Top Court Nullifies EMATUM Loan

In early June, the Constitutional Council (CC) declared “the nullity of the acts inherent to the loan hired by EMATUM, SA, and the respective sovereign guarantee granted by the Government, in 2013, with all legal consequences.” Notably, decisions by the CC cannot be reversed.

Mozambique’s top court ruled that the government had breached the constitution and abused its institutional powers by not seeking approval from parliament to contract the loan. The CC also declared that the government had issued a sovereign guarantee that surpassed the respective limits of that year’s budget law. According to the constitution, parliament has the exclusive competence to “authorize the Government, while defining the general conditions, to contract and make loans and to carry out other credit transactions, for periods exceeding one financial year, and to establish the upper limit for guarantees that may be given by the State.”

The CC also argued that the government breached budget laws by not inscribing the loan in the 2013 state budget, as established in Law no. 9/2002: “No expense can be assumed, ordered or made without… being duly inscribed in the approved state budget,” and, “The Expenses can only be assumed during the economic year to which they had been budgeted.” Tellingly, it was only in 2016 that the loan was inscribed in Mozambique’s state accounts, particularly in the one referring to 2014.

The decision came three days after the government and a group of bondholders signed an agreement in principle to restructure $727mn of Eurobonds that have been in default since January 2017. However, views of the ruling’s implications for the Eurobonds differ substantially. On one hand, critics of the loans argue that the Eurobonds’ validity should be reconsidered in the context of the CC’s decision, since they replaced a now unconstitutional loan. Not only is the EMATUM loan involved in investigations over an alleged fraud scheme, but also the guarantee was inscribed in the 2014 state accounts, thus officially becoming sovereign debt before being converted into Eurobonds.

On the other hand, the bondholders’ legal advisors argue that the ruling has no legal bearing for the agreement in principle, since the Eurobonds comprise a new legal obligation that has been contracted by the government and not by EMATUM, and that the government guarantee was in fact extinguished with the debt’s inclusion in the state accounts.

The case was launched by the Budget Monitoring Forum (FMO), a civil society coalition that leads a domestic and international campaign to revoke the state-backed loans made to EMATUM, MAM and ProIndicus. The CC is expected to rule on similar challenges lodged by the FMO regarding the other two.

Of note, in April, the government announced that it had signed an agreement in principle with holders of a $535mn debt from MAM and that it planned to withdraw the guarantee on the $622mn loan to ProIndicus. The Attorney General’s Office has filed a lawsuit in the UK seeking to void the sovereign guarantee contracted with Credit Suisse for the ProIndicus loan. In our view, this effort gains strength amid indictments by US and domestic authorities against former Credit Suisse bankers and other individuals, including Mozambican nationals, accused of committing crimes in the process of contracting the loans.

We believe that the case for canceling the Eurobonds is weaker than that pertaining to the MAM and ProIndicus loans, which were converted into sovereign debts and have remained so. Moreover, since the government has been engaged in efforts to improve its reputation abroad, it must consider the implications of revoking debts, namely the reactions of markets and credit rating agencies – some of which have welcomed efforts to reach restructuring agreements. In addition, the government may be concerned with the exposure of domestic banks to said loans.

Recently, when asked if the government would continue negotiating with creditors, President Filipe Nyusi said “there are examples, worldwide, of decisions taken in the past that must be upheld in the present and future. We want to turn Mozambique into a normal, sustainable and credible country.” Furthermore, in a year when Mozambique will hold elections, the government must consider the implications of refusing to revoke the debts amid growing pressure from civil society and the political opposition in that regard. This criticism could escalate into civil unrest and impact Frelimo’s electoral chances. Against this backdrop, we do not expect final debt restructuring agreements to be reached before the October elections.