Ethiopia: Eurobond coupon payment looms large

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On Friday, Ethiopia teetered on the edge of a potential default on its debt as negotiations with major holders of the country’s $1 billion international bond concluded without reaching an agreement.

The most acute manifestation is a $33 million coupon due in December to holders of the countries $1 billion Eurobond. Ethiopia issued this bond in 2014 to fund the development of industrial parks and sugar estates. The principal payment of $1 billion is due in December 2024. This bond is primary held by institutional investors, including the American Beacon Frontier Markets Fund, Templeton Emerging Markets Bond Fund, Pictet, and JP Morgan Chase Emerging Market Bond Fund.

Most of these initial investments made with proceeds from the Eurobond did not pan out. For instance, Ethiopian Sugar Corporation became embroiled in corruption schemes that became public throughout 2016 and 2017, while industrial parks did not generate enough capital due to a myriad of shortcomings, including energy shortfalls. In addition, debt of inefficient state owed enterprises has been a drag on the banking sector.

More recently, a confluence of challenges, including the financial strain induced by the COVID-19 pandemic, the recently concluded war in the Tigray region, as well as clashes in Oromia and Amhara have placed Ethiopia, traditionally viewed as one of Africa’s most promising economies, in a precarious position regarding meeting its financial obligations to creditors.

Production facility of Ethiopian Sugar Corporation (ESC), a state owned enterprise in southern Ethiopia. ESC was perhaps the most emblematic of corruption, with dozens of delayed projects and siphoned cash from 2013 to 2018. It was one of the most leveraged state assets.

In response, Fitch downgraded Ethiopia’s credit rating into default territory last month, raising concerns about its fiscal stability and underscoring the severe liquidity challenges.

The “long-term foreign-currency issuer default rating” for Ethiopia has been revised from ‘CCC-‘ to ‘CC,’ reflecting the country’s ongoing struggle to address substantial external financing gaps and cope with diminishing foreign exchange reserves. Fitch paints a bleak financial picture for Ethiopia, emphasizing the significant risk of a default event associated with its participation in the G20 Common Framework for debt treatment.

Ethiopia communicated to bondholders that it may be unable to fulfill a $33 million bond interest payment scheduled for December 11. This development, if materialized, would signify a default, underscoring the economic hurdles faced by the country.

Regrettably, within the limited timeframe from the initiation of discussions to the imminent interest payment date, the finance ministry stated in a release that an agreement could not be reached.

External debt owed by Federal Government, National Bank of Ethiopia and State owned enterprises(SOEs)

The bondholder committee expressed its perspective on the non-payment of the $33 million, deeming it both unnecessary and unfortunate. The committee cited the brevity of the notice for engagement in talks, coupled with what they perceived as the decision not to make the coupon payment being presented to them as a fait accompli.

The statement further conveyed a willingness to engage constructively and proactively with Ethiopian authorities.

The finance ministry outlined its intention to expand the dialogue with Eurobond holders, scheduling a call for the upcoming week to articulate a potential debt proposal. The ministry highlighted that in the discussions with bondholders, an initial restructuring proposal was presented, followed by a final proposal in response to a counteroffer from the bondholders.

The proposed changes encompass extending the scheduled repayment date to 2024, reducing the coupon rate from 6.625% to 5.5%, and reconfiguring the distribution of interim payments. The $1 billion bond, set to mature in December 2024, recently garnered a bid at approximately 61 cents on the dollar, yielding 66%. It remains to be seen if Bond issuers will be forced to accept a haircut, potentially as part of a G20 and IMF-led restructuring scheme next year.

In the fiscal year 2021/22, Ethiopia witnessed a reduction of approximately 8 percentage points in its overall debt, encompassing both public and publicly guaranteed debt, relative to the nation’s total economic output. As of June 2022, the combined public and publicly guaranteed debt in Ethiopia stood at 48 percent of the country’s GDP. This marked a decline from the previous year, when it was 56 percent of GDP, representing an approximately 11 percent decrease from peak debt levels observed in 2017/18.

The national debt of Ethiopia has been a long time in the making, and debt arrears accumulated in past decades are dragging its economy today. A wholesale restructuring of the country’s economy hinges on making the counties external debts sustainable. Neighboring Kenya and others in Africa face similar debt obligations, tying their economies down.

Struggling African countries have to make big payments on their hard currency denominated bonds. This comes at a tough time as inflation is going up, interest rates rise, and their local currencies are under pressure due to decreasing foreign exchange reserves. In the absence of more substantial debt relief or additional issuance of special drawing rights (SDR), a number of African nations, including Ethiopia and Tunisia, and possibly Kenya and Ghana, are on track to experience defaults in the upcoming years.

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