Mozambique is a mess in 2016 – Questions to ask
Mozambique is on the verge of default. State-owned companies have borrowed funds, possibly as high as $2bn that was previously undeclared. Mozambique is a cautionary tale for Frontier investors and a reminder that while Frontier Markets in aggregate are not that risky, the idiosyncratic risk is significant. The best risk mitigation approach is to know the markets you invest in very well and monitor events, metrics, and institutions that are leading indicators of a potential change in the risks inherent in a particular country.
The IMF has suspended support after it provided $286mm in funding to help cushion the economy from the fall in commodity prices. The attorney general is probing what exactly happened, and at this stage, it is unclear who knew about this secret borrowing. What is clear is that it disproportionately benefitted members of Mozambique’s military and secret services who had stakes in these companies. What is unclear is if the political establishment was aware of these loans or if Mozambique’s two bookrunners for its debt, Credit Suisse and VTB Bank were aware. The IMF is of the view that these two banks were not aware of this secret borrowing.
Mozambique has already restructured its “tuna” bond which was intended to grow the domestic fishing industry. It will not be the last. The 1990 – 2010 was an era of tremendous progress for Mozambique, it settled a civil war, moved away from a planned economy, enjoyed double-digit growth, and transitioned to a full democracy. Between the lines, however, poverty has remained unabated and growth has somehow always managed to disappoint in some way or another. Despite having one of the most beautiful coasts on earth, a tremendous amount of natural resources, and a healthy population, Mozambique has not been able to use this to meaningfully reduce poverty. Mozambique has the 3rd lowest human development in the world, it’s only surpassed by a lack of development by Afghanistan and Niger; terrible company.
The characteristics of Mozambique’s exports have also remained largely unchanged with limited industrial development despite a tremendous amount of investment by foreign donors. Mozambique consistently ranks in the top 10 beneficiaries of foreign aid by gross dollars. This is noteworthy because two of the major recipients are Israel and India. Mozambique’s economy in comparison is diminutive at ~$20bn; over 10% of GDP for over a decade has been foreign aid. This will dry up, given the default and continued downgrades. One of the things we will cover in an upcoming post is the utility of the OpenBudget Survey which assesses the transparency that a particular government has with respect to its debt. What is apparent from these studies is that sovereign government, in general can be quite opaque with respect to sovereign debt. In this study, Mozambique scored 38/100.
Corruption in Mozambique has gone beyond the tipping point of greasing the wheels of the economy to actually harming the economy and impairing it. What we expect in light of what has happened is an aggressive push towards more transparency. Until we see that, we do not think that it makes sense to consider Mozambique for investment of any kind, unless you have some access to information that the average market participant or investor does not have.
Mozambique has so many things going in its favour; beautiful coast, tremendous resources, great neighbours (Tanzania, Swaziland, Zambia, Malawi, and South Africa) and one not so good neighbour (Zimbabwe). We profiled it as one of the world’s smallest stock exchanges, the systems are in place, it just needs more companies and more capital; the sovereign situation won’t help this nascent exchange.
There are countries where companies can thrive in the midst of chaos (Nigeria, Pakistan, Palestine), Mozambique is not one of them. Portugal never adequately developed the expertise, institutions, and infrastructure needed for Mozambique to thrive, the way that the UK has done in many of the territories it controlled; literacy is at 50% and urbanization is quite low (32%). Angola has been similarly mismanaged but has benefitted from more natural resources relative to population. However, even there, the elites have exploited the masses to such a degree that the country remains incredibly unstable.
We are always looking to learn from the world, part of what excites us about Frontier Markets is there is never a shortage of new things to learn or new approaches that improve investment returns and results. To that end, some of the things to consider in light of Mozambique’s situation are as follows:
- Within a range of behaviours, how consistent has government behavior been over the last 1, 3, and 5 years?
- How do companies within the country access capital, which partners do they use and why?
- What is the IMF and World Bank’s assessment of recent government policy and actions?
- Is corruption stable or changing in the country? If it is changing, in what way? Evaluate impacts to your potential investment.
- How secure is the currency, is the central bank independent?
- Is the improvement in standard of living centred on only one economic class?
- Where does government debt lie, in government agencies, or at the sovereign level? What currency is the debt issued in?
- How consistent is the country in staying within reasonable budgetary guidelines?
If you would like to do some further reading, check out these pieces.