Wednesday 17 July 2019

Mozambique tops returns in bet on gas reserves bonanza

Gas extracted offshore will be processed in Mozambique before shipping. Photo: Bloomberg
Gas extracted offshore will be processed in Mozambique before shipping. Photo: Bloomberg

Srinivasan Sivabalan and Paul Wallace

In a world replete with negative-yielding assets, some investors have made 14pc in under three weeks on betting that an African country in default is about to come into a lot of money.

This month's rally in Mozambique's sole dollar bond comes after the government proposed a restructuring deal at the end of May that should see coupons, which they stopped paying in early 2017, restarted later this year.

For investors who swallowed the diluted terms and bought the bond, vindication has just come in the form of Anadarko Petroleum's $25bn plan to develop some of the country's gas reserves. The yield on the Southern African nation's bond, due 2023, has fallen almost 5 percentage points since May 30 to 10.8pc, compared with the coupon rate of 10.5pc.

Total returns on the security beat gains from Cypriot and Spanish counterparts, who were a close second, according to data from Bloomberg Barclays gauges for global and emerging-market debt.

Mozambique has been in the news for all wrong reasons since January 2017 over missed debt payments, $1.4bn of hidden liabilities, US indictments of its officials and slowing economic growth. But now investors are overlooking short-term turmoil in expectation of a surge in government revenues from gas output.

"Investors are hoping that Mozambique will come into a lot of money as gas becomes a huge source of foreign currency by 2022 or 2023," said John Ashbourne, a senior emerging-market economist at Capital Economics in London. "If they can ride out the next couple of years, things should look up."

Anadarko on Tuesday signed off on what it called the biggest foreign direct investment in Africa, seeing potential for Mozambique to become one of the largest LNG exporters in the world.

Gas from the Anadarko-operated offshore field will be processed on land, then shipped abroad - meaning more tax revenue.

"Between now and 2025, government revenue can go through the roof," Ashbourne said. "But investors will be watching the government's ability to harness this project for sustainable growth and long-run outcomes. If that doesn't happen, they'll be disappointed."


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