In recent times the Mozambican government has suffered the spill overs of its hidden-debt crisis, particularly in 2016, causing it to fall short of the requirements of most international aid programs. Growth has also been sluggish, the International Monetary Fund (IMF) estimating growth to remain below the 1% in 1Q2017.
The concern for many foreign investors will be the several credit downgrades the Mozambican government has experienced over the past year. In June 2016 global ratings agency Fitch announced Mozambique’s credit rating would be downgraded from CCC to CC. This downgrade was soon followed by another announcement on the 30th November 2016 of a further downgrade to RD.
Fitch downgrading Mozambique’s credit rating denotes a very real risk of default. Mozambique’s current RD rating suggests the country has defaulted on a number of its obligations and Fitch believes it will generally default on most if not all of its future obligations.
These 2016 downgrades will increase the cost of borrowing for the Mozambique government and domestic private sector in the international financial market, hindering the country’s infrastructure and other development projects that could’ve been financed through foreign borrowing. Additionally, high borrowing costs are likely to impact domestic consumer spending as interest rates will rise, reducing disposable incomes.
The Mozambican government’s debt problems are seemingly spiralling out of control. In April 2016 the government made a surprise announcement that it had USD 1.4 billion in undisclosed debt that it could not pay timeously. The country’s debt owed to foreign creditors, stood at an estimated $9.86 billion in 2016, or 80.0% of its GDP according to the World Bank.
Connected to Mozambique’s debt crisis are its large natural gas reserves across its shoreline. According to industry analysts there is as much as 180 trillion cubic feet of natural gas across Mozambique’s shoreline, making the country one of the top three nations with the largest natural gas reserves in Africa.
In recent times Mozambique’s massive reserves have attracted widespread attention from some of the largest oil and gas companies in the world, including: ExxonMobil, Royal Dutch Shell, Eni, Statoil, Anadarko Petroleum and Russia’s, Rosneft. The idea the Mozambican government is pursuing public-private partnerships by enlisting private companies to drill for the natural gas and pipe it to the shore. Some of the natural gas would be expended domestically, but the bulk of it would be processed into liquefied gas and exported to various markets from yet-to-be constructed liquefied natural gas (LNG) export terminals. The IMF conducted a study in which it predicted the discovery of Mozambique’s natural gas reserves will prompt an estimated $100 billion over the next two decades, but the figure is questionable as foreign investments in the sector has slowed down considerably over the past 24 months.
Earlier in 2016 Bloomberg reported multi-national oil and gas firm Anadarko Petroleum is considering an investing in a USD 15 billion LNG export terminal, but the US company is going through financial restructuring due to lower than expected oil prices affecting its revenues. This has caused great concern for the Mozambican government which is competing against several other natural gas exploration projects in various parts of the world.
One of the issues that may impede the Mozambican natural gas industry is that the infrastructure development has taken longer than expected whilst market conditions have changed rapidly. Particularly, global LNG markets are no longer desperate for new sources of supply due to a more globally competitive market and high capital costs associated with drilling for natural gas. Spot prices in East Asia, which has traditionally been the most attractive market, are down by as much as 75% from peak levels two years ago. Consequently, major global oil corporations, who had initially considered large-scale gas drilling off the Mozambican coast, are reluctant to invest due to declining revenues.
South Africa has a longstanding relationship with neighbouring Mozambique. Over the years Mozambique and South Africa have established bilateral trade agreements through the SADC and other institutions to promote intra-African trade by stimulating regional integration initiatives across the continent. Mozambique sits in a position to strengthen its trade relations by exporting LNG to South Africa and its private entities, such as Sasol that have a natural propensity to purchase LNG. As part of the SADC mandate for intra-regional trade expansion, Mozambique can grant South African companies such as Sasol concessions to stimulate trade between both countries.
According to the IGU1, natural gas will account for approximately 24% of global power generation by the year 2040, as the share of less-environmentally friendly coal power declines. IGU predicts a surge in LNG supply in the next two decades, increasing its market share and playing a key role in expanding access to natural gas as a critical part of the world’s future energy mix.
Mozambique’s LNG projects need to proceed quickly to take advantage of the next market upturn within the energy sector. As a country endowed with natural resourced, Mozambique has the potential to transform the lives of its citizens by taking advantage of market growth spurts in order to expand public revenues and contribute towards economic development. Nonetheless, the government has to navigate challenges such as rising government debt, lower foreign investment and sluggish economic growth by making the necessary structural changes to unlock Mozambique’s growth potential.
1 International Gas Union