Two months out from elections, Mozambique’s government has secured a peace deal with the armed opposition and agreed on debt restructuring with most of its creditors. These are crucial steppingstones as the country seeks massive gas-related investment inflows and a potential new IMF programme. However, an intensifying Islamist insurgency, suspected electoral manipulation, and lack of progress on bringing perpetrators of the hidden loans scandal to account remain key obstacles towards longer term stability.
The risk of violent protests by opposition supporters over reports of electoral manipulation poses a higher threat of commercial disruption than the northern insurgency, which might even simmer around the October elections. However, any threats by the main armed opposition to suspend the peace agreement are unlikely to be implemented and a resumption of conflict seems unlikely.
Evidence for an Islamic State attack last month in northern Mozambique seems spurious, although the group’s claim will have symbolic value for the Islamist insurgency in the gas-rich region. The conflict is increasingly posing a risk of attack on NGO assets engaged in post-cyclone recovery, as well as to local businesses that are targeted in extortion and kidnap raids. However, EXX Africa continues to assess that any mooted aspiration to attack gas assets remains subdued by fears of a more heavy-handed retaliatory counter-insurgency.
The largest ever foreign direct investment into sub-Saharan Africa has been secured by Mozambique, and even more commitments in the LNG sector are underway. The country’s long-struggling economy is already witnessing signs of a recovery in anticipation of more foreign exchange revenue. But in order to participate fully in its own LNG sector, the government will have to restructure its debts, nullify some loans, and bring in IMF support.
On 18 June, US energy firm Anadarko Petroleum Corp confirmed it had given final investment decision (FID) on a USD 20 billion gas liquefaction and export terminal in Mozambique. Anadarko has agreed to be taken over by Occidental Petroleum Corp. Once that deal goes ahead, Occidental has agreed to sell assets including the Mozambique LNG project to French oil major and large LNG trader Total SA.
Anadarko’s FID marks the largest single LNG project approved in Africa, with 12.88 million tonnes per year (mtpa) production capacity. Natural gas use is growing rapidly around the world as countries seek to meet rising energy demand and wean their industrial and power sectors off dirtier coal. Earlier this month, the International Energy Agency said global gas demand is expected to grow at a rate of 1.6 percent a year until 2024, fuelled by Chinese consumption which will account for over a third of the demand growth during the period. The Asia-Pacific region will remain the largest source of gas consumption growth in the medium term with an average rate of 4 percent per year and will account for around 60 percent of the total consumption increase until 2024.
Anadarko’s project has committed long-term supplies to utilities, major LNG portfolio holders, and state companies around the world, including a co-purchase agreement with Tokyo Gas and Centrica. The liquefaction plant will be able to sell LNG to both the Asian market, which accounts for 75 percent of global LNG demand, and to the European market. Anadarko’s partners in the Mozambique LNG project are Mitsui, Mozambique state energy company Empresa Nacional de Hidrocarbonetos (ENH), Thailand’s PTT, and Indian energy firms ONGC, Bharat Petroleum Resources, and Oil India.
Last year, the USD 8.6 billion Coral South Floating LNG project operated by Italy’s Eni brought together some 16 commercial banks to raise USD 4.63 billion debt for the project. ENI’s partners in Coral South are ExxonMobil, the China National Petroleum Corporation (CNPC), ENH, Kogas, and Galp Energia. However, Anadarko’s project for the development of the Golfinho/Atum fields faces a different risk outlook as it is onshore. Attention is now turning to when ExxonMobil will make FID on its even larger 15.2 mtpa LNG project. Expectations are this will happen before presidential elections in October.
The establishment of an extractive industry has been a key political priority since the 2010 discovery of approximately 20 million barrels worth of LNG deposits in Rovuma by the Anadarko and ENI oil consortiums in areas 1 and 2 of the basin. Mozambique’s economic decline in subsequent years has only served to hasten the imperative of such an industry. The FID on Anadarko’s project, and the impending decision by Exxon, come at a critical time for Mozambique, which is recovering from a lengthy economic and financial crisis and has recently been hit by twin cyclone storms.
According to assessments by Standard Bank, estimated stocks of LNG – which are only a fraction of the total resource endowment – could inject approximately USD 39 billion into the Mozambican economy. For a country that ranks among the poorest in the world, with a GDP of approximately USD 11 billion and public debt in excess of that amount, the windfall could fundamentally transform the country’s economic landscape. This is not to mention the potential residual benefits in employment, infrastructural development, and general economic welfare in proximate communities. The government of Mozambique believes the Anadarko project is expected to create more than 5,000 direct jobs and 45,000 indirect jobs.
The impending influx of dollars is already making itself felt — with the Bank of Mozambique last week cutting interest rates for the first time in 2019, thanks in part to the anticipation that investment in the LNG project will eradicate future foreign exchange shortages and calm inflation. Mozambique’s international reserves currently stand at over USD 3 billion, which amounts to six months of import cover of goods and services, excluding the transactions of the foreign investment mega-projects.
The government aims to create a sovereign wealth fund to channel LNG sector revenues, which has calmed investor fears that state revenues might be squandered. The metical local currency has been gradually appreciating against the US dollar and the South Africa rand, which reflects the improvement in the current account deficit in the first quarter of 2019, combined with the measures taken by the central bank to ensure greater discipline and transparency in exchange operation.
There remains a risk from declining state revenues due to the twin cyclone storms that hit devastated parts of northern and central Mozambique earlier this year. International donors pledged to contribute USD 1.2 billion to help rebuild areas and infrastructure destroyed by cyclones Kenneth and Idai in Mozambique. However, much of these pledged funds have not yet been disbursed and the timeline for disbursement remains uncertain. Even so, the pledged funds remain insufficient for recovery efforts. Mozambique needs a total of USD 3.2 billion for post-cyclone reconstruction in the provinces of Sofala, Manica, Tete, Zambézia, Inhambane Nampula, and Cabo Delgado, where Anadarko’s gas project is located. Meanwhile, the central bank has acknowledged that it may struggle to find sufficient funds to finance this year’s elections due in October (See SPECIAL REPORT: THE LONGER TERM IMPLICATIONS OF CYCLONE IDAI IN MOZAMBIQUE).
Meanwhile, the government is trying to close a deal on a USD 2 billion package of financing for state petroleum company ENH, which will require a sovereign guarantee. The risks of ENH defaulting is low, yet it still adds another USD 2 billion in sovereign–guaranteed debt to Mozambique’s already strained debt burden. Mozambique’s bondholders will be reluctant to agree to a restructuring that would allow Mozambique to take on even further debt. French financial consultancy Lazard Freres is advising the government on its debt restructuring, including the ENH debt requirements to develop its concessions.
Debt restructuring progress
Earlier this month, Mozambique’s Constitutional Council ruled that a government-guaranteed USD 850 million Eurobond issued by state-run tuna-fishing company Ematum in 2013 was illegal, since neither the bond nor the guarantee were ever appropriately noted in the country’s budget. In 2016, Mozambican officials agreed to swap the bond’s outstanding USD 697 million for a sovereign Eurobond. The court judgment may frustrate efforts by the Mozambican government to restructure the bond again. Even though the ruling was made by the country’s highest court, bondholders do not expect any impact on the bond’s restructuring process currently under way. The restructured Eurobond bonds had been approved by the country’s parliament in line with the constitution and within the limits of the budget law.
A few days before the ruling, Mozambique’s finance ministry said it had reached a restructuring deal in principle with holders of its defaulted 2023 bonds (See MOZAMBIQUE: NEW DEBT DEAL INCHES FORWARD). According to the proposal, Mozambique’s government will issue a USD 900 million bond maturing in September 2031, paying a 5 percent coupon rate until 2023, after which the coupon steps up to 9 percent. Mozambique will also make a cash payment to eligible bondholders of up to USD 40 million. This includes a consent fee and an exchange payment. The restructuring of some USD 726.5 million of Eurobonds is expected to be completed by 1 September, according to the ministry. That timeline may now be frustrated by the Constitutional Court ruling since the restructuring negotiations may face further legal challenges.
According to the latest proposal, bondholders will no longer get access to the country’s future natural-gas revenue. A previous proposal included extending maturities and sharing future revenue from offshore gas projects through implementing a new Value Recovery Instrument (VRI) capped at USD 500 million. However, the Mozambican government has been reluctant to proceed with the initial proposal and has lobbied bondholders to ditch the VRI. The main difference between the agreements is that the government will no longer pay bondholders about USD 500 million of earnings from liquefied-natural-gas projects, while the coupon rates have also changed. Essentially, the VRI has been replaced by a shorter maturity and higher coupon past 2023.
Under the previous deal reached in November, the government would have paid back the bond’s USD 900 million principal in five equal annual instalments, starting in September 2029 and ending September 2033. The new agreement envisages eight equal semi-annual payments of USD 112.5 million from 2028 to 2031. At least four creditor committee members have agreed to the proposal. Together these institutions control around 60 percent of Mozambique’s 2023 bond. Support from creditors holding 75 percent of the bond will be needed to activate the collective action clauses. The fifth group of creditors had been due to review the initial agreement, although the timeline may now be delayed given the court ruling.
The FID on Anadarko’s massive foreign direct investment, as well as the expected decision by Exxon, will mark a highly significant turn-around for Mozambique’s failing economy. Low prices for the gas in previous years prompted fears FIDs such as Anadarko’s would be delayed or scrapped. But the US company has gathered enough long-term buyers to underpin the financing of the project. The takeover of the project by the highly experienced French major Total may also be a positive indicator for the project.
Initial indicators show that Mozambique’s economy is recovering on the back of the FID, given the expected boost to foreign exchange levels derived from direct royalties, taxes, carried interest, and other financial contributions, as well as indirect benefits to the broader economy. A sustainable recovery path will also depend on progress in restructuring the debt deals. The deal is also being motivated by a stronger desire by the Mozambican government to reengage with the International Monetary Fund (IMF), because the state needs billions of dollars in loans to fund its own participation in the natural gas concessions. The Fund is considering giving Mozambique a shadow programme, which would be a step towards securing financing from the IMF after the freeze in 2016. The IMF has insisted that any agreements with holders of previously undisclosed debts should be consistent with returning Mozambique’s debt position to a sustainable path.
That provision will shift the attention towards a restructuring of a USD 535 million loan to Mozambique Asset Management (MAM) and a USD 622 million facility for ProIndicus, a state-owned maritime security company. Bondholders complain that loan arranger Credit Suisse was not transparent with them about its other lending commitments to Mozambique, only revealing its loan to Proindicus when forced to do so during the 2016 debt exchange. Mozambique’s Attorney-General has filed a lawsuit in the UK to nullify the alleged criminally obtained government guarantee to the loan contracted by ProIndicus. Last month, a former Credit Suisse banker pleaded guilty to a US charge that she helped launder money. Meanwhile, the IMF says that Mozambique’s restructuring discussions with Russian lender VTB over the loan to the state-owned MAM are ongoing.
Moreover, the IMF insists that Mozambique should hold officials accountable for previously undisclosed debts, which may remain a real stumbling block to any eventual new credit facility. The IMF still insists on the need for Mozambique to fill the information gaps before any progress can be made towards re-engagement. The Fund is unlikely to change its stance until the full completion of an audit. Yet the audit remains stalled, not least by Attorney General Beatriz Buchili, who claims the audit is being frustrated by a lack of cooperation from other western countries. There is a lack of political will in Mozambique and among donor countries to continue the probes into Mozambique’s previous borrowing practices and allegations of embezzlement, as the momentum for investment into the natural gas sector accelerates.
This briefing does not mention the security challenges facing the LNG sector in northern Mozambique, which have been covered extensively by EXX Africa in a series of briefings in recent months. Another update is due next week (See SPECIAL REPORT: ISLAMIST INSURGENCY RESUMES IN NORTHERN MOZAMBIQUE AFTER CYCLONE).
SEE COUNTRY OUTLOOK: MOZAMBIQUE
The latest loan restructuring proposal no longer gives bondholders access to natural gas revenues but does provide Mozambique with cash flow relief and moves the country closer to a rapprochement with the IMF and towards a potential new credit facility to support its economic recovery. However, the fall-out over judicial extraditions and alleged bribe-taking still threatens to entangle senior Mozambican politicians ahead of elections later this year.
International donors and NGOs are focussing relief efforts on central provinces of cyclone-ravaged Mozambique, yet neglecting the much poorer and less accessible northern region. As EXX Africa anticipated, the Islamist insurgency in the north has resumed following an initial post-cyclone lull, Militants are staging attacks in close proximity to natural gas operations, while targeting NGO relief workers and even staging their first ever kidnap for ransom attack.
Transport logistics are a vital and promising sector for business in Africa. However, traversing land, sea, and air routes across the continent comes with a plethora of political and security risks. EXX Africa explores the key concerns in this regard, their manifestation, impact, and outlook.
Doing business in Africa is beset with a number of political and security risks. Recent research by Aon reveals that 70 percent of countries in sub Saharan African are currently at risk from strikes, riots, and other types of civil unrest while 25 percent are at risk from sabotage and terrorism. Although government assets are most frequently targeted during such events, these risks ultimately affect the viability and profitability of private entities and investments as well.
The latest Emerging Markets Logistics Index, which ranks 50 emerging economies across the world, places these concerns in the transport logistics sector. Agility Logistics produces this index. Rankings are pulled from data from institutions such as the IMF, the OECD, the World Bank, the UN, and the WEF, among others, and is supported by a survey of trade and logistics industry professionals. Findings from the 2018 Index reveal that many of the top supply chain risks in sub Saharan Africa relate to political and economic concerns, with industry professionals citing corruption (23 percent), government instability (18.3 percent), terrorism (9 percent), and piracy (4.1 percent) as major risks. In North Africa, terrorism (43.8 percent) and government instability (19.9 percent) together represent almost two thirds of the primary concerns.
A similar long-term study by Willis Towers Watson echoes these findings. Its 2016 Transportation Risk Index, compiled from data and insights derived from 350 interviews with executives in the sector, noted that the number one long-term (up to ten years) megatrend for logistics across the continent concerned geopolitical instability and regulatory uncertainty.
Such political and security risks tend to affect transport logistics across the continent in three ways: border closures or delays, the targeting of state assets, or the targeting of private assets. We explore each of these manifestations, identifying their major trends, impact and outlook below.
Border closures and delays
Government and geopolitical instability frequently result in the planned or unexpected closure of land, sea and air routes, affecting the movement of goods and services. Such closures most often arise as a result of a change in government – whether by democratic or undemocratic means – or as a result of bilateral tensions between neighbours.
Election periods pose one of the primary threats in this regard. Even votes deemed free and fair, and organised by democratically elected governments can cause disruption. During the General Elections in Nigeria in February 2019, for example, the government announced the closure of all borders and implemented various restrictions on vehicular movements for the voting weekend. A similar elections-related border closure took place in December 2018 when the Democratic Republic of Congo (DRC) closed its borders with its nine neighbours as it held its long-awaited polls.
Unexpected changes of power, such as via an insurrection, coup, revolution or rebellion, further results in risks to the logistics sector and induces high levels of uncertainty. During the successful removal of President Omar Al-Bashir in Sudan in April 2011, following weeks of anti-government protests, the transitional military council closed the country’s airspace for 24 hours as well as all border crossings until further notice.
Unsuccessful attempts at regime change can also result in panic, as witnessed in January 2019 when Gabon suddenly closed its border with Cameroon following an attempted coup against President Ali Bongo. All cross-border trade ground to a halt forcing local businesses to divert their goods to Equatorial Guinea.
Poor bilateral relations can further limit the flow of goods and services. While there are some known long-standing tensions between neighbours that have resulted in border closures, such as between Morocco and Algeria (ongoing for 25 years) and Ethiopia and Eritrea (borders have closed again despite a peace deal in July 2018), emergent socio-political developments can cause abrupt stoppages to cross-border commerce as well. In February 2019, Rwanda unilaterally decided to close its busiest border with Uganda over mutual allegations of threats to national security. The decision not only affected bilateral trade but impacted trade to Burundi, the DRC and Zambia as well. One month later, borders were again closed in Southern Africa, this time between South Africa and Mozambique following xenophobic attacks in Kwa-Zulu Natal province. During this incident, a crowd of around 200-300 Mozambicans barricaded the N4 and began targeting trucks with South African license plates.
Targeting of state assets
Beyond broader political threats and the closure of borders, the logistics sector is often impacted by security-related incidents in which non-state actors target key state infrastructure assets. Such incidents may emerge during acts of militancy, labour unrest or sabotage.
The strategic importance of a country’s infrastructure – particularly its ports – often renders these assets prime targets for militant attacks and activity. This has been demonstrated repeatedly in conflict zones over the past 12 months, with attacks reported against sea and air ports in Somaliland (Bosaso Port), Somalia (Mogadishu International Airport), Libya (Ras Lanuf and Es Sider Ports, and Mitiga International Airport), Niger (Diffa Airport), and Mali (Sevare Airport). Militants may even attempt to seize such assets for political leverage. In March 2019 in the Central African Republic, a local rebel group stationed at the border post with Cameroon blocked cargo to impede commercial traffic in an attempt to force the government to include them in the newly formed government.
The economic importance of logistical infrastructure further incentivises established worker unions to target such assets during labour disputes and negotiations. In this instance however, disruptive events are not limited to conflict zones but can be found across all countries, including the major economies. In a 2019 survey on supply chain risk management in South Africa, all 20 participants identified socio economic factors, such as labour unrest, as a key source of vulnerability. South Africa has also been impacted by frequent incidents of sabotage within the logistics sector, with arson and derailment attacks having recently been carried out against both its passenger and cargo rail services.
Targeting of private entities
Political and security risks may also affect private commercial entities and their assets directly as well. One of the primary security threats in this regard is posed by piracy. While this threat is location and sector specific, its impact is significant – particularly considering that 90 percent of African imports and exports are moved by sea. According to the 2018 Oceans Beyond Piracy report, in East Africa alone, the annual cost of maritime piracy was estimated at USD 1.4 billion in 2017 (down from USD 7 billion in 2010) while in West Africa it was estimated at USD 818 million (up from USD 719.6 million in 2015).
Most concerning, according to the latest statistics released by the International Maritime Bureau, the threat from piracy is increasing in West Africa. Since 2014, there have been approximately 250 actual and attempted attacks in the Gulf of Guinea, with a 70 percent increase in incidents being reported between 2017 and 2018 alone. This surge is expected to result in associated rises in the cost of maritime business, particularly with regard to insurance. In 2017, the total costs of additional premiums incurred by ships transiting the Gulf was calculated at USD 18.5 million. Moreover, it was estimated that 35 percent of all ships now take out Kidnap & Ransom insurance, totalling USD 20.7 million.
Companies operating in the transport logistics sector are also frequently targeted by corrupt individuals. The sector remains particularly vulnerable to corruption given its close engagement with customs officials who are often underpaid and look to increase their wages through opportunistic facilitation payments. Extensive red tape and delays further amplifies this risk: according to the African Development Bank, the average customs transaction across the continent could involve 30-40 different parties. In addition to increasing commercial operating costs and affecting intraregional and international trade, such corruption at ports of entry and exit frequently facilities a range of illicit activities as well, such as the smuggling of people and goods, and tax evasion.
Despite these challenges, there remain sound opportunities for transport logistics in Africa. Egypt, Morocco, Algeria, Tunisia, Libya, South Africa, Nigeria, Ethiopia, Ghana, Tanzania, Uganda, Kenya, Mozambique, and Angola all featured within the Emerging Markets Top 50 Logistics Index last year.
Looking more closely at the data, Egypt and Ethiopia were identified as having made significant strides in the logistics sector. The improvement in business conditions in Egypt, including the reduction in business costs associated with crime, violence and terrorism, has been identified as one of the primary reasons for it jumping six places in the index last year – the most of any country. Similarly, Ethiopia’s goal to become a low-cost manufacturing and textiles hub along with the opening of Africa’s largest cargo terminal in Addis Ababa has attracted much attention. However, ongoing security concerns, especially the threats posed from ethnic conflicts and terrorism along border areas with Somalia and Kenya, were identified as setbacks.
In another promising development, South Africa, Nigeria, Egypt, and Kenya were identified within the pool of countries that have the most potential to grow as logistics markets within the next five years. However, sub Saharan Africa’s two largest economies – South Africa and Nigeria – each fell down the index, with Nigeria falling seven spots. Both countries were nevertheless identified as turning a corner, particularly with regard to corruption and political instability and uncertainty in 2019.
As demonstrated above, supply chain risks vary wildly from country to country across Africa. From isolated events that cause single points of impact (such as a militant attack), to ongoing events that generate a localised yet sustained impact (such as strikes), to all-encompassing events (such as a coup), companies in the transport logistics sector are advised to stay abreast of political and security dynamics to navigate and forecast their threat environment. In addition, transport logistics should consider using political risk insurance to insulate their operations against disruption.
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The second major storm to hit Mozambique in the past two months will have a much greater impact on the Islamist insurgency in the LNG investment hub of Cabo Delgado. Despite a recent drop-off in the number of attacks in the province, EXX Africa expects insurgents to increasingly target cyclone relief aid operations, while attacks on villages near gas facilities will increase again in coming months.
The long term impact of last month’s cyclone will be felt in terms of the looming humanitarian disaster and new bottlenecks on supply chain networks across the affected region. Mozambique may postpone its scheduled general elections this year, although a return of donor and IMF aid should support an economic recovery.
US and Mozambique indictments of those implicated in the undisclosed lending scandal pave the way for the government to declare the loans void and to refuse repayment of some USD 1.2 billion in syndicated loans, although a restructuring of publicly recognised bonds remains on the cards ahead of the October elections.
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