SA investors in Mozambique stay put despite debt crisis

Despite the country’s debt crisis and credit rating downgrades, SA investors have decided to weather the storm

South African investors in Mozambique are staying put, despite a debt crisis in the country that is threatening capital projects, causing foreign exchange shortages and the currency to depreciate.

“This is a temporary setback and Mozambique is committed to developing a diversified economy,” said David Robbetze, CEO of the SA-Mozambique Chamber of Commerce.

“Donors and multinationals have invested too much time and money in Mozambique to throw their hands up in the air over this. We don’t see them withdrawing their support going forward, and they will be encouraged that, at least, everything is now in the open.”

Tongaat Hulett CEO Peter Staude this week said Mozambique was in talks with the International Monetary Fund (IMF), and Tongaat, which has sugar cane operations in the country, was confident that the issues would be resolved soon.

Staude said that the recent events were likely to be a “hiccup”.

Robbetze said that the biggest effect so far had been felt by manufacturers and traders. While noting increased “economic anxieties” among businesses and some deferred projects, he said many had adopted a wait-and-see attitude.

The breakdown in trust followed the government’s admission that it hid as much as $1.4 billion (R21.4 billion) in state guarantees to state-owned companies.

International donors and the World Bank subsequently cut aid to the southern African nation, demanding the full disclosure of a foreign debt burden, which is estimated by some economists to be more than 90% of gross domestic product.

Then, state-owned Mozambique Asset Management last month missed a $178 million payment to Russia’s VTB Bank and talks to reschedule the payment failed.

This caused S&P Global to lower its rating to CCC, Fitch to cut its rating to CC and Moody’s placed Mozambique’s Caa1 rating on review for downgrade. These are the weakest sub-investment grade ratings with a risk of default.

Mozambique’s stumble could still be contained through full disclosure by the country’s state-owned enterprises in particular, according to Alex Vines, research director and head of Africa at Chatham House in London.

“If there are no further loan surprises and the government comes up with a credible, accountable and transparent road map for repayment of these loans ... donor suspensions will be lifted over time and the ratings agencies will also consider upgrading Mozambique,” Vines said.

John Ashbourne, Africa economist at London-based Capital Economics, said: “It’s not in crisis mode yet as the economy is still growing. But what might be difficult in future is convincing foreign investors to deal with the government.”

In the past week, Sasol, Standard Bank, Netcare and South32 all maintained they were in Mozambique for the long term, despite the economic crisis, which may halve the country’s economic growth this year to between 3% and 4%, according to the IMF.

John Sichinga, Sasol Exploration and Production International senior vice-president, said Sasol’s natural gas operations in Mozambique had not been affected by the
debt crisis.

“We are in Mozambique for the long haul,” he said.

However, industry sources say that the financial crunch could hamper the ability of state enterprises to access funding.

This could threaten a new 400 megawatt gas-fired power plant planned in Mozambique’s capital, Maputo, which Sasol could supply with gas as part of a $1.4 billion expansion of its operations in the country.

Last month, Tiger Brands, which exports products to Mozambique, said the devaluation of the metical and foreign currency shortages in the country could hurt its profit.

Foreign currency shortages increase costs for corporates looking to buy hard currency, particularly importers, because they force them to buy at a black market premium.

Rosario Cumbi, managing director of Tongaat Hulett’s sugar business, said that Mozambique central bank regulations allowed a company to keep half of its foreign exchange proceeds from exports as hard currency.

This meant that, for now, Tongaat’s sugar operations had sufficient foreign currency to import critical items to continue trading.

Cumbi said he didn’t expect the debt crisis to result in socioeconomic unrest because the government was prioritising key issues such as food and fuel prices.

“Another two or three months, and everything should be resolved,” Cumbi said.

He expected the Mozambique government to cut spending and boost tax revenue to balance its books.

Standard Bank said there might be delays in some projects, but the long-term prospects for the country remained appealing.

Diversified mining company South32, which owns 47% of Mozambique’s Mozal aluminium smelter, said the smelter was operating at full capacity.