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
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
Congos 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 countrys 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
governments 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
presidents 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
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 Congos creditors, revealed that Sphynx had
signed a pre-financing deal with China for 15 cargoes per year
over 10 years.
Thats 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
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 Congos 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 Morgans EMBI+.
And there is Congos
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