Banks Batten Down in Mozambique as Bond-Coupon Payment Looms

JOHANNESBURG (Capital Markets in Africa) – Africa’s largest banks are ensuring they protect themselves and their clients from the potential fallout if Mozambique defaults on its government debt next week.

Standard Bank Group Ltd., the continent’s biggest lender by assets, is holding liquidity in excess of regulatory requirements in its Mozambique unit “to cater for funding withdrawals during periods of stress,” said Finance Director Arno Daehnke.

FirstRand Ltd.’s consumer-banking business, First National Bank, is holding all of its capital in its subsidiary in the country in short-term investment securities, with a small portion of fixed assets, said Johan Maree, chief executive officer of FNB Mozambique. FNB has seen an increase in deposits and is complying with the mandatory cash reserve requirements of 15.5 percent, he said.

If Mozambique defaults “there will be more fallout than people might expect,” New York-based risk adviser Teneo Intelligence’s Senior Vice President Anne Fruhauf said. “There will be rating actions, the currency may take a hit, the bonds will fall.”

The Johannesburg-based lenders are taking these steps as concerns grow that Mozambique will fail to pay a $60 million Eurobond coupon on Jan. 18. JPMorgan Chase & Co. says the southern African nation will probably miss the payment, while a former International Monetary Fund official who’s advising bondholders insists the government has the money. The former Portuguese colony is battling a financial crisis spurred by decreased commodity revenue and the IMF’s decision to cut aid last April.

Banking Crises

While there’s a chance Mozambique will pay the coupon to avoid credit rating downgrades, it will probably decide not to, according to Teneo. The government debt defaults in Argentina, Turkey and Russia aggravated domestic banking crises with some lenders in those regions collapsing. Regulators took over at least two Mozambique banks last year, including Moza Banco SA, which was stabilized to prepare it for a sale.

Standard Bank “has full confidence in the ability of the local regulator to manage its local banking system risks, as demonstrated in the recent failure of Moza Banco,” Daehnke said. While Mozambique makes up a small portion of earnings and assets, the difficult operating environment is “impacting the performance” of Standard Bank’s unit there, he said.

Mozambique said in October it would try to restructure its Eurobond as well as $1.4 billion of government-guaranteed loans to two state companies. While the government hoped to finalize a restructuring by Jan. 18, it hasn’t started formal discussions with the bondholders. There’s a 15-day grace period to settle the coupon payment, according to the prospectus.