The US and other favoured investment partners like Qatar and Turkey are staking out a position of influence over Somalia’s nascent oil sector ahead of a much-anticipated licensing round later this year. Previously preferred partners like Kenya and other Gulf Arab countries are losing their foothold in Somalia, just when the economy starts to recover.
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.
In President Buhari’s second term, the government will continue to prop up the local currency and maintain costly subsidies, policies which have fostered massive fraud and embezzlement and undermined economic recovery. As the budget deficit widens, debt servicing spikes, and some banks again face non-performing loans, there are growing concerns that Nigeria may be running into ‘bankruptcy’. However, oil sector state asset sell-offs might be sufficient, at least in the short term, to stave off another recession or liquidity crisis.
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
A mostly peaceful and democratic transition of power will allow the political status quo to remain intact, while Mauritania embarks on an exciting new chapter of rapid economic development driven by recovering iron ore mining revenues and a nascent natural gas industry. Despite some concerns over potential contract reviews and the looming threat of regional militancy, EXX Africa remains largely optimistic on Mauritania’s investment outlook.
A long-running corruption scandal has hit the president’s family, providing a trigger for renewed protest action and civil disobedience by the opposition and powerful civil activist groups, while driving heightened risk of violence and acts of sabotage. President Macky Sall’s ambitious economic development agenda may stall in his second term, while participants in the oil and gas sector will face increased reputational risks, as well as potential delays to projects due to costly and lengthy arbitration proceedings and international fraud investigations.
A former ethnic Arab militia accused of war crimes in Darfur and now integrated into the Sudanese security forces and armed with new weapons from the Gulf has seized control of the capital Khartoum in recent weeks. These hard-line militia forces are increasingly likely to clash with the military, which is seeking to create an Egypt-style post-coup political order and to repair Sudan’s international reputation.
The central African regional CEMAC bloc is unlikely to fully deliver on its fiscal consolidation and debt sustainability agenda, as its respective national governments prioritise political patronage and regime survival over fiscal and monetary prudence. Failure to successfully implement IMF-mandated reforms is likely to trigger a devaluation of the CEMAC currency, which would in turn sharply increase non-payment risks across key sectors.
On 20 May, the Congolese senate voted to approve the restructuring of USD 2.5 billion of loans from China’s Import-Export Bank, which includes eight credit agreements between Congo Republic and China. The restructuring is a key condition for the unlocking of a three-year lending programme with the International Monetary Fund (IMF). In June, the Fund’s Executive Board is due to approve, or not, a three-year Extended Credit Facility (ECF). EXX Africa made further observations on Congo’s risk outlook in a recent briefing in May (See REPUBLIC OF CONGO: IMF BAILOUT OFFERS ONLY SHORT-TERM RELIEF AS POLITICAL CHALLENGES REMAIN).
If approved, Congo Republic will become the fifth country in the central African regional bloc, the Communauté économique et monétaire de l’Afrique centrale (CEMAC), to join the IMF programme, leaving out only Equatorial Guinea. A slump in global oil prices between 2014 and 2016 saw the foreign reserves at the Bank of Central African States (BEAC) drop by 68 percent from USD15.5 billion in 2014 to USD 4.8 billion in December 2016. Reserves dropped further to USD 4.5 billion in April 2017, which amounted to less than two months of import cover. The slump also led to a combined loss of almost one percent of GDP in the CEMAC region. This fiscal and monetary crisis led to the holding of an extraordinary meeting in Cameroon, where all constituent countries agreed to undertake painful reform.
The successful completion of an IMF programme by all CEMAC countries will be critical to ensure economic recovery, as well as to stave off a devaluation of its currency by France. On the back of dwindling foreign reserves at BEAC, the French Treasury in June 2017 called for a 50 percent devaluation of the CEMAC currency, which has a fixed parity with the euro. The last time France devalued the currency by 50 percent without warning was in 1994 following a dramatic collapse in global oil prices.
The role of the IMF in CEMAC
Negotiations between the Congolese government and the IMF have been ongoing since January 2017. The main sticking point in the negotiations has been the runaway public debts of Congo owed to China and other investors, especially oil exporters. As a precondition set by the IMF, Congo should secure debt restructuring from both China and the oil exporters. Following its May vote, the Congolese parliament has finally ratified the agreement with Export-Import Bank of China that will see 33 percent of Congo’s entire debt paid in the first three years, while the remaining 67 percent paid over 15 years.
Moreover, the IMF is also demanding enhanced transparency in the oil sector, calling for state oil firm Société nationale des pétroles du Congo (SNPC) to submit to parliament a report of all pre-export financing contracts. This has to be done before the meeting of the IMF’s Executive Board later in June. Although the debt restructuring agreement with China has the potential of facilitating the approval of the ECF, there is risk of a further delay to the process in the event the government fails to declare all pre-export finance contracts and demonstrate new resolve to renegotiate these contracts.
At present, CEMAC constituents Central African Republic (CAR) and Chad have secured a three-year ECF with the IMF amounting to USD 132 million and USD 312 million respectively, while Cameroon and Gabon secured USD 666 million and USD 642 million dollars, respectively. The amount approved is a reflection of the size of the economy of each country, with CAR having the weakest economy, while Cameroon holds the largest economy in the CEMAC region. This means that the amount to be approved for Congo Republic will be between USD 500 and 600 million.
However, for most of these countries, the amount of the IMF loan is not of great importance. What is more important for some of the CEMAC countries is the fact that securing an IMF programme would legitimise contract renegotiations with commercial investors and facilitate the release of financial support from other partners in the name of debt relief or restructuring.
Social strife undermines economic diversification
Protracted social strife in Cameroon, CAR, and Chad, as well as intermittent political violence in Gabon and Congo Republic is compounding the challenges to promote economic diversification in these countries. On 6 February 2019, a peace agreement was signed in CAR between the government and 14 armed groups, raising hope for a revitalisation of country’s sluggish economy. However, armed attacks along the Bangui–Garoua Boulai corridor has led to the disruption of key exports, including gold, cotton, timber, and coffee. In Chad, the ongoing insurgency by Boko Haram together with the loss of oil revenue have left the country with three consecutive years of recession, with poverty expected to hit almost 40 percent by the end of the year. Its foreign reserves are critically depleted, amounting to just under one month’s worth of import cover, according to the latest available figures in 2018. EXX Africa is due to publish analysis briefings on Chad and CAR in the coming two weeks.
Meanwhile, Cameroon is struggling to contain the worsening security situations in the Far North from Boko Haram attacks and the North West and South West by the Anglophone separatist movement. EXX Africa has published monthly briefings on these security situations in Cameroon and their impact on the country’s economic outlook. The buoyant economic statistics for Cameroon underestimate the impact of the conflicts in the real economy (See CAMEROON: BUOYANT ECONOMY DESPITE SECURITY THREATS). Due to the rising attacks in these areas, businesses have come to a halt. Following the kidnapping of Tunisian workers in 2018, the Tunisian firm SOROUBAT-CM, abandoned the 60 km Kumba- Ekondo Titi road rehabilitation project, an important route for agricultural exports.
The North and South West regions of Cameroon, where the Anglophone separatist movement launched an armed struggle in October 2016, is a key provider for agricultural produce aimed at the export market. The fighting is disrupting the agro-business sector, with banana exports dropping, while palm oil factories, in particular the PAMOL plantations in Ndian Division, have almost ceased operations in the Anglophone regions. The Cameroon Development Corporation (CDC), which is an important debtor to local banks, is also in crisis with its plantations and mills not in operation due to the insecurity. This is likely to impact negatively the bottom line of local banks.
In times of economic hardship, CEMAC governments are more likely to pile pressures on foreign investors to extract more money. This is done mainly through arbitrary demands for backdated tax, demands for new investment, reduction of equity participations, and other unilateral demands to sponsor local projects or some government programmes.
In 2018, the government of Gabon seized the assets of the national power and water supplier, SEEG, a 51 percent subsidiary of French utility firm Veolia, before annulling its contract. This was partly due to Veolia’s refusal to bring down its equity share. Veolia took the matter to the International Centre for the Settlement of Investment Disputes (ICSID), an offshoot of the World Bank for international conciliation. The government’s action against Veolia, a French company was meant to send a strong message to other investors and concession holders to support its agenda or face serious consequences on contract stability.
Similarly, Congolese oil companies Total E&P, Eni, Perenco, Congorep, and Wing Wah E&P have received a letter in April 2019 from the authorities requesting a joint contribution towards the payment of EUR 1.7 million directly to the Organization of the Petroleum Exporting Countries (OPEC) to cover Congo’s 2018-2019 statutory contributions. Furthermore, the Congolese authorities have threatened to cancel Eni’s offtake agreement of 171,000 barrels per month, stating that the company’s contract with the government to finance infrastructural project in exchange for oil export has come to an end. Perenco and Congorep were also asked to end the practice of deducting the maritime tax from the profit of their oil sales, which was a well-established practice in the past. The Congolese government’s claim of having no knowledge about the practice was to justify future sanctions including claims for backdated tax payments.
In Cameroon, businesses are also facing a number of challenges including increasingly high operating cost, the ongoing security crisis in vast swathes of the country, and difficulty in accessing foreign currencies to pay for imports, according to the employers’ union (GICAM). The government has imposed price controls on essential commodities, such as frozen fish and rice, which together require over half a billion dollars annually for importation. Moreover, the IMF is concerned with the ailing health of some the country’s local banks as some struggling companies like PAMOL and CDC, are fast losing revenue and are struggling to honour some of their financial obligations.
In Equatorial Guinea, in September 2018, the government threatened oil companies with a licence extension refusal if they failed to invest collectively at least USD 2 billion in new oil wells. As part of its strategy, the government has launched an audit exercise to determine firms that are not complying with the National Content Regulation of 2014. The first company to fall foul of the audit has been US-based oil services company Subsea 7. The government has now ordered all energy firms in the country to cancel their contracts with the company. In its banking sector, local sources in the ministry of finance have claimed that the government has requested new loans from local banks, which is against the advice of IMF not to accumulate new arrears with local banks in a bid to protect the banking sector.
Finally, in Chad, the government with the assistance of IMF is working to improve the ailing health of the country’s two largest public banks in a bid to mitigate the risk of banking collapse. The only bright spot so far for the CEMAC banking sector is in CAR, where the government has managed to pay back commercial arrears, thereby decreasing the share of the sector’s non-performing loans. EXX Africa will continue to monitor these developments in the CEMAC region in coming months on the political, security, and economic front.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
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.
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