The annual interest payment on the bonds issued by the fraudulent company Ematum (Mozambique Tuna Company) has jumped to 81 million dollars (up from 45 million dollars per year) as the interest on Mozambique’s sole Eurobond (maturing in 2031) rises from five per cent to nine per cent, according to Gregory Smith, a senior economics analyst from M&G Investments.
Ematum was created in the context of Mozambique’s greatest financial scandal, known as the case of the “Hidden Debts”. Ematum was one of three fraudulent companies set up by the State Intelligence and Security Service (SISE). The others were Proindicus and Mozambique Asset Management (MAM).
The companies obtained loans of over two billion US dollars from the banks Credit Suisse and VTB of Russia, thank to illegal loan guarantees issued by the government of the day, under the then President Armando Guebuza.
The guarantees were signed by Guebuza’s Finance Minister Manuel Chang, who is currently under detention in New York, awaiting trial for crimes arising out of the Hidden Debts.
“Back in 2019 this bond was issued as part of an exchange on the previously defaulted “tuna” bond, with the hope that Mozambique would be reaping lots of revenue from natural gas production by now”, Smith wrote in his LinkedIn account. “However, delays in gas production have meant that government revenues are yet to get a raise. In fact, government revenues have fallen from 29% of GDP in 2019 to an estimated 24% in 2023”.
According to Smith, the government will be giving up vital foreign exchange before it has realized any substantial inflows, while it faces challenges with foreign debt arrears and depleted foreign exchange reserves after the Covid-19 pandemic and several natural disasters.
“The lesson from this is that any agreed increase in coupon should have been contingent on the gas revenues actually arriving. This idea was considered as part of the restructuring, but deemed too complex at the time”, Smith said, adding that the question “how do you reliably measure gas revenues? went unanswered.”
“The simple route was chosen, but this now looks like a mistake”, he added, arguing that more effort is needed to design practical contingent debt instruments that work.
“Meanwhile the hope (for about 10 years from now?) remains that the liquefied natural gas (LNG) projects get going and save the day”, he concluded.
Smith is far too generous to the Mozambican authorities. For paying the Ematum interest is not just a mistake – it is a crime.
For in June 2019, the Constitutional Council, Mozambique’s highest body in matters of constitutional law, declared null and void all acts concerning the Ematum loan. Also null and void, “with all the legal consequences” is the loan guarantee issued by Guebuza’s government.
The initial loan took the form of 850 million dollars worth of bonds issued by Credit Suisse and VTB in 2013. But this was not authorized by the Mozambican budget law of 2013.
That law set a ceiling of 183.5 million meticais (equivalent at the time to about five million dollars) on loan guarantees that the government could legally issue. A guarantee for a loan of 850 million dollars smashed through that ceiling.
The Ematum loan and its guarantee were not mentioned in the 2013 budget, thus violating a basic principle of the law on state financial management which states that no expenditure can be authorized unless it is duly included in the budget. (The guaranteed loan counts as state expenditure because, if the company does not repay – as has happened –then the Mozambican state becomes liable, and the guarantee adds to the State’s foreign debt).
The Constitutional Council said that the government had “completely disrespected” both the Constitution and the law by contracting the Ematum debt. The loan and its guarantee were thus null and void.
Despite the Constitutional Council ruling the government went ahead with a deal under which the bonds were exchanged for new bonds, for 900 million dollars, maturing on 15 September 2031, with an interest rate that started at five per cent, and has now climbed to nine per cent.
The government could tear up its deal with the Ematum bondholders, on the grounds that the Constitutional Council, effectively the highest court in the land, has ruled it null and void. Instead, it has chosen to ignore the Constitutional Council ruling, and continues to pay the Ematum interest.
The situation will worsen later in the decade, when the government has to pay the capital. The capital is to be paid in eight equal six monthly instalments of 112.5 million dollars on 15 March and 15 September of the years 2028, 2029, 2030 and 2031.