eurobond floated two years ago. To be sure, it is not the first default. Cote D’Ivoire defaulted in 2011 but that was on account of the crippling post-election crisis following former president Laurent Gbagbo’s attempt to cling to power. However, the Cote D’Ivoire case is what is known as a force majeure event. Mozambique’s default is, therefore, the first “normal” default.
In 2013, a Mozambique State-owned company Ematum, borrowed $850 million to finance a tuna fishing operation. The debt was in the form of “loan participation notes”. These are something close to a bond, but not quite. They are tradable loans but are not listed on stock exchanges as bonds are. The borrower pays both the principal and interest. The transaction was arranged by three blue-chip investment banks: Credit Suisse of Switzerland, BNP Paribas of France and VTB of Russia. The loans were to be repaid over seven years with a two-year grace period. The floating interest rate was 6.5 over the benchmark London interbank offer rate.
As the loan was about to fall due, the Mozambican government informed the creditors that the fishing operation was not as successful as had been anticipated. As such, Ematum would not be in a position to service the debt. A negotiation process ensued, which culminated in an exchange of the notes with a sovereign bond (a proper Eurobond) paying a higher interest of 10.5 per cent and due 2023. This transaction was arranged by Credit Suisse.
Trouble started when it became public that at the time when Credit Suisse and BNP Paribas were selling Mozambique the Ematum debt, Credit Suisse and VTB were secretly arranging loans totalling close to $1.2 billion to two other peculiar entities – Proindicus and Mozambique Asset Management – both linked to the Mozambican security services.
The creditors were only informed of these loans after they had accepted the restructuring transaction. This is beyond the pale. First, by failing to disclose this in 2013, the investment banks misled the investors about the true indebtedness of Mozambique. With a $16 billion economy, the secret loans amounted to 7.5 per cent of GDP and 12.5 per cent including the Ematum debt. The banks added insult to injury by failing to disclose the same to the creditors during the restructuring transaction, an even worse crime because as holders of the secret loans, they were direct beneficiaries of the restructuring.
Three months ago, the Mozambican government notified the bondholders that it may not be in a position to service the next interest payment amounting to $60 million which was due last week on January 18, and would also struggle to keep up payments in 2017. Sure enough, come January 18, Mozambique did not make the payment.
Why did Ematum default? It had spent 40 per cent of the money – $350 million – to buy 24 fishing boats and six naval patrol boats. The rest, according to Mozambique’s Fisheries minister, was used to install radar and satellite communication equipment, license fees, technology transfer, training, running costs as well as a provision to pay interest due during the first year of the loan. In short, most of the money was spent on military hardware. But even the cost of the fishing fleet was suspect. In France, where the boats were made, the press put the cost at 200 million euros, which is about $100 million below the Mozambican figures.
Whether in fact any money actually made it to Mozambique at all is doubtful.
Everything financed by both the Ematum and secret loans was bought from PrivInvest, a European shipbuilder and defence contractor owned by Iskandar Safa, a French-Lebanese businessman of no mean repute, and his brother Akram. It is alleged that all the proceeds of the Ematum loans went directly from the investment bankers to a Safa-owned company by the name Abu Dhabi Mar. Mozambique law, like ours and every other country, requires public money be put in a consolidated fund and only spent with authority of parliament.
But this is not the only law that the government flouted. Mozambique’s budget law limits government loan guarantees to State entities to $6 million, yet the government guaranteed over $2 billion, more than 300 times the ceiling, without disclosure and approval by parliament. Moreover, the secret loans were totally fraudulent since these entities were not revenue generating State enterprises that would be expected to service the loans. This was disguised government borrowing.
Once the Mozambique deals were closed, the Credit Suisse banker who arranged them – a New Zealander by the name Pearce – left his job and went into business with Iskandar Safa. Shortly after, he took control of a Swiss company, Palomar Capital Advisors, from a British lawyer who also happens to sit on the board of some of Safa’s other companies including Abu Dhabi Mar. The Panama papers show that Pearce, the British lawyer and PrinInvest are shareholders and directors of a British Virgin Island registered company also known as Palomar.
What it looks like is that the entire operation was originated and arranged by and for the benefit of Pearce, Safa and associates. Obviously, there were kickbacks paid to Mozambican public officials, but overall, the Mozambican people have been scammed 12.5 per cent of GDP by economic hitmen. In relative terms, this is the equivalent of Kenya being hit for $7.5 billion, the equivalent of Mombasa-Naivasha SGR and the Eurobond combined. Following these revelations, UK and Swiss financial authorities opened investigations on the loans, focusing specifically on the role of the banks. The US authorities appear to have followed suit.
Mozambique has no tuna fishing industry to speak off. Ematum was a greenfield venture predicated on foreign vessels fishing in Mozambique’s Exclusive Economic Zone. But just having fish in the water does not make for a successful fishing industry. You need expertise and markets. Ematum had neither. It was a start-up. In such case, such a huge investment only makes sense if there is joint venture or technical partner with a strong balance sheet and track record. There was no such. Ematum’s shareholders were other State entities, including the State Intelligence and Security Agency. The fisheries minister estimated the tuna potential at $200 million per year. Supposedly savvy international investors, the who is who of global fund management, lent this boondoggle $850 million, with an annual repayment of close to $260 million. What were they smoking?
The cold reality is that the investors could not care less where the money ended up. They were optimising their portfolios. Mozambique had been striking some of the biggest natural gas finds in recent years. Franklin Templeton and AllianceBernstein, two giant asset managers on the Mozambique bondholders creditors committee, have $850 billion and $480 billion in assets under management respectively, a combined value of more than 20 times our GDP. An investment of say $100 million by Templeton translates to 0.01 per cent of its portfolio. For a potential return three to four times the average, it is well worth the risk. Greylock Capital, one the others in the committee, specialises in “distressed and high-yield assets worldwide.” Many people think that heightened international investor interest reflects confidence in our wonderfully managed rising economies. Mammon has no qualms helping our kleptocrats to dip into our oil and gas finds while still in the ground. When it comes out, we will pay.
All this racketeering was going on under the watchful eye of the IMF, which had an active three-year credit facility approved in June 2013. Did the IMF know about Ematum? It did. It warned the government in one of its reports that it needed to take action to ensure Ematum’s profitability before it became a risk to the national Budget. The IMF did not see reason at the time to take issue with a government that had borrowed three times its $283 million credit for a dubious venture.
Once the scandal came to light, the IMF promptly suspended the credit, and the other donors followed suit. But this is precisely when Mozambique required the IMF facility. Once the scandal broke, a confidence crisis and a run on the currency was assured. Indeed, it is against such an eventuality that the IMF has extended Kenya a $1.5 billion standby facility that the government can draw on to cushion the economy from external shock. It is what Nobel Laureate and former World Bank Chief Economist Joseph Stiglitz famously referred to as shouting fire in a crowded theatre, in reference to the IMF’s response to the onset of the Asian financial crisis. There is not a single macro-financial crisis in recent times that the IMF has seen coming, and there is not one that it has not made worse.
A common refrain by Jubilee cheerleaders – including the IMF – is that our debt is sustainable because our debt-to-GDP ratio is only 50 per cent of GDP, while some rich countries’ ratios are more than double that. How can we talking about debt distress while the US (104 per cent) and Japan (230 per cent) are not distressed.
Before the Tuna bonds, Mozambique’s debt was just about 40 per cent of GDP. The economy was growing at a blistering 7 to 8 per cent of GDP and with the gas finds, you needed very dark sunglasses to look at Mozambique’s economic prospects.
As the economic hitmen were hard at work, the IMF was co-hosting an Africa Rising conference with the Mozambican government in Maputo. As noted, the bond heist amounted to 12.5 per cent of GDP, which would still have left Mozambique with a comfortable debt to GDP ratio. Today, Mozambique’s debt is hovering around 130 per cent of GDP. What happened?
In 2014, the Metical – the Mozambican currency – was exchanging at 30 to the dollar. It bottomed out towards the end of last year at 70 against the dollar. That is the equivalent of the shilling falling from the current Sh104 to Sh240 against the dollar a year down the road. Our $17 billion foreign debt (Sh1.8 trillion at current exchange rate) suddenly balloons to Sh4 trillion without borrowing an additional penny. The $180 million interest on the Eurobond shoots up from Sh19 billion to Sh43 billion.
The rich countries the Jubilee cheerleaders want us to benchmark don’t have such exposure; they borrow in their own currency and at prime rates. We say in Gikuyu “ndîakaguo ta ya wakinî” meaning a wise person does not copy peers blindly. More importantly, “ukiona mwenzako anyolewa, chako tia maji (when you see your accomplice getting shaved, please wet your scalp)”.