Traders Snap Up Assets of Nation Where Default Is New Normal

LAGOS (Capital Markets in Africa) – For a country that has missed several debt payments this year, Mozambique’s assets are performing remarkably well.

The southern African nation’s currency has posted the world’s biggest gain in 2017, while the price of its overseas bonds, which the government defaulted on in January, has soared about 30 percent, making them among the best-performing sovereign notes in emerging markets.

The rally — after last year’s rout — suggests investors may be starting to look beyond Mozambique’s debt crisis, which was triggered by excessive, sometimes illegal borrowing and plummeting commodity prices.

While policy makers have yet to start restructuring talks, investors have been encouraged by two things: the completion of an independent audit into Mozambique’s foreign debts and a $7 billion project signed off on by an Eni SpA-led consortium to exploit one of the biggest natural gas discoveries in a generation. Interest rates that almost tripled to 23 percent since the start of 2016 have also helped lure yield hunters.

“The currency has rallied massively, which has helped the debt burden, and the deal with Eni is also positive,” said Phillip Blackwood, a managing partner at EM Quest Ltd., which advises Sydbank A/S on about $2.5 billion of emerging-market assets. The Danish lender bought Mozambican bonds after the default and sold some about a month later at a profit, Blackwood said.

Mozambique, one of the world’s poorest countries, went from being a darling of investors thanks to its high growth and gas discoveries to a pariah after it revealed about $1 billion of secret loans last year to state companies, causing the International Monetary Fund to cut lending and investment to plummet.

The metical, which has strengthened about 20 percent this year to 60.295 per dollar, will probably appreciate further as coal exports increase and the audit by U.S. corporate investigation firm Kroll Inc. may entice international organizations, including the IMF, to resume aid packages, analysts at Standard Bank Group Ltd., including Penny Byrne and Walter de Wet, said in a note last month.

The bonds traded at about 76 cents on the dollar on Wednesday, up from as low as 50 cents in mid-January.

What’s buoyed them is investors refocusing on the fact that the country “sits on a crown jewel” when it comes to gas, said Aly-Khan Satchu, the chief executive officer of Nairobi-based Rich Management, an adviser to companies and wealthy individuals.

Unfinished Business
The government had hoped to complete a restructuring of its commercial foreign debt by January, but Eurobond investors have refused to start formal negotiations until the audit is published. The bondholders’ position is strengthened by them having voluntarily swapped into the notes last year from higher-yielding debt issued by a state-owned tuna-fishing company, according to Blackwood. By contrast, investors in the previously undisclosed loans, which Mozambique also defaulted on, haven’t taken part in any swap.

“Bond investors feel they’re in a good position,” he said. “There are plenty of other places the government can go and find a haircut. The restructuring discussions will be very difficult for Mozambique and could easily drag into next year.”

But the start of Eni’s project to build a liquefied natural gas terminal “is a positive light during a very dark period in Mozambique,” said Pieter du Preez, an analyst at Paarl, South Africa-based NKC African Economics. “It indicates that there is still enough interest in the economy despite the ongoing debt scandal.”

Source: Bloomberg Business News