"WHO cares about the tuna fish?" asked a fund manager a year or so ago, explaining his decision to buy bonds issued by a Mozambican government-backed company that planned to use the money to buy a brand-new fleet of fishing boats.
Instead this investor, and many others, looked simply at the government guarantee that underpinned the deal: Even if not a single tuna were caught, the loans would still be repaid, since the government would step in.
That assurance was as full of holes as an industrial-sized tuna net. Although the government has indeed stepped in to honor the debt, its own finances are horribly stretched, not least because it has borrowed far more than it had previously admitted. Faced with a shoal of troubles, it now appears to be on the brink of default.
For a start, its decades-long civil war, which raged from 1977 to 1992, has returned. Vehicles are being burned and people killed daily in parts of central Mozambique where Renamo, a former rebel movement that became an opposition party, has gone back to guerrilla warfare. Highways, including those linking neighboring countries such as Malawi to the sea, are no longer safe to travel without a military escort. Government forces are returning Renamo's violence, with interest.
Drought compounds the misery: In the southern half of the country some 1.5 million people are hungry after rains failed for the second year in a row. And weak oil and gas prices have slowed the development of reserves in the north that many had hoped would provide huge dollops of cash to pay off the country's debts. Instead, investors are running scared. Government bonds are trading about 70 percent of face value. Moody's, a ratings agency, recently downgraded the country, saying it was very near to defaulting.
At the heart of Mozambique's debt crisis is a series of three foreign-currency loans that, between them, add up to about 15 percent of GDP. The first was for $850 million that was meant to have been spent on a fishing fleet. Yet it seems to have bought ludicrously expensive boats, and a chunk went on high-speed patrol craft. The fishing boats that did arrive generally spend their days tied up on the docks, though occasionally one is seen puttering about inside the harbor.
Earlier this year, Empresa Moçambicana de Atum (EMATUM), the state-owned tuna-fishing company, said it could not repay its debt. A rescue plan was cobbled together under which investors swapped their EMATUM bonds for ones issued by the government.
That ought to have settled the matter. But just as the swap was going through it was revealed that Mozambique had secretly borrowed another $1.4 billion, or about 10 percent of its GDP, making it the most indebted country in sub-Saharan Africa. The revelation shocked the IMF and Western donors into freezing disbursements to the government, whose budget relies on international aid. It also led to red faces at Credit Suisse and VTB, the two banks that helped arrange the various bond sales. Some of the investors who bought the bonds complain that the banks should have given them more information.
Yet it seems to have induced almost no shame in the government. The IMF and western donors are pressing for an independent audit of the secret loans. Yet Filipe Nyusi, Mozambique's president, is dragging his feet, prompting speculation that a coverup is underway.
Mozambique is not alone in its fiscal fishiness. Economic crisis is stalking Angola, which is also suffering from the slumping price of oil, its main export. Its bonds tumbled earlier this month after Jose Eduardo dos Santos, its president since 1979, said the country was collecting barely enough revenue to service its debt. It, too, had been in bailout talks with the IMF, but called them off after seeing the fund's conditions on fighting corruption.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
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