Congo debt deal fuels debate

13/12/2007 | Philip Alexander

IMF praises London Club restructuring, but doubts raised on the government’s use of new funds

A bond issue by the Republic of Congo sealed a restructuring deal with the London Club of commercial creditors last week, replacing around $2.1 billion in bank loans that had been in default for up to two decades. But transparency campaigners warned that there are still insufficient safeguards to ensure that the funds unlocked by the agreement will not go to waste.

The new bond matures in 2029, and includes a five-year grace period before amortization begins, together with a step-up coupon rising from 2.5% in the first three years to 6% for the final two years. The package also included a 5% up-front amortization for those participating in the original deal, to encourage acceptance.

The government of President Denis Sassou-Nguesso agreed to recognize not only the principal, but also the substantial amount of past-due interest, said George Estes, credit analyst for the $4 billion emerging country debt portfolio at Grantham, Mayo, Van Otterloo (GMO). This helped ensure that the deal, which cancelled more than 77% of the debts and arrears treated, achieved 90% acceptance among creditors.

“The borrower showed good faith during the negotiations, and we think this is a good example in the market of how a restructuring can be done,” said Estes, whose fund held about $14 million in distressed Congolese loans before the deal.

The IMF also welcomed the restructuring concluded on December 7, which implies debt relief of more than $1.6 billion for Congo, equivalent to 25% of external debt, or 19% of GDP.

“We are very happy with this deal, we consider it critical to help the Republic of Congo achieve higher sustainable growth and fight poverty,” Joannes Mongardini, IMF mission head for Congo, told Emerging Markets.

“By normalizing relations with external commercial creditors, it will improve Congo’s access to foreign direct investment and private sector financing, which is critical for private sector-led growth,” he added.

But Mongardini noted it would be “prudent” for the Congolese authorities to “improve budgetary execution and financial management, and to strengthen programme implementation,” to get back on track with the Heavily Indebted Poor Countries (HIPC) initiative, and the country’s poverty reduction and growth facility (PRGF) with the IMF.

Congo reached decision point for HIPC in March 2006, but progress toward completion point – and accompanying multilateral and bilateral debt forgiveness – had been “slow”, Mongardini acknowledged.

“Large fiscal slippages in 2007 have jeopardized a swift return to the PRGF arrangement, and we hope that the authorities will adopt a 2008 budget that is prudent and well executed in line with their commitments with us,” he said.

Still, he pointed to growing signs of good intent from the government, especially in the vital oil sector that accounts for more than 60% of government revenues. The Congolese authorities agreed to present a public financial management action plan to parliament alongside the 2008 budget. And the approval in October of an Extractive Industries Transparency Initiative (EITI) committee that includes civil society representatives, together with the establishment of an anti-corruption observatory in November “bode well in this regard,” said Mongardini.

Sarah Wykes, researcher for transparency campaign group Global Witness in London, did not share his cautious optimism. She pointed to the government’s failed attempt to obtain a court injunction against Global Witness. This was intended to stop the publication of documents that appeared to show the personal credit card bills of government officials (including the president’s son) being paid by funds from oil marketing companies with names such as Sphynx Bermuda, that had been working on behalf of the Congolese state oil company SNPC.

“This raises huge concerns over the marketing of oil, and the authorities continue to market through these shell intermediaries, they have just changed the names of the companies,” Wykes told Emerging Markets.

In June 2007, accountants KPMG released their 2005 audit report on SNPC, which concluded that the quality of financial management had improved enough for the accounts to be auditable, but not yet certifiable. Certified accounts for SNPC are a key HIPC completion point trigger, and the 2006 audit will be closely watched by the IMF.

Wykes is also unconvinced by government assurances to the IMF that Congo is not contracting fresh non-concessional lending. Testimony given in September 2006 in a UK court case brought by Kensington International Ltd, one of Congo’s creditors, revealed that Sphynx had signed a pre-financing deal with China for 15 cargoes per year over 10 years.

“That’s a huge sum of money, the counsel for Kensington estimated it at $9 billion – there is no transparency on what the government needs that amount of credit for,” said Wykes, adding that the IMF had apparently not seen details of the framework agreement.

She noted that IMF and World Bank influence over Congo was limited because multilateral lending was only small compared with bilateral and commercial credit. Wykes warned that this gave little reason for confidence that Congo will not end up with another unsustainable debt burden over the coming years.

And Stuart Culverhouse, chief economist at specialist illiquid emerging market brokerage Exotix in London, agreed that Congo’s reputation in the market was “tarnished” by a history of “weak credit culture.” Investors are apparently uncertain about the appropriate fair value yield for the new bond, given the absence of a credit rating, the off-track PRGF, and limited comparisons for such an instrument.

“Estimates are ranging from 9.5% to 11.5%, with the restructured bonds issued by Iraq, or perhaps Belize or Grenada, as possible peers,” Culverhouse told Emerging Markets.

Even so, he anticipated lively interest in the secondary market, given the limited number of diversification plays available – as evidenced by the strong demand for recent Eurobond launches by Ghana and Gabon. If the acceptance rate on the London Club deal is high enough, the new bond may also clear the $500 million hurdle that would allow inclusion in JP Morgan’s EMBI+.

And there is Congo’s unprecedented oil boom, which gave the government a primary fiscal surplus estimated at more than 20% of GDP in 2006.

“If the country is able to achieve HIPC completion point, then the IMF numbers suggest debt sustainability would no longer be in question,” said Culverhouse. “But what to watch is whether the good macroeconomic performance translates into policy gains.”

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