Creditors of US $ 727.5 million of Mozambique’s public debt submitted a proposal to the country’s government that provides for the payment of US $ 200 million by 2023 and the remainder after that date, as a result of tax revenues from the future exploitation of natural gas.
The negotiation process is being conducted by the financial consultants Lazard & Fréres and White & Case, who have been advising the Mozambican government in this process.
The proposal presented by the Global Group of Debt Holders of Mozambique provides financial relief to the Mozambican government until 2023, when the issue of euro bonds would have to be amortized, capital and interest.
This amortization would represent almost US $ 1 billion and about 80% of the amount owed by Mozambique over the next five years, i.e. until 2023.
In 2013, Credit Suisse and Russian VTB banks set up a Euro 850 million euro bond issue for the newly created Mozambican Tuna Company (Ematum).
The company formed by the Mozambican secret services wanted these funds to acquire fishing boats to catch tuna, the sale of which should be enough to pay off the bonds and still make a profit.
The boats were ordered, built and delivered to Ematum, which never used them for the initial purpose, i.e. to fish for tuna, remaining anchored in the port of Maputo.
The issue was at that time promoted to investors as a way of creating a national fishing industry but most of the money was eventually spent on the acquisition of shipping and war material vessels.
In March 2016, the Mozambican government proposed the restructuring of this bond loan guaranteed by the State, given the country’s inability to pay interest.
The proposal now presented by the Global Group of Debt Holders of Mozambique does not contemplate a debt forgiveness but rather the extension of the payment term through a financial instrument indexed to tax revenues in the liquefied natural gas (LNG) sector.
Thus, the requirement of full payment of the public debt issued in 2016, resulting from the conversion of the Eurobonds of the Mozambican Tuna Company (Ematum) into sovereign debt securities, is eventually maintained, thus meeting the Government’s request.
In this context, the amount and timing of payments will depend on the amounts received in government revenue.
Government advisers say that the state will, under any circumstances, keep a minimum of 97% of these revenues.
The proposal was presented as the solution for the normalization of Mozambique’s relations with the international financial markets, thus enabling foreign financing to be obtained.
Following the disclosure of the “hidden debts”, in the present case two loans taken over by two public companies also set up by the country’s secret services, the International Monetary Fund, the European Union and the World Bank decided to suspend direct support to the State Budget until there was a report on what had happened, as well as those responsible.
This scenario, which is most likely to be agreed, is supported by forecasts of LNG revenues from the exploration of blocks in the Rovuma Basin considered very optimistic by local sources and will only happen after the second term of the current president Filipe Nyusi.
The start of LNG production has been revised successively with the postponement of the scheduled dates and tax revenues will not reach the state coffers before 2023.
For Area 4, the only block with Final Investment Decision (FID) already signed by the consortium led by the ENI and ExxonMobil groups (November 2016), the start of production is now expected for the last quarter of 2022.
The first revenue for the state is forecast for 2023, estimated at USD 100 million until reaching USD 2000 million / year from 2032.
Total public revenues over the life of the project (25 years) stand at USD 49.4 billion (USD 38 billion from Area 1 and USD 11.5 billion from Area 4).
The second major project, Block Area 1 – also called “Dolphin-Tuna” – with an investment of USD 20 billion, is led by the American group Anadarko Petroleum. The FID has been postponed successively and is now scheduled for the first quarter of 2019, a postponement of more than two years compared to the originally planned.
In a confidential document from the Ministry of Economy and Finance, the Government outlines four scenarios for gas revenues: downside, baseline, upside and contingency, which combine investment costs with LNG prices in the international market.
In three of the scenarios, there is in common the forecast of more gains for the State than for the concessionaires.
In the contingency scenario – the most negative one – the revenue mix by the Government would only start in mid-2024 and revenues would be 6% lower than in the base scenario. In the downside scenario, revenues for the state could reach USD 35 billion between 2024 and 2048.
The consistency of government forecasts is questioned by a number of local observers due not only to the volatility of the energy market but also because production costs can increase significantly, reducing the government’s profit margin.
The current situation of insecurity in the region, resulting from the attacks of radical Islamic militants in the province of Cabo Delgado, is one of the most apprehensive points.
Privately, the members of Filipe Nyusi’s government admit that by 2024 there will be hardly any revenue to service debt.
In this context of uncertainty, creditors have reacted with reservations to official LNG forecasts, which will serve as a basis for debt renegotiation.
The VTB bank, with the participation of the Russian state and which has co-financed the financial operations that have placed Mozambique in the “club” of defaulters, is opting to negotiate through the government channel, where José Pacheco, current Minister of Foreign Affairs of the wing of former President Armando Guebuza, has played a central role.
Government sources have assured that Russia does not express urgency to receive the reimbursement and even admits to buy the entire bank debt, including the percentage put by the bank Credit Suisse.