The increasing pace of offshore gas development and the need for investment are pushing the secret loans saga to the margins
The abandoning of the United Kingdom Financial Conduct Authority's criminal investigation into Credit Suisse bank over its role in Mozambique's US$2 billion in hidden loans for dubious security projects that never came to fruition has been widely criticised by investigators, civil society groups and investors (AC Vol 57 No 11, Sovereign default looms). Despite promising to do so, the FCA has not initiated a single criminal prosecution for money-laundering and the worst that any party can expect if found to blame in the Credit Suisse case is a fine or a ban.
The disappointment in the FCA decision is based on readings of the report by risk consultancy Kroll Associates, published last July, which showed numerous irregularities (AC Vol 58 No 14, Rock and Kroll). The findings indicated Credit Suisse lacked basic information on whether the companies they were lending to were viable. The most serious potential offence that critics of the FCA say it ignored is money-laundering. 'The money was paid straight from the banks to Abu Dhabi. It's a clear red flag; that alone should be enough for the FCA to investigate,' one investigator familiar with the case said. Taking into account overpricing and money re-allocated to the Ministry of Defence in an opaque accounting exercise, over $1bn is unaccounted for.
Bondholders told Africa Confidential that they believed Credit Suisse was not transparent with them about its other lending commitments to Mozambique, only revealing its other $622 million loan, to Proindicus, when forced to do so during the 2016 debt exchange. In that deal, the original bond issued by state tuna-fishing company Ematum was restructured into the Mozam sovereign bond (AC Vol 57 no 23, The burden of war and debt). One bondholder complained that the bank should have answered questions about the details of the loans. The investor said they would never have agreed to the Mozam exchange had they known the details of the Proindicus loan. The source says that one of the larger bondholders asked Finance Minister Adriano Maleiane about it directly during exchange discussions in London, and he denied the loan existed.
Concern has been expressed that the FCA decision sends the wrong signal about UK regulatory enforcement. The United States Department of Justice continues its criminal investigation into the loans and Switzerland is also looking into Credit Suisse's role. There is less examination of the Russian-owned VTB despite its major role in the lending, which totalled almost half of the $2bn.
New debt deal
The downgrading of the FCA inquiry comes just after the Mozambican government agreed in principle a new deal with 60% of the holders of the Mozam sovereign bonds. This restructures the remaining $727m debt on terms far more favourable to the bondholders than those presented by the government in March (AC Vol 59 No 6, Maputo's haircut). Rather than the 50% 'haircut' proposed by Maleiane earlier this year, bondholders will accept a trim of only 1.7%, or, as one financial expert put it, 'basically nothing'. Mozambique's bargaining position against the bondholders' group is weak.
The new bond is larger, at just over $900m, and will be more attractive to creditors as interest payments are tied to Mozambique's expected gas revenues. After repeated delays and uncertainty, the buy-in of US oil giant ExxonMobil has breathed new life into the gas sector projects and given reassurance to investors that the money will eventually start to flow.
As part of the bond restructure, the government has committed to paying 5% of its revenues from the gas projects into a new Value Recovery Instrument (VRI) capped at $500m and ending when the bond matures in 2033. It will pay 4% of the new bond's 5.875% coupon in cash, and the rest from the VRI. Although the effective interest rate has almost halved, creditors will still make large profits. Between $1.7bn and $2.2bn will be paid to creditors on the original loan of $760m, according to the anti-debt lobbying organisation, the Jubilee Debt Campaign.
Mozambique's apparently newfound desire to normalise relations with its creditors coincides with the new impetus behind the gas projects.
It may also signal the government's need to to re-engage with the International Monetary Fund. Investors remain cautious, and IMF discussions have been largely fruitless while the country has remained in default. The Fund is considering giving Mozambique a so-called shadow programme, we hear, which does not come with a loan but is a step towards securing financing from the IMF after the freeze in 2016.
There are fears that the International Financial Institutions are doing just what the ruling party, the Frente de Libertação de Moçambique (Frelimo), hoped they would – become tired of the failure of Mozambique to account for the illegal, secret loans, and 'move on'. Donors, IFI staff and diplomats once invested in getting to the bottom of the secret loans saga are transferring to different locations, climbing their corporate ladders and the institutional interest in pressuring Maputo to account for the funds is accordingly fading. Lenders and donors want to return to their core function – getting money out of the door. This comes as a blow to Mozambican civil society, which was grateful for foreign help in its own campaign against corruption.
Restoring relations with the IMF is important because the state needs billions of dollars in loans to fund its own participation in the gas concessions. In April state petroleum company ENH hired financial consultancy Lazard Freres, which is already advising the government on its debt restructuring, to help it raise $2bn to refinance its stake in the ENI's gas concession in the Rovuma basin. Société Générale has been helping ENH raise funds for its interests in Anadarko's block for which it needs another $2.3bn, according to the IMF. These funds will need sovereign guarantees, which will once again add to Mozambique's public and publicly guaranteed debt stock.
Your bank has been declined
All Mozambican bank card payments stopped working on 16 November in an unexpected addition to the country's financial woes. Bank account holders could not withdraw money from cash machines while card payments and direct debits were blocked, sparking serious fears that a run on the banks would leave the country dangerously short of cash and the currency vulnerable. Mozambicans outside the country were left high and dry with no access to funds.
The interbank society of Mozambique, SIMO, has blamed 'unsustainable' conditions demanded by providers of the software that controls all these transactions, Portugal's Bizfirst. SIMO calls the conditions 'blackmail'. But Bizfirst insists that SIMO was in breach of contract and claims that the Mozambicans ignored two warnings issued in November that the payments system would shut down, having earlier failed to pay long overdue fees.
In spite of the complaints of harsh business practices, blackmail and more, observers expect incompetence in Maputo lies at the heart of the problem.
Bizfirst took a hard negotiating position in talks in April, we hear, but SIMO did not act to replace Bizfirst with an alternative contractor or take steps to resolve the points of difference. Critics pointed to the silence of Central Bank governor Rogerio Zandamela, who despite the Central Bank owning 51% of SIMO, said nothing until Tuesday when he bizarrely claimed Bizfirst's system shutdown was a cyberattack. Zandamela ran into more criticism by claiming SIMO was finding a new provider while Bizfirst was negotiating with local banks to restore the service. On 21 November it was reported that local banks will pay the €5 million owed to Bizfirst, and the system resumed operation. It is unclear if and how the banks will be reimbursed by the authorities.
Financial sources suspect that months of internal bickering over how to resolve the problem led to the inaction, and then to ending of the service. Zandamela and SIMO should have anticipated the problem and dealt with it before it reached this point, critics say. There have been calls for his resignation over the affair, but there is no replacement available.
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