Ethiopia defaulted on a $33 million bond coupon payment on Monday and looks poised to become the latest African country to default on its debt unless a restructuring deal is reached with international bondholders within a 14-day grace period. A call is scheduled for Thursday with Ethiopia’s creditors to try to find a final deal, but markets now expect Ethiopia to join Zambia and Ghana as Africa’s latest debt defaulters.
Just two weeks ago, the governor of the National Bank of Ethiopia told the Ethiopian parliament that the country had secured more than $1.5 billion in temporary debt relief from its international creditors, leading to speculation that Ethiopia would avoid the bankruptcy.
Earlier this year, Ethiopia’s largest single creditor, China, allowed the East African country to suspend debt repayments on bonds due in the 2023-24 fiscal year. Ethiopia also has relatively low levels of external debt compared to other bankrupt countries.
However, Ethiopia’s finance ministry said on Friday it was “unable to pay” the $33 million bond due to the country’s “fragile external position”.
Hailemelekot Berhan, a capital markets analyst in Addis Ababa, says African Business that “Ethiopia is not really a country with debt problems” and therefore the impending default is likely the result of a breakdown in communication with private bondholders.
“Ethiopia appears to have entered into restructuring agreements with Paris Club members and China, but private bondholders and international investors have not agreed to the same terms,” ​​he says.
“This situation may have arisen due to insufficient or ineffective communication with these bondholders. Government officials working in this area may not have the proper knowledge or experience to deal with these things.”
However, Philip Pilkington, investment professional and senior research analyst at GMO in London, notes that this default may be the result of “persistent current account deficits” and Ethiopia’s high exposure to international debt markets.
“I have noticed that Ethiopia has lower external debt ratios than it has in the past, but, as he said, the country has had consistent current account deficits since the mid-1990s, and in recent years they have become large and consistent,” he says. Pilkington. African Business.
“It appears that the country is financing its development by issuing bonds denominated in other countries’ currencies. I guess they are in trouble at the moment due to rising interest rates on this debt as central banks raise interest rates to deal with inflation. This is a problem we often see in developing economies.”
A dent in Ethiopia’s capital raising hopes
While the exact cause of the default is disputed, Berhan fears the situation could seriously damage Ethiopia’s hopes of attracting foreign capital – and could even undermine Abiy Ahmed’s long-term liberalization plans.
“Ethiopia is not highly indebted and the repayment amount of $33 million is very small. However, the consequence of a default is that investors will be really worried,” he says. “The government is liberalizing sectors such as finance and is geared towards attracting foreign direct investment, but it is very difficult to do this successfully when the country is bankrupt.”
Pilkington is also concerned about Ethiopia’s economic trajectory in light of the bankruptcy. “The worst-case scenario is that the large increases in GDP per capita that Ethiopia has seen over the past decade or so could be reversed as markets stop allowing them to finance their large current account deficits,” he argues. “But that will all depend on how the situation is managed.”
Geopolitical implications
He adds that the default could have significant geopolitical as well as economic implications for Ethiopia – and believes there is now an opportunity for the BRICS countries “to offer members financing on friendlier and less punitive terms than the International Monetary Fund (IMF) ».
“When Ethiopia joined BRICS, it was already clear that they were facing economic difficulties,” he says. “From this I would conclude that the BRICS leaders are aware that Ethiopia is likely facing a crisis – and this makes me wonder if they have a strategy to deal with it that will further the BRICS goals.
“What we can say is that immediately after Ethiopia joined BRICS in August, China suspended its debt payments and Ethiopia is now using the agreement with China as a model for negotiations with other creditors. This highlights that, at the very least, the new BRICS formation introduces ‘competition’ into geo-economic relations. This is an important development.”