The Case for Term Limits, Angola Edition

The erasure of Jose Eduardo dos Santos’ 38-year rule in Angola appears to be accelerating. Angola does not have executive term limits, but Eduardo dos Santos finally stepped down as president in late 2017.

On Wednesday his successor, Joao Lourenço, removed replaced his son (Jose Filomeno dos Santos) as head of Angola’s $5b sovereign wealth fund. This follows the sacking of Isabel dos Santos (Africa’s wealthiest woman) as head of the country’s state oil company last year. President Lourenço has also moved to replace key security chiefs in sub-Saharan Africa’s third largest economy and second biggest oil producer.

When Eduardo dos Santos said he’d retire I was skeptical. The anointment of his defense minister, Joao Lourenço, as his successor (while retaining position atop the ruling party) did little to change my mind. But like in Mozambique and Zambia before it, the mere change of guard in Angola appears to have initiated a process of elite churn that is accompanied by a dismantling of the old order (at the very least within the ruling party).

Now, there is no guarantee that this will lead to normatively desirable outcomes (such as better governance and service delivery in Angola). Change for its own sake is only good up to a point. But it is a testament to the political importance of term limits. Regular leadership turnover is a nice way of ensuring that no single interest group or ruling cabal completely dominates a country’s political economy.

Relatedly, I am not a close watcher of Angola but recent events have led me to update my view of the level of institutionalization of MPLA. For a long time I thought that it was just an electoral/patronage SPV for Eduardo dos Santos. But news events seem to suggest that its powers transferred almost intact to Joao Lourenço (I could be wrong of course).


The top 20 best countries to invest your money in Africa

This is according to the latest Ernst & Young’s Africa Attractiveness Report (2016). Kenya is ranked 4th. Ahead of Tunisia, Mauritius, and Botswana. You just need to spend a few hours in Nairobi, or the other 46 county headquarters, to understand why. While economic inequality remains to be a huge (political) challenge, it’s hard to argue against the structural transformations underway in the Kenyan economy.

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More on this year.

Is there such a thing as predatory sovereign lending?

The Wall Street Journal has a great story on Mozambique’s stolen hidden debt scandal:

Screen Shot 2016-06-30 at 8.03.37 PM.pngThe government picked Mr. Safa’s company, Privinvest, to supply ships, including patrol and surveillance vessels, and asked its help getting financing. The company disputes the characterization of the ships as military, saying they weren’t outfitted with weapons. Privinvest approached Credit Suisse about a loan for Mozambique, and a committee of senior executives, including then-CEO Gaël de Boissard, approved the deal.

Credit Suisse’s top brass signed off in part because the bank had pioneered a way to lend in developing countries without taking on much risk.

The bank found it could purchase sovereign-debt insurance through the Lloyd’s of London insurance market to hedge as much as 90% of the loans against default. Credit Suisse charged higher interest rates on the debt than its insurance premiums, pocketing the difference mostly risk free.

The insurance policies Credit Suisse used only covered governments. So when Mozambique wanted to borrow the money through state-owned companies instead, the bank came up with a twist: Mozambique would cosign.

FT notes that:

The debt was originally borrowed via a special purpose vehicle for Ematum [tuna fishing company], an arrangement that does not require the same level of disclosure as a sovereign bond issue.

Basically Credit Suisse, the Russian VTB Capital, and their Mozambican accomplices knew exactly what they were doing.

When the money got to Mozambique it mostly went into private pockets. The proposed tuna business the loans were intended to finance went bust (realizing a paltry 2.5% of projected sales). And the security purchases (ostensibly to secure Mozambique’s vast yet-to-be-developed gas fields) proved useless.


…….conditions in Mozambique are worsening. Its foreign-currency reserves fell to $1.8 billion in May from $2 billion in January, and it is seeking $180 million in food aid. Intensified fighting has sent more than 10,000 refugees to neighboring Malawi, according to the U.N. High Commission for Refugees.

Credit Suisse is a Swiss financial services company. According to the WSJ Privinvest’s struggling subsidiary Constructions Mécaniques de Normandie built the ships sold to Mozambique. The latter is, of course, based in France. Corruption knows no borders.

Mozambique may have squandered up to $2b of borrowed money

Public Finance is emerging to be one of the biggest development challenges of our age. Here’s Africa Confidential on Mozambique’s hidden loans, which may amount to more than $2b.

Screen Shot 2016-05-12 at 1.38.32 PMSources close to Rosário Fernandes, ex-head of the revenue authority, the Autoridade Tributária de Moçambique, have told us of systematic diversions of taxes straight into the pockets of the Frelimo elite, especially in the later years of President Guebuza’s term of office, when he exercised enormous patronage. Massively inflated contracts were commonplace. The latest to emerge is the extravagant, nearly complete, Bank of Mozambique building in Maputo, which boasts a helicopter landing pad on the roof. Originally estimated to cost $90 mn., the final cost is reckoned at at least $300 mn., with kickbacks and ‘commissions’ accounting for the cost inflation, say Frelimo sources.

Guebuza engaged in an ultimately doomed attempt to extend his term of office, which ended in October 2014, and this partly explains the extraordinary scale of his liberality towards loyalists, sources formerly close to him told us (AC Vol 53 No 18, The Putin option). The schemes became increasingly brazen, and the creation in 2013 and 2014 of three companies – Empresa Moçambicana de Atum (Ematum), Proindicus and Mozambique Asset Management (MAM) – was the culmination of this programme. The companies, which received the totality of the $2 bn. now owed by the state, were mainly in the field of maritime security, even though it was the intelligence and security services that provided the management. They bypassed parliament, illegally, and defence procurement, effectively privatising, as one commentator put it, national security while lining the pockets of the elite into the bargain. Yet the ill-equipped companies could not cope and quickly collapsed. Ematum, which originally claimed to be focused on tuna fishing, is no longer operating its few licensed vessels because it cannot pay salaries (AC Vol 56 No 24, Nyusi’s nightmare).

Kenya, Zambia, among others, have also borrowed enormous amounts of money that have not been properly accounted for. Several of these countries have recently gotten cover from the IMF that all is well. But the IMF has strong incentives to save face and maintain confidence that it does its job.

If Mozambique could do it, what stops more sophisticated treasuries elsewhere on the Continent?

I am increasingly convinced that Africa’s newfound love with international creditors is a bond bubble waiting to happen. The 1980s and early 1990s sucked. And we might be headed for a repeat if the African states floating eurobonds continue on the same path.

How did Mozambique manage to hide more than $1b in debts from the IMF?

It’s common knowledge that most developing states have data problems. But even with those priors, the revelation that Mozambique managed to hide more than $1b in undisclosed debts (ALMOST 8% of GDP!!!) from the IMF for almost three years is cause for pause.

According to the FT:

Details of the previously undisclosed loans — which add about the equivalent of 10 per cent of gross domestic product to the government’s known debt burden — emerged after the “tuna” bond was restructured last month.

Of the two previously undisclosed loans confirmed last week, the first was for $622m to a state-owned company, Proindicus. The second, to another unidentified state company, was valued at more than $500m, a person familiar with the matter said.

Credit Suisse, the Swiss bank, and Russia’s VTB bank, both of which arranged the sale of the tuna bond, provided the undisclosed loans, the IMF said.

Basically Mozambique borrowed a lot of money ostensibly to set up a state-run tuna fishing company but ended up spending nearly all the money on military speed boats.

Borrowing so much money to spend on the military seems like a really REALLY bad idea.

Also, how did the IMF miss this for so long?

Public Finance is hard.

More on this here.

Some Africanist inside baseball

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Former HIPC countries are back in the red

The Journal reports:

Mozambique was one of the biggest benefactors of debt forgiveness, with its debt slashed from 86% of gross domestic product in 2005 to 9% the next year. The country has built it back up since then to 61% of GDP.

Ghana’s debt was 82% of GDP in 2005 just before the international community forgave about half of it. It’s now up to 73% of GDP and growing, according to the IMF.

The burgeoning debt burdens are putting more pressure on African budgets. The cost of servicing Ghana’s debt will consume nearly 40% of government revenue this year, according to an analysis by Fitch Ratings — twice what is considered sustainable under the rule of thumb used by the IMF and many analysts.

More on this here and here and here.

Is Nigeria’s Economy Overrated?

Here is Izabella Kaminska of the FT:

Source: Financial Times

Source: Financial Times

On the surface, Nigeria’s oil sector has dropped in significance to a mere 13% of real GDP, while the services sector has climbed to 40% in real terms. Yet, the reality is that it is the country’s oil revenues that have supported growth and, to a large extent, maintained social order. Without oil, both would fall apart; government spending would be much smaller, interest rates much higher, and the currency’s valuation much lower.

….. the country’s domestic savings rate, at a measly 20 per cent of GDP, is extremely low for a developing economy at this stage. A key reason being the government’s inability to tame chronically high inflation, meaning bank deposits have earned negative real interest rates for most of the past decade.

More on this here (HT Tyler Cowen).

And by the way, on this score Nigeria is not alone.

In an instance of the triumph of hope over experience The Economist recently pronounced the end of the resource curse in Africa. I do not completely buy their argument. Yes, growth and investment across the Continent may no longer be tightly coupled with natural resource cycles. But from Ghana, to Zambia, macro-economic stability (and important aspects of social spending) are still very tightly tied to movements in the global commodity markets.

Furthermore, many of these countries have recently re-entered the global debt markets partly backed by primary commodities as surety. The same applies to debts owed to Beijing. Last year alone foreign debt issues in the region exceeded $6.5b. As I argued in June of 2013, we might be entering another pre-1980s debt bubble.

Tanking crude prices have put Angola on the ropes. The country recently slashed $14b of previously planned spending. The Cedi and Kwacha took a nosedive (26% and 13%, respectively) last year because of sagging commodity prices (gold and copper) and government deficits (fueled by the expectation of future commodity bonanzas, especially in the case of Ghana whose debt to GDP ratio is now a staggering 65%). Even well-balanced Kenya (also a recent eurobond issuer) has had to go to the IMF for a precautionary loan against currency-related shocks in the near future. The current situation has prompted ODI to warn that:

The exchange-rate risk of sovereign bonds sold by sub-Saharan African governments between 2013 and 2014 threatens losses of $10.8 billion, equivalent to 1.1 percent of the region’s gross domestic product, the ODI said. While Eurobonds are typically issued and repaid in dollars, the depreciation of local currencies in 2014 makes it harder for governments to repay them.

All this brings to the fore SSA’s biggest challenge over the next two decades: How to carry out massive investments in infrastructure and human capital, while at the same time maintaining a sustainably balanced macro environment that is conducive to long-term saving.

Resource Dependence in Africa (with some thoughts on Mozambique)

Source: The World Bank

Source: The World Bank. Click on image to enlarge  

This map shows resource rents as a share of GDP for the period 2009-2013. Note that the colouring on the map is about to change, with the Indian Ocean east coast getting some of the hydrocarbon action that has hitherto been a preserve of the Atlantic coast and a couple of landlocked states like Chad, Sudan and South Sudan (The biggest change in West Africa will most likely be in Guinea once the mining of its high grade iron ore in the Simandou Mountains gets going. A few contractual and logistical hurdles still stand in the way of the mega mining project).

The eastern African states of Kenya, Uganda, Tanzania and Mozambique are about to get a shade or more redder. Kenya and Uganda will start producing oil between 2016-17. Tanzania and Mozambique have massive amounts of natural gas, with Mozambique having recently climbed to top four in the world with a capacity to meet total global demand for more than two years.

As you may have guessed Mozambique is by far the country to watch out for as far as the ongoing eastern African resource bonanza is concerned. The country will continue to see a rapid rise in coal production, ultimately producing an estimated 42 million tons in 2017. Mozambique’s Gold production is also expected to more than triple by 2017 relative to its 2011 level. Estimates suggest that based on the full capacity exploitation of coal and gas alone the Mozambican economy could rise to become SSA’s third or fourth largest (after Nigeria, South Africa and (or ahead of) Angola). Going by the 2012 GDP figures from the Bank, that would be a change from US$14 billion to about $114 billion.

Have you enrolled in Portuguese classes yet?

As Mozambique gets wealthier in the next five years at a vertiginous pace, it will be interesting to see if it will go the Angola way. Both are former Portuguese colonies that had drawn out civil wars. Both tried to have democratic elections but then the ruling parties managed to completely vanquish the opposition. And both continue to be ruled by overwhelmingly dominant parties that appear to have consolidated power.

My hunch is that Mozambique is different, as FRELIMO is less of a one man show than is the MPLA. Indeed FRELIMO just selected a successor to Guebuza, the Defense Minister Filipe Nyusi (Nyusi’s background in engineering and the railway sector should prove useful for the development of the country’s coal industry).

The Tanzanian model of dominant/hegemonic party with term limits appears to have spread south. And that is a good thing. The other African country that appears to be embracing this model is Ethiopia (I think I can now say that the Zenawi succession was smooth and that Desalegn, also an engineer, is credibly term limtied).

Kampala, Kigali and Yaounde should borrow a leaf from these guys (that is, as a second best strategy given that their respective leaders do not seem to be into the idea of competitive politics).

For more on the politics and management of natural resources in Africa see here, here and here.

Why are some African governments so bad at managing their countries’ resources?

UPDATE: According to Reuters,  Israeli billionaire businessman Dan Gertler sold one of his Congo-based oil companies to the government last year for $150 million – 300 times the amount paid for the oil rights – in a deal criticised by transparency campaigners.


Just to reiterate what I have said before regarding the need to boost the capacity of African governments to manage their resources well, here is a long quote on Vale’s mining operations in Mozambique (H/T Anna).

The point here is that resource mismanagement in Africa is not just a story of rampant corruption and the complete lack of political will for reform. It is also a story of governments that remain completely out-staffed by multinations with far superior technical capacities. Improving resource management on the continent will therefore have to be as much about government technical capacity development as it will be about political reform.

Vale, for example, employs nearly 200,000 people around the world and has annual profits equivalent to nearly four times Mozambique’s state budget. It can recruit, train, and compensate employees to represent its interests on a scale far beyond what the government can do. Without Vale’s capacity for number crunching, Mozambique’s regulators lean on the companies they oversee for all manner of important data.

In 2011, the Mozambican government published an independent study of the country’s mining, oil, and gas industries. Conducted by a Ghanaian consulting company, Boas and Associates, the report was part of Mozambique’s application to the Extractive Industries Transparency Initiative, a World Bank-funded program designed to encourage an honest accounting of mining revenue and payments by participating countries and corporations alike. Mozambique’s candidacy was ultimately denied on the basis of its failure to publish what it earned from the companies involved, [but the report also noted a lack of qualified personnel in the agencies governing almost every aspect of the extraction of Mozambique’s natural resources]: licenses, prospecting, mining and drilling, sales, export.

According to the report, the [Mozambican government has no way of verifying the quality and quantity of minerals in the concessions it leases to private companies, and it depends on those companies for data on what is ultimately mined and exported]. Worse, the government has no system for monitoring global commodity prices or of tracking companies’ investment costs, which means it cannot independently verify a company’s profits.

Lesson? It’s not all corruption. It is also about the incentive structure that has resulted from government’s reliance on the word of profit-maximizing mining companies.

Improving government capacity to regulate resource sector operations is a key pillar of accountability and transparency that is currently missing from the discussion on how to manage Africa’s resources. It is easier to blame it all on thieving politicians and mining executives.

Not all governments might find it useful to improve their technical capacity (it is easier for them to steal if the valuation of state assets remain uncertain) but I bet many African states, especially those with moderately democratic regimes, can be persuaded to boost their technical capacity, if not for anything then just to improve their bargaining position vis-a-vis mining companies. At a minimum, this would mean more money for their pockets, and perhaps also more money for roads, schools and hospitals.