Ethiopia: Payment on Eurobond due in December

Ethiopia’s $1 billion Eurobond, carrying an interest rate of 6.625%, is set to mature on December 11, 2024. In response to the impending maturity, some investors have proposed extending the bond’s maturity period, particularly if an IMF funding mechanism for post war reconstruction and stabilization continues to be delayed.

The country’s dollar denominated bond is facing increasing pressure due to worries about potential non-repayment, mainly as a $33 million Eurobond coupon payment is due on December 11. This is essentially the principal amount of the $1 billion Eurobond payment that is due in its entirety by December 2024. Eurobond coupon payments take place every 6 months or once a year, depending on initial agreements made. Ethiopia’s dollar bonds are under pressure amid concerns over the nation’s overall debt profile. 

As a result, the risk premium for Ethiopia’s bonds compared to US Treasuries has been steadily increasing since March. It has now reached its highest level in almost nine months, surpassing the critical threshold of 1,000 basis points, which is considered a sign of significant debt distress.

Ethiopia’s government has been grappling with escalating debt levels over the years. Between 2000 and 2021, the country’s debt has fluctuated significantly, growing from $7.7 billion to $58.9 billion in that period. In 2021, Ethiopia’s government debt reached its highest point in recent history, hitting the $59 billion mark. Debt accumulation has since subsided.

The rising debt burden has also affected Ethiopia’s national debt in relation to its gross domestic product (GDP). However, the growth in debt levels has recently slowed. From 2020 to 2022 the portion of public and publicly guaranteed debt in relation to GDP decreased to 48.4%, down from 56% in the previous years. Additionally, external debt as a percentage of GDP decreased from 29% to 23.3%. The debt of state-owned enterprises (SOEs) also declined by nearly 13% of GDP from FY2017/18 to FY2021/22 due to restrictions on investment projects imposed by the authorities.

Nonetheless, decrease in reserves and a lower credit score have led to a proposed downward revision in the country’s debt carrying capacity, categorizing it as weak. This has resulted in breaches of two export-related Debt Sustainability Analysis (DSA) thresholds. In an extreme stress scenario, three out of four external debt indicators indicate prolonged breaches. Ethiopia faces significant debt repayments over the next three years, including the repayment of a $1 billion Eurobond in December 2024, prompting the authorities to seek debt treatment under the G20 Common Framework (CF) in February 2021.

As the maturity date for the Eurobond draws nearer, Ethiopia faces a critical decision regarding its debt management strategy. The proposal to extend the bond’s maturity could provide the government with additional time to address its financial challenges and navigate the complex terrain of international debt obligations as well as structural issues.

Ethiopia’s response to this offer and its broader approach to managing its debt will be closely watched by investors and financial markets in the coming months. A more improved diplomatic engagement with the European Union offers hope for debt negotiations to come, as a well as a hefty IMF financial package focused on post conflict reconstruction.

These developments take place amid national dialogue and transitional justice efforts, as the country grapples with a new reset, one that promises to rekindle another era of strong economic performance. The country is currently the biggest economy in East Africa. The IMF estimates a GDP growth rate of 6.1% for 2023 and 6.2% in 2024. Below chart provide an overall summary of economic outlook, based on calculations made by IMF staff and National Bank of Ethiopia.