Mozambique: future target of vulture funds?

Added 25 Nov 2016
Once considered an economic recovery miracle, Mozambique is now facing a debt crisis that puts its future in jeopardy. Restructuring its debt in the absence of an international sovereign debt restructuring mechanism will be tricky and vulture funds might use that opportunity to attack the country. 

Is the Mozambican economic miracle over? In recent years, many saw Mozambique’s success story with great optimism. Despite the very low human development index of this former Portuguese colony, Mozambique’s economic potential was widely recognised. As with many emerging African economies, the important natural resources of Mozambique suddenly created a surge in investments and exports. In addition to its huge coal reserves, massive gas fields were discovered in the Indian Ocean waters bordering Mozambique. Those discoveries in a context of high demand for energy resources, in particular from China, brought impressive foreign investments, in particular in energy and real estate projects. However, according to a 2013 UN mission, 54% of the population lives in poverty, a figure that is stagnant despite the economic dynamism. 
It appears that this picture is now coming to an end. Mozambique is now in its worst economic crisis since the end of civil war in 1992. It started after the disclosure in April of more than $1 billion hidden public debt. This hidden debt comes from secret loans taken from two London-based banks, Credit Suisse and Russia’s VTB bank, by public companies, which have now been counted as government debt. After this disclosure, the IMF announced the suspension of its lending to Mozambique as the failure to disclose loans violates the borrowing arrangement in place. The IMF was quickly followed by a group of donors that includes Portugal, UK, France, the EU and the African Bank of Development. 

The suspension of financial assistance combined with the collapse in commodity prices hit the country very hard. In a few months, Mozambique’s economic and financial situation deteriorated dramatically. Inflation rose to 25% and the government announced difficulties in paying salaries and overtime hours. The government acknowledges that the situation might get worse and that it will have difficulties paying pensions next year. The government also announced that it cannot pay external debt to private creditors next year. The government’s priority is the restoration of financial assistance from its donors and creditors. It plans to restore its trust with Western donors and the IMF through the realisation of an independent audit of its public debt

However, this will not be sufficient: Mozambique needs to renegotiate its $11.2 billion public debt if it wants to receive assistance from the IMF. This is the consequence of IMF’s policy of not lending to countries whose debt is deemed unsustainable. The government plans to do so by the end of the year. This is of course very ambitious but the country cannot afford to wait any longer. The debt renegotiation process will however be extremely complex. VTB and Credit Suisse’s loans were sold to other investors and it is unclear how they will be treated compared to other bondholders. Those loans are under British law, which could enable vulture funds to attack the restructuring. Mozambique might therefore be the new target of vulture funds, only a few months after Argentina was forced to settle with vulture funds that successfully attacked its debt restructuring in New York courts.

This topic was been at the centre of discussion in Geneva last month during the meeting of the Inter-Parliamentary Union. During a panel discussion, MPs from all over the world discussed what parliaments could do to tackle vulture funds activities. MPs praised the anti-vulture funds law adopted by Belgium. This law is indeed the most ambitious and comprehensive legislative attempt to prevent vulture funds’ business model by providing judges with relevant criteria to reject vulture funds’ arguments. However, many delegates acknowledged that such legislation would not be sufficient to deal with the problems of debt crises resolution. 

Vulture funds activities are only allowed by the existing gap in the financial international architecture: the absence of an insolvency regime for public debt. As we have seen with Argentina, and now with Mozambique, the fragmentation of creditors and the existence of many different debt instruments, such as public and private loans as well as bonds, makes it very difficult for a state to organise in a timely manner the restructuring of its debt. Unfortunately, Mozambique might highlight in the future, once again, the need to establish an international sovereign debt restructuring mechanism that puts human rights at the centre of discussion.