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Finance Ministry says Eurobond payment is “affordable”

Failure to pay the December coupon on Ethiopia’s outstanding USD one billion Eurobond has led Fitch Ratings to downgrade the country’s credit rating for the second time in the span of a few weeks, leaving it teetering on the edge of default.

Fitch’s latest report released December 14, 2023, says Ethiopia’s failure to make the USD 33 million coupon payment is the “beginning of a sovereign default process and consistent with a ‘C’ rating.”

The federal government has said its failure to pay the coupon “stems from the intention to treat all its external creditors equitably,” in light of a recent debt suspension agreement reached with external creditors.

The USD one billion Eurobond –a debt instrument issued in foreign currency– was secured in 2014 and funneled into the development of the country’s industrial parks. Construction of the flagship Hawassa Industrial Park reportedly consumed a quarter of the total.

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By mid-2015, the full amount had been disbursed. A chunk of the debt (mostly interest) has since been repaid, but the principal is due in full by the end of 2024.

Part of the payment installments, referred to as ‘coupons’, totaling USD 33 million was due December 11, 2023. The federal government announced it will skip to make the payment, leading Fitch to downgrade the country’s credit rating for the second time in five weeks.

The agency cited a lack of external financing, the unsolved G20 Common Framework debt relief saga, and the “increased likelihood of a default event” when it issued the first of the most recent downgrades in early November.

“A default-like process has begun and payment capacity is irrevocably impaired,” reads the Fitch report released Thursday.

Reports of the latest downgrade came as the Ministry of Finance held a meeting with over 100 investors in Ethiopia’s Eurobond. State Minister of Finance Eyob Tekalign (PhD) led the brief discussions in a bid to restructure the terms of repayment.

The Finance Ministry is “seeking to ensure consistency and fairness” among its creditors by requesting a restructuring from bondholders, according to a statement released yesterday.

Last month, the Paris Club and other external creditors approved a two-year debt suspension agreement with Ethiopian officials. China, which co-chairs the Paris Club with France but is not a member, reached its own bilateral debt standstill agreement with Ethiopia.

Eyob and his colleagues at the Ministry say they are withholding the coupon payment to “invite bondholders to contribute early on –and likely once and for all– to the resolution of [Ethiopia’s] debt issue.”

The USD 33 million coupon payment is an “affordable amount at stake,” the State Minister reportedly told bondholders.

Seasoned financial analysts such as Abdulmenan Mohammed (PhD) observe that missing the Eurobond payment is reason enough for rating agencies to issue a downgrade, no matter any other debt-related developments.

“Despite the positive developments in relation to the debt service suspension, what matters in sovereign and other credit ratings is the weight the rating agencies place on various aspects of the country in question,” Abdulmenan told The Reporter.

The terms of the debt suspension agreement oblige Ethiopia to secure an IMF programme before the end of March 2024. Failure to reach an agreement could potentially void the debt suspension.

Abdulmenan warns that if Ethiopia and the Eurobond holders fail to agree on the terms of restructuring the Eurobond, it will affect other bilateral lending as well as the IMF package that Ethiopian officials are eager to secure.

“If this is the situation, Ethiopia’s rating will be further downgraded,” said the London-based analyst.

The Finance Ministry seems to share his opinion.

“The Ministry wishes to reiterate its strong desire to reach an agreement quickly with Ethiopia’s bondholders,” reads the statement.

Abdulmenan observes that although the country’s economy is in bad shape, it is not completely hopeless.

“Reviving the economy requires political commitment, sensible policies, and time,” he said.

The expert says that while securing breathing space via successful negotiations is crucial, the government should not tarry in addressing the “serious” domestic economic problems.

The federal government has a grace period lasting until December 25, 2023, to settle the Eurobond coupon. Fitch has said it would downgrade Ethiopia’s rating to ‘restricted default (RD)’ if the coupon payment is not made in the coming days.

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