Dec 13 , 2021

The federal government has settled a bi-annual coupon payment on its Eurobond debt maturing in three years, despite deteriorating ratings by major global rating agencies.

The interest payment of 33.1 million dollars, due at the end of last week, was made after the Ministry of Finance sent a letter to the central bank to transfer the funds to Deutsche Bank AG in London. When Ethiopia issued the sovereign bond seven years ago, Deutsche Bank and JP Morgan were book-runners. Sold at a 6.6pc yield, the principal payment of one billion dollars is due in December 2024.

Ethiopia’s Eurobond was availed in December 2014 to pay for the development of industrial parks and sugar estates. The total amount was disbursed in the second quarter of 2015. The largest holders of the debt were the American Beacon Frontier Markets Fund (125 million dollars), Templeton Emerging Markets Bond Fund (65 million dollars), Pictet (51 million dollars), and JP Morgan’s Emerging Markets Bond Fund (32 million dollars).

Initially, the bond received a subscription of 3.2 billion dollars. However, the government only sold a third of the amount. With no additional sovereign bonds issued since 2014, Ethiopia’s Eurobond debt is among the lowest for African countries.

Ethiopia's relatively low Eurobond debt burden meant that agencies such as Standard & Poor's (S&P) and Moody's Investors Service had not changed their outlook on its credit standing. That changed earlier this year as Moody's downgraded Ethiopia's long-term issuer and senior unsecured ratings to Caa1 from B2 in March, signalling that one of the largest economies in Sub-Saharan Africa was on the brink of defaulting on its foreign debt.

Five months later, S&P also downgraded Ethiopia's credit standing, citing political turbulence, civil war and susceptibility to fail in servicing its payments, including dues on the Eurobond.

However, the federal government has been paying interest on the sovereign bond since June 2015, while interest payments are made twice a year. There have been 13 rounds of interest payments of 430 million dollars serviced before last week's, including 33 million dollars in June this year.

Experts cautioned the wisdom of issuing the bond in the first place. The decision came during a period of economic optimism that encouraged senior officials under the administration of former Prime Minister Hailemariam Desalegn to issue the bond despite foreign exchange risks and uncertainties over project managment.

Abdulmenan Mohammed, a financial analyst based in London, is among the pundits with concerns that the principal payment due in 2024 will be a severe burden on the economy.

"It'll be much higher than the proceeds received in Birr in 2014," he told Fortune.

However, Eyob Tekalign (PhD), a state minister for Finance, contended during a recent media interview that the country could not fail to make its payments and the ongoing conflicts have little effect on the matter.

Yohannes Hailu, director of debt management at the Finance Ministry, concurs.

“We're serious about these payments,” he told Fortune. “Had we failed to make them, credit agencies would further downgrade our rating."

S&P has projected that Ethiopia’s external obligations will reach 5.5 billion dollars by 2024. Last month, the agency lowered Ethiopia's rating to 'CCC', indicating rising vulnerabilities to debt repayment obligations. The move came after the US government decided to revoke Ethiopia’s eligibility for the African Growth and Opportunity Act (AGOA), a preferential trade regime allowing the duty- and quota-free exports to the United States. The Biden administration announced early last month that the trade privilege would end in January 2022. Subsequently, S&P announced it had lowered its GDP growth projection for Ethiopia by one percentage point to four percent for the fiscal year.

The Eurobond makes up about three percent of the country’s total external debt. Last year, the interest payment accounted for less than four percent of the entire debt serviced, at 1.84 billion dollars. A quarter of the amount went to interest and commission payments, including Eurobond.

Upon issuing the bond, the official exchange rate of the Birr stood at 19 Br to a dollar, and the interest payment amounted to around 1.2 billion Br annually. It has tripled since to over three billion Birr in the wake of currency devaluation and depreciation, where the Dollar was exchanged by 49.29 Br last week.

Compared to countries like Argentina or Egypt, the interest rates are reasonable; however, they are in the higher bounds, according to Alisa Strobel, a senior economist for Sub-Saharan Africa at IHS Markit, an information provider headquartered in London. According to Strobel, more attention should be given to Ethiopia’s overall debt service requirements to its gross exchange reserves.

Weak macroeconomic fundamentals such as double-digit inflation rates and a stringent currency policy are among the factors that determine the interest rate.

"However, one could conversely argue that before the escalation of the domestic conflict, we did see good advances in economic reforms," she said.

Washington's decision to delist Ethiopia from AGOA has also affected Eurobond yields, which dropped to an all-time low of 0.78 dollars last month.

Interest repayment on sovereign bonds and other external loans become a heavy burden for many Sub-Saharan African countries. According to the Global Development Policy Centre, 21 African countries have issued Eurobonds with a combined worth of 155 billion dollars since 2006. South Africa was the first country on the continent to do so in 1995.

In countries like Ghana, interest payments account for 37pc of the total tax revenue, according to the IMF.

Zambia, one of the most indebted countries on the continent, defaulted on its Eurobond interest payment in November last year. When a country fails to service payments, credit agencies drastically lower its credit rating, making it challenging to source external loans from the global capital market. It could also result in restructuring, which might entail extending the maturity period with increased interest.

With the Eurobond trading at sharply reduced prices, investors are more sceptical in their outlook on Ethiopia, says Strobel. Worsening international relations amid the ongoing conflict and political uncertainty will exacerbate pressures on the sovereign’s already-fragile external liquidity, rising default risks, she observes.

Ethiopia serviced 607 million dollars of foreign debts over the first quarter of the fiscal year. Around 100 million dollars went to repaying loans from China, while a similar amount was used to settle government-guaranteed loans from private creditors. Nearly 150 million dollars went to other private creditors.

While the debt restructuring under the IMF's debt service suspension initiative (DSSI) is ongoing, reprofiling under the common framework agreement remains to be finalised. Under the initiative, Ethiopia suspended external debt service payments only for the federal government's bilateral creditors from May 2020 to June 2021, totalling 220 million dollars.

Negotiations are underway for the common framework agreement initiated by the World Bank, which would allow debt restructuring for several low-income countries. A creditors committee chaired by China and France was set up in September and held its second meeting last month. The conflict adds to the complexity of this slow process of decision making and what is being prioritised, observes Alisa.

"Inadequate transparency over debts owed to Chinese lenders, such as Chinese loans to state-owned enterprises, is also of concern," said the economist. "Further rating downgrades are likely as a prolonged process would raise more concerns among private creditors."

PUBLISHED ON Dec 13,2021 [ VOL 22 , NO 1129]

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