In January, Mozambique failed to pay a $59.8 million coupon to its bondholders, saying that its capacity to service its debt would be very limited this year. This is the latest event in a saga that has lasted years and follows a meeting with creditors in October during which the country announced that its debt levels were unsustainable.
After the October revelation, the sovereign’s bond – a 10.5% dollar-denominated bond maturing in 2023 and totalling $727 million – quickly lost value in secondary trading. Some analysts interpreted the announcement as meaning Mozambique might miss its January coupon payment. The bondholders apparently held on to the hope that they would receive their money as expected and declined to enter into negotiations with Mozambique over a debt restructuring.
Now that the bondholders know they will not receive the latest payment on Mozambique’s debt, they may be finally forced to the negotiation table.
Stuart Culverhouse, head of research at Exotix, tells Euromoney this may even be the reason for Mozambique’s decision to withhold payment.
“It seems the government is trying to take a hard line,” he says.
A kinder reading is also possible: Mozambique’s economic woes may be such that it simply cannot afford to pay. In any case, the failure to do so hardens the tone of whatever discussion will take place with the bondholders.
It gets more complicated. Mozambique and its bondholders are not the only parties involved in the debt restructuring process to come. Mozambique has held informal talks with the IMF and is hoping to obtain the Fund’s support. The IMF may well be willing to help, but only once the sovereign’s existing debt is on a path to sustainability – meaning only once a restructuring has been agreed with the bondholders.
There is the rub.
So far, the bondholders have said they would not even consider a debt renegotiation until Mozambique had reached an agreement with the IMF, as they think only the IMF can now bolster the country’s weak financial position.
It’s a chicken-and-egg situation: the IMF will not negotiate with Mozambique until the bondholders have done so and the bondholders won’t until the IMF has.
Stuck in the middle is a country not known for savvy debt dealings.
But there is a solution to this seemingly intractable problem. Mozambique could negotiate with both parties simultaneously, rather than go through one restructuring process before moving to the other.
Simple enough, in theory at least. But it will require a little flexibility on all sides and for the IMF and bondholders to reassure one another that they are committed to making things work. If the bondholders and IMF are confident in each other’s participation and are regularly informed of the state of each other’s negotiations, a comprehensive debt restructuring deal, with the injection of new IMF money, could be struck.
Whether or not this will happen is, at this stage, anyone’s guess.
A level of trust is necessary for this solution to be workable. But all creditors have developed a profound distrust for the sovereign, borne out of years of deceit.
The last time the sovereign borrowed from the IMF, in 2015, it failed to disclose $1.4 billion of other borrowings, giving the Fund a false impression of the state of its finances – one of the worst possible offences as far as the IMF is concerned.
The bondholders have also been mistreated recently. The 2023 bond they now hold is itself the result of a previous restructuring – that of the much-maligned ‘tuna bonds’ due in 2020. That restructuring took place only last year.
It is a near miracle that the sovereign’s creditors have expressed a tentative willingness, whether on or off the record, to keep working with Mozambique. But if the country chooses to bulldoze through negotiations, forcing bondholders to the negotiating table and only then trying to reach a deal with the IMF (or vice versa), whatever goodwill there is could quickly evaporate.
Mozambique’s economy is on its knees. The $1.4 billion of undisclosed debt alone represents over 10% of the country’s GDP – a huge burden on Mozambique’s public funds. And although Mozambique struck gas in the Indian Ocean in 2010, that discovery has so far failed to produce the kind of economic growth many had hoped for.
The reputation of those that have worked on its debt – in particular Credit Suisse and VTB Capital – is also being damaged.
There are ways out of this mess. One such way is seeking the joint support of the IMF and the bondholders. If Mozambique opts for that approach, as appears likely, the country had better perform a thorough audit of its past borrowing mistakes and carefully plan the timing – and tone – of its debt talks.