Event

The IMF suspended disbursements of its emergency loan to Mozambique on 15 April after it was revealed that the country had additional undisclosed government debts of over USD 1 billion. It would add the equivalent of about 10% of GDP to the known government’s debt burden of 74% of GDP, seriously increasing Mozambique’s risk profile. What’s more, the money raised was meant to fund fishery infrastructure but instead was allocated to defence equipment for protection against pirates off its coast where huge gas discoveries have been made. Credit Suisse and VTB bank provided these undisclosed loans to state-owned entity ProIndicus. According to the IMF, this is one of the largest cases of inaccurate data provision it has seen in Africa in recent times.

Impact on country risk

Mozambique’s current account deficit ballooned over the past years due to megaproject investment imports combined with falling commodity prices hitting aluminium and coal export returns. As a result, foreign exchange reserves tumbled and the local currency came under increased pressure, inciting the central bank of Mozambique to impose restrictive capital controls on hard currency availability in November 2015. For the financing of its external and fiscal deficits, Mozambique is highly reliant on international donor funds and on multilateral aid in particular. Suspension of IMF assistance might encourage other donors to freeze disbursements as well, while weakening confidence in the country is likely to raise interest rates and reduce access to other financing. Consequently, there is a serious risk for the domestic liquidity squeeze to worsen since the debt scandal, which could plunge the country into a balance of payments crisis and more damaging capital controls might be slapped on. This scenario would have an important negative impact on short term political risk. For the medium- to long-term political risk, Credendo Group downgraded Mozambique to off-cover category 7 in August 2015 after debt sustainability indicators started taking a turn for the worst. Total external debt stock exceeded the value of the entire GDP (USD 14 billion), despite the fact that the hidden government debt load wasn’t included at the time. It is likely that the IMF will now ask for mitigating actions to maintain relations, knowing a break of IMF assistance could pose serious risks for the country. Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com