THE BLOG

Shark-Infested Waters: Mozambique and International Borrowing

10/07/2015 12:38 BST | Updated 09/07/2016 10:59 BST

When Mozambique celebrated the 40 year anniversary of independence on 25 June, it was a time for reflection on the gains and losses made by the country which has experienced rapid shifts from civil conflict, to democratic consolidation and exponential economic growth driven by commodity discoveries. A mark of how far Mozambique has come since 1975 was demonstrated last year, when it undertook its first voyage in to international debt markets.

For the past decade, the number of bonds being issued by sub-Saharan countries has sky-rocketed as foreign investors try and capture greater yield in markets outside of Europe and the US. Mozambique is no exception to this trend. But serious questions are also being asked about the viability of this kind of funding. In a post debt-relief age, how can Mozambique resist a dizzying spiral of debt while still reaping the opportunities that the international financial markets have to offer?

Unlike other African bond deals which have tended to use private markets to fund projects with a clear developmental bent such as the building of power stations, roads and airports, Mozambique is dealing in fish. In September 2013, the Mozambican government sought loans worth $850 million from Credit Suisse Group AP and Russian-owned bank VTB Capital Plc to finance the development of the Empresa Mocambicana de Atum (EMATUM), a newly-created and state-owned tuna fishing venture. The debt was then packaged in to notes with 6.3% annual interest for overseas investors, due to be repaid in full in 2020. Given the promises of high yield at 8.5% (to put this in to perspective, 'investment-grade' corporate bonds have remained under 3.1% for 2015) and the fact that the notes are backed directly by the government, the issue was highly oversubscribed.

Why tuna? Although not an obviously profitable venture at first glance, it may be a way for Mozambique to reel in some leaking industry. Some estimates suggest that out of the $60 million earned in the fishing industry, only $1 million stays in the country as a result of foreign trawling and illegal fishing in the Mozambique Channel. The fisheries minister Victor Borges has predicted that tuna could bring in revenues of $200 million a year once the 24 fishing boats and six patrol vessels bought for $272 million with the loans are fully operational.

But less than two years later and EMATUM may already be in deep water. In 2014 alone, the company recorded a $24.9 million loss, as initial catches of tuna proved to be unprofitable. The government is now trying to restructure the debt, by extending the repayment period of the loans until natural gas production ramps up (and they can pay investors back). Nevertheless, ministers continue to defend the venture and remain optimistic that fishing will pick up once the remainder of the boats commissioned arrive in Mozambique from France.

In the meantime, the issue has opened up a can of worms in political circles. The former prime minister Luisa Diogo, part of the team that negotiated debt-relief for Mozambique in 2005, has expressed concerns about the level of the country's indebtedness as a result of the new loans. A high ranking opposition figure recently went so far as to call for the arrest of former president Armando Guebuza in connection with the deal, claiming that EMATUM alone was responsible for 53% of Mozambique's debt in international markets.

Considering that Mozambique is poised to reel in the income from natural gas resources in the Rovuma basin, international investors are unlikely to lose out from this particular deal. The real danger lies in the country's (and the region's) continued vulnerability to global financial shocks in the future. If commodity prices remain at current levels or fall even further, it is possible that African economies will struggle to cope with debt repayments. In 2014, the IMF head Christine Lagarde warned against accruing high levels of debt, while others have sought to hammer home the message that cheap and abundant funding from the international community to Africa will not last forever. Some of the ill effects have already been seen in countries like Ghana, which sought deals with the IMF after it became saddled with debts standing at 60% of GDP last year.

For Mozambique, tuna may still net some profits. But recent developments have called assessments of the transparency and viability of these massive deals in to question. Very little information about EMATUM was ever offered, including where money would be spent and what would be bought, prompting the IMF to call for clarification on possible "non-commercial activities" (e.g. using fishing patrol vessels with a capability to be armed with cannons and military drones as anti-piracy boats) in the next budget. To ensure Mozambique gets the most out of international borrowing will require them to fish or cut bait when it comes to EMATUM, and to navigate deals with high debt potential extremely carefully in the future.