By Thatego Seanego
TotalEnergies’ declaration of a force majeure in April 2021 has brought about uncertainty on whether the construction of the Afungi LNG export facility will continue, resulting in the Export Credit Insurance Corporation of South Africa (ECICSA) excluding the project from its forecast.
“The forecast of the current book excludes Total LNG Mozambique project which was suspended in April 2021 before any drawdowns under the covered loan had occurred,” noted the state insurer in its 2022 annual report.
TotalEnergies’s declaration of the force majeure was the result of a series of violent attacks by terrorist organisations in Cabo Delgado, the northeastern province of Mozambique where the gas export facility was being built.
Without the Afungi project coupled with the refinancing of the Nacala corridor railway and port debt in June 2021, the state insurer expects a sharp reduction in its portfolio. Despite this ECICSA has made a provision in its Strategic Plan 2022 – 2023 to 2026-2027, worth $370 million, to reinsure the Afungi project in case the force majeure is lifted in 2024.
In the 2020/2021 financial year, ECIC approved $800 million to underwrite loans issued by private banks to companies that supplied goods and services to the Afungi gas export project.
ECIC was created in 2001 to protect transacting parties in international trade, particularly within the African region. It is also a vehicle that the South African (SA) government uses to benefit SA’s economy. Companies, whose loans are underwritten by the ECIC scheme, are required to use 50% of their financing to procure services and goods from SA companies.
Had ECIC reached its target to insure loans for $800 million, then $400 million (or R6.58 billion) would have been spent on SA companies. Such opportunities could have had a positive spin-off on the ailing SA economy which is struggling to recover from a COVID-19-induced economic meltdown. With the current $/Rand exchange rate the Afungi construction project would have added R14,7 billion to ECIC’s total insurance book increasing it to R35,5 billion in the last financial year ending March 2022. Based on the historical data, ECIC charges a premium of 2% of the total insured value per financial year as shown in table 1. The halting of the Afungi thus meant the state-owned insurance company lost an opportunity that could have earned it R711.04 billion, 39% higher than the R513 billion realised in 2021/2022.
Various SA financial institutions had already made plans to take advantage of the Afungi construction project. On July 17, 2020, SA’s banking group Standard Bank’s oil and gas head, Dele Kuti, reported that financing documents were signed, confirming that the bank would contribute $485 million (over R8 billion) in debt finance to the project. According to its 2020 annual report, Rand Merchant Bank also committed a total of $637 million to the construction project and other projects in Mozambique.
There are many other financial institutions that are participating in the Afungi project. In total there are eight Export Credit Agencies (ECAs), 19 commercial bank facilities, and the African Development Bank that committed to participating in the project (see table 2).
Although the ECIC’s scheme has potential benefits for SA’s economy it has a drawback. In the 2021/2022 financial year, there had been no default event that warranted claims to be filed. “However, an Incurred But Not Reported Claims reserve was (IBNR) was raised given the probability of default in the next financial year” noted the 2022 ECIC Integrated Report. .
The reserve amounted to R752 million resulting in the state insurer recording an underwriting loss of R298 million. The reserve is to provide for claims that might arise from ABSA, the financial institution that insured a senior loan worth $84.2 million to Firestone, a United Kingdom-based company operating in Lesotho and Botswana. In April 2020 operations at its Liqhobong Diamond Mine based in the district of Butha-Buhle, Lesotho, had to be halted due to the low quality of the diamonds mined and COVID-19 induced diamond price declines. This made it difficult for Firestone to continue servicing its debt. Since then, the mine has been on a care and maintenance status as all parties involved are trying to find ways to restructure its debt.
Between 2017 to 2020 claims rose from R19,9 to R373,7 million. Most of the claims were due to credit risks that followed COVID-19. However, in the medium to long term, the insurer will have to navigate political risks in the African region, especially in Mozambique because its exposure in the country is significant.
More than 100 years ago South African farmers left the Cape on their Great Trek to the north. Today this odyssey is continuing as SA farmers seek opportunities north of Limpopo river. In July 2019 SA Forestry Online reported that Mozambique Tree Farming, a consortium of leading SA commercial timber farmers secured 50-year leases for 10 000ha of land in Sofala and Monica provinces in the central region of Mozambique, close to the port of Beira where timber export hub is being developed.