Ethiopia could become latest African country to default after failing to pay its obligations

by MMC
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Ethiopia failed to pay a $33 million bond coupon on Monday and appears set to become the latest African country to default on its debt unless a restructuring deal is reached with holders of international obligations within the 14-day grace period. A call is planned for Thursday with Ethiopia’s creditors to try to find a last-minute deal, but markets now expect Ethiopia to join Zambia and Ghana among the last African countries to default their debts.

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, which leads to speculation that Ethiopia will avoid default.

Earlier this year, Ethiopia’s largest creditor, China, allowed the East African country to suspend repayment of its bonds maturing in the 2023-2024 fiscal year. Ethiopia also has relatively low levels of external debt compared to other defaulting countries.

But Ethiopia’s Finance Ministry said Friday it was “unable to pay” the $33 million coupon due to the country’s “fragile external position.”

Hailemelekot Berhan, capital markets analyst in Addis Ababa, says African affairs that “Ethiopia is not really a country in debt distress” and that the impending default is therefore likely the result of a breakdown in communication with private bondholders.

“It appears that Ethiopia has reached 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 be due to insufficient or ineffective communication with these bondholders. Government officials working in this area may not have the knowledge or experience to deal with these issues.

However, Philip Pilkington, an investment professional and senior research analyst at GMO in London, notes that this default could be a result of Ethiopia’s “consistent current account deficits” and its high exposure to international currency markets. debt.

“I have noticed that Ethiopia has lower external debt ratios than in the past, but that said, the country has experienced consistent current account deficits since the mid-1990s and in recent years these have been become significant and constant,” Pilkington said. African affairs.

“It appears that the country is financing its growth by issuing securities denominated in the currencies of other countries. I suspect they are currently experiencing problems due to rising interest rates on this debt as central banks raise rates to combat inflation. This is a problem we often see in developing economies.

A dampener on Ethiopia’s capital-raising hopes

Although the precise cause of the default is controversial, Berhan fears the situation could seriously dent Ethiopia’s hopes of attracting foreign capital – and could even undermine Abiy Ahmed’s long-term liberalization plans.

“Ethiopia is not particularly indebted and the repayment amount of $33 million is very low. But the consequence of a default is that investors are going to be really worried,” he says. “The government is liberalizing sectors like finance and trying to attract foreign direct investment, but it is very difficult to achieve this when the country is in default. »

Pilkington is also concerned about Ethiopia’s economic trajectory in light of the default. “The worst case scenario is that the large increases in GDP per capita that Ethiopia has experienced over the past decade could be reversed, as markets cease to allow them to finance their large current account deficits,” says -he. “But all that will depend on how the situation is handled.”

Geopolitical implications

He adds that the default could have significant geopolitical and economic implications for Ethiopia – and believes there is now an opportunity for Ethiopia. BRICS countries “offer its members financing on friendlier and less punitive terms than those of the International Monetary Fund (IMF)”.

“When Ethiopia joined BRICS, it was already clear that it was facing financial difficulties,” he says. “I would infer that BRICS leaders are aware that Ethiopia is likely facing a crisis – and that leads me to wonder if they have a strategy for dealing with this situation that will advance BRICS goals .

“What we can say is that just after Ethiopia joined BRICS in August, China suspended its debt payments and Ethiopia is now using the deal with China as a template for negotiations with other creditors. This shows that, at the very least, the new BRICS formation introduces “competition” into geo-economic relations. This is an important development.

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