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A 'hidden debt scandal' might crush one of the world's poorest countries

mozambique gold miner
mozambique gold miner

(Goran Tomasevic/Reuters)
A gold miner climbs down into a mine shaft in Manica Province near the Zimbabwe border on September 18, 2010. Hundreds of miners work in individual claims rented from local landowners.

After about a decade of strong growth, Mozambique has hit a snag.

In April, the southeast African nation admitted that it had hidden over $1.4 billion in debt from the International Monetary Fund and other investors — after which the IMF, the World Bank, and the UK promptly suspended aid to the country.

And before that, there was another controversy "involving a state-backed $850 million bond that was ostensibly issued to set up a tuna fishing company ... even though $500 million of the debt was spent on naval vessels and other security equipment," as reported by the Financial Times.

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Since then, S&P Global Ratings slashed Mozambique's credit assessment to CCC from B-, noting an increased risk of defaulting on debt either because of higher than expected debt-service obligations or acceleration clauses in the government's external commercial debt. The S&P now estimates that Mozambique's net general debt is at 90% of GDP for this year.

Additionally, Fitch downgraded the country's rating to CC last week, arguing that "a default of some kind appears probable."

Notably, now that investors' feelings toward Mozambique have cooled, a report by BMI Research argues that the country is edging closer to the possibility of seeing a balance-of-payments crisis over the next five years.

"A significant deterioration in investor sentiment towards Mozambique following the recent hidden debt scandal will have negative consequences for the wider economy, highlighting the flaws in an economic model so heavily dependent on strong balance of payments dynamics," the BMI Research report stated.

The report continued:

The likelihood of slower growth in levels of inward investment, particularly into the infrastructure sector, has led us to make substantial downward revisions to our economic forecasts, as the strong flows of foreign capital that have buoyed the economy in recent years begin to decline. While inward investment into key sectors will provide sufficient capital to fuel relatively robust real GDP growth over the next five years, averaging 4.7% per annum according to our forecasts, this will not be enough to alleviate the ongoing dollar shortage, causing the economy to operate below its potential.

Plus, not only are there questions over the sustainability of the government's debt burden, but investors are now also worried about the sovereign's liquidity given that donors have suspended aid, BMI Research added.

mozambique
mozambique

(Grant Lee Neuenburg/Reuters)
A fisherman cleans his boat beneath Maputo's skyline in Mozambique on August 15, 2015.

Yields on the recently issued sovereign Eurobond have spiked to 16.7% from 10.5%, reflecting the increased risk associated with the government.

Moreover, the country's currency, the metical, has fallen by about 32% against the dollar since January.

"The key challenge for Mozambique will be meeting its financial liabilities, and rebuilding trust with its international development partners and investors," argued Alex Vines, the head of the Africa program at Chatham House, in the blog post for the think tank.

Screen Shot 2016 06 02 at 3.04.09 PM
Screen Shot 2016 06 02 at 3.04.09 PM

(Investing.com)

Mozambique's economy was battered by years of economic mismanagement and a bloody 16-year civil war that ended in 1992.

But the country emerged as a strong African performer over the last 10 years. It even had one of the highest projected compounded annual-growth rates (CAGR) from 2014 to 2017 of +7.30%, according to a list compiled by Business Insider based on the forecasts from the World Bank's 2015 Global Economic Prospects.

The country had recently attracted large investment projects in natural resources — especially after discovery of gas fields off the country's coast in 2011. Investors believed that Mozambique might be able to generate revenues from natural gas, coal, and hydroelectric capacity greater than its donor assistance within five years.

But even though Mozambique's economy had grown rapidly over the last decade, over half of the population remains below the poverty line, and the vast majority of the country works in subsistence agriculture. And the country's GDP per capita is one of the lowest in the world at just $585.6.

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