It has been a bad year for Ethiopia, a country with very low forex reserves, a double-digit inflation, high external debt, and just recovering from a civil war, and economists warn that it could be on the verge of economic crisis after it missed interest payment on its only sovereign bond this week.
Ethiopia formally defaulted on $33 million interest repayment on its $1 billion Eurobond, joining Zambia and Ghana, the other bond defaulters on the continent.
The default followed weeks of discussions and on December 15, Eyob Tekalign, State Minister for Finance, held a global investor call, in which he explained that Addis was “seeking to ensure consistency and fairness by requesting other external creditors, including bondholders, to participate in similar debt arrangements.”
“Ethiopia’s decision to withhold December coupon payment on its Eurobond, despite affordable amount at stake, stemmed from the intention to treat all its external creditors equitably. A failure to do so could indeed jeopardise ongoing discussions with external lenders on the same matter,” he said.
When Tuesday passed without paying, Addis knew it risked being downgraded by rating agencies, which will directly affect the flow of investments into the country. Indeed, on Wednesday, Fitch downgraded its rating to “default,” from “near default”.
While the payment was due on December 11, a 14-day grace period clause meant it technically had until December 27, the first working day after Christmas, to provide the money.
The rating agency also lowered Ethiopia’s long-term foreign currency rating to “RD” or restricted default, from “C”. It does not assign outlooks to sovereigns rated “CCC+” or below.
Ethiopia requested debt relief under the Group of 20’s Common Framework in early 2021. But the effects of the Covid-19 pandemic and a two-year civil war in Tigray meant progress was initially delayed.
A general view of an abandoned settlement 30 kilometres from the city of Gode, Ethiopia, on January 12, 2023. The last five rainy seasons since the end of 2020 have failed, triggering the worst drought in four decades in Ethiopia, Somalia and Kenya.
Photo credit: AFP
Ethiopian officials told bondholders in the December 15 call that the coupon was affordable, but that it was not paying in order to treat all its creditors equally.
“Statements by the Ministry of Finance suggest that the non-payment reflects the effort to provide equal treatment to private creditors following agreements with official creditors to suspend debt service,” Fitch said in a statement.
Africa’s second-most populous country’s official sector government creditors have agreed to a debt-service suspension. But parallel talks with pension funds and other private creditors broke down, the government said on December 8.
Fitch said it affirmed Ethiopia’s long-term local currency at ‘CCC-’ as the government has continued servicing that debt, with no indication that it planned to include domestic debt in any restructuring.
Observers warn that the default will not only be bad for the Ethiopian economy but may also have a contagion effect on eastern African economies as well.
With the region’s states in debt distress, it will be hard to access credit on the international markets. That will leave the World Bank and International Monetary Fund to the rescue, with conditions that may not augur well for the pace of recovery required.
The consequences of such measures are already manifest in Kenya, where IMF-recommended requirements have seen higher taxation on fuel and incomes, which has caused widespread public outcry as the cost of living soars and workers and employers suffer an income squeeze.
Ikechukwu Iheagwam, East Africa regional director for pan-African credit rating agency Agusto, says the immediate consequence of the Ethiopian default will be a rise in cost of borrowing for Addis and other African capitals, due to a drop in the confidence on the continent’s capital markets.
A destroyed tank is seen in Mesobit, Ethiopia, on December 6, 2021.
Photo credit: Amanuel Sileshi | AFP
“With the defaults of Ghana, Zambia, and now Ethiopia, access to the international capital market will become more expensive for African issuers, as markets will automatically price-in potential defaults or delayed payments into new or re-issuances,” Mr Iheagwam told The EastAfrican.
“Ethiopia’s default has shown the fragility of most African economies and this means that African countries will have to reassess their capacity and seek debt restructuring ahead of due dates to forestall further defaults.”
Latest statistics from the IMF paint a grim picture. Ethiopia’s external debt stood at 23 percent of GDP in 2022, but it is projected to fall to 14.8 percent in 2024. Its foreign exchange reserves, however, continue to decline, currently standing at less than one month of imports.
Inflation, although declining, also remains high, estimated at 29.1 percent in 2023 and projected at 20.7 percent in 2024.
Experts argue that while Ethiopia’s bond interest default was almost inevitable, given its poor fiscal standing, it will deepen its economic difficulty and will take more than restructuring to revitalise the economy.
Addis Ababa has unsuccessfully been seeking to rework its foreign debt repayment plans with its bilateral creditors since 2021, especially through the G20 Common Framework, from which Zambia and Ghana managed to restructure their debts, brokered by the IMF.
Last month, Ethiopia agreed with its bilateral lenders to pause debt repayment as it continues with restructuring negotiations after a two-year long civil war in Tigray, which jolted investor confidence and slowed economic growth.
According to Ken Gichinga, chief economist at Nairobi-based research firm Mentoria Economics, the Bretton Woods institutions can — and should —help negotiate debt restructuring for Ethiopia, but should not stop at that.
“Yes, restructuring is the immediate conversation that should be held, but it should not end there. The best thing the Bretton Woods institutions can do is collaborate with this country to emphasise policies that are good for them and the African continent on the long term,” Gichinga said.
But outside the higher cost of borrowing, economists also say Ethiopia’s dampened access to foreign financing will also worsen their forex reserve crisis, translating into higher inflation.
Other experts argue that the default could also impact domestic investor sentiment in Ethiopia, affecting the government’s ability to raise debt-financing denominated in the local currency from the domestic markets.
From this viewpoint, the default jeopardises the success of the Ethiopia Securities Exchange (ESX), which was scheduled for launch in 2023, with state corporations being among the first companies planned for listing.
Brook Taye, director-general of the Ethiopia Capital Markets Authority, had expressed confidence that the exchange will have “a significant impact on government finance” as it is expected to aid in local-currency floated bonds.
According to Mr Iheagwam, a default “typically has both financial and non-financial costs on local markets, perception and risks,” although the magnitude of this particular default’s impact on the local markets cannot be accurately quantified at the moment.
Mr Gichinga, however, argues that the default will have little implication for the soon-to-be bourse in the country, saying, instead thatthe exchange will improve the credit rating of the country instead.
“An investor should see this (launch of the exchange) as a very positive step, because with the listing of state corporations, Ethiopia will have more breathing room to be able to repay its debts in time,” Gichinga said.
People migrate with their livestock from a drought affected area in Mandera, Kenya on December 2, 2022. The riparian regions are now utterly unusable as the majority of rivers flowing from the Ethiopian mountains have dried up.
Photo credit: Anadolu Agency via AFP
For other countries on the continent, economists project that Ethiopia’s default could lead to spiralling yields on existing bonds.
“With international bond maturities of other African nations like Kenya expected in H1’2024, we expect to see some tensions and market reactions,” Mr Iheagwam said.
Kenya is currently considered by the IMF to be at high risk of debt distress and is rated by international credit rating agencies such as Standard and Poors and Moody’s as “high-risk.”
Ethiopia’s woes have been myriad. Last week, it suffered a dent to its image when the African Development Bank (AfDB) announced it was pulling out all its international staff from Addis, after a “serious diplomatic incident” in which staff were attacked by security officers.
The pan-African lender’s decision was triggered what it called “breach of diplomatic protocol and assault” by Ethiopian security forces on two of its staff – who are entitled to diplomatic immunity — back on October 31. A senior official in the Finance ministry reportedly ordered their arrest, beating and detention. Sources told The EastAfrican the matter revolved around a $6 million Ethiopian officials had not accounted for, but which had been wired to an individual account in Mexico.
Prime Minister Abiy Ahmed had earlier intervened to have the two officials, country manager Abdul Kamara and his deputy John Bosco Bukenya, freed. Both the AfDB and its major shareholders have accused Addis Ababa of stalling investigations.
The UK Embassy in Ethiopia said on Wednesday there is a need for “all nations observing and protecting the Vienna Convention on diplomatic relations so diplomats around the world can carry out their mission safely.”
“We call for a thorough investigation into the assault and detention of two African Development Bank personnel,” it said. Canada, too, said it “remains concerned with the assault of African Development Bank Group diplomats in October, regrets that those responsible have not yet been held accountable, and is dismayed the AfDB have withdrawn foreign staff. Diplomats cannot do their job without the full protection of the Vienna Convention.” And the US said the same thing on Wednesday that it was “concerned by the assault and detention of African Development Bank personnel and call for those responsible to be held accountable.”
Ethiopia had previously blamed civil war in Tigray region for its economic woes but the AfDB incident may certainly mean there won’t be new monies coming from the Bank until they deal with the dispute. By the time the war in Tigray ended in November 2022, some estimates said it had lost some $4 billion worth of destroyed infrastructure, medical expenditure on the wounded as well as a humanitarian burden on the displaced.
The conflict further hurt its forex reserves, although creditors like China had initially given it a break on debt.
A year since the war in Tigray ended with a mediated peace deal, Addis Ababa has struggled to attract investment. Last month, French telecoms firm Orange pulled out of competing for a stake in the state-owned Ethiopia Telecom, arguing that some of the conditions fronted by Addis Ababa were unfavourable.
Men carry a sack of wheat during a food distribution by the World Food Programme (WFP) for internally displaced people in Debark, 90 kilometres of the city of Gondar, Ethiopia, on September 15, 2021.
Photo credit: Amanuel Sileshi | AFP
That complaint negated the liberalisation drive of Abiy, who had begun to open up the country’s telecoms and financial markets to foreigners.
Bad policies and insecurity have seen even new entrants like Kenya’s Safaricom, which was licensed to operate in the country in 2021, struggle to expand.
Yet the end of the Tigray conflict also, sort of, triggered other problems. In neighbouring Amhara, Ethiopia declared a state of emergency earlier in August following mounting violence from militia opposed to disarmament.
Addis Ababa now faces accusations of committing human rights violations. Amhara Association of America, a lobby for the welfare of ethnic Amhara, argued on December 26 that government forces were forcibly relocating displaced people to areas they will face more danger. It said Addis should allow “independent internationally mediated accountability mechanism including investigations” into “genocide” in the region and open transitional justice for victims. In fact, Addis has argued that the state of emergency has helped prevent killings.
A report released on December 28 by the Ethiopian Human Rights Commission and the Office of the United Nations High Commissioner for Human Rights said victims of Ethiopian war across the country have expressed “a resounding recognition of the importance of responding to past human rights violations.”
“Community consultations show broad consensus on the importance of a comprehensive transitional justice process that incorporates criminal accountability, truth-seeking, reparations for victims, and guarantees of non-recurrence,” said Daniel Bekele, the chief commissioner at the Ethiopian Human Rights Commission.
“Implementation of a genuine and comprehensive transitional justice process grounded in human rights norms, with a strong focus on the needs and priorities of victims, is the most appropriate means for Ethiopia to confront its past, establish a just and peaceful future, and foster national cohesion.”
The report did admit that Ethiopia has already shown some progress, including holding dialogue with warring parties as well as starting a rebuild of areas damaged by war. However, talks between Addis Ababa and the Oromo Liberation Front (OLF) collapsed in November in Dar es Salaam, leaving an opening for potential clashes in future.
Ethiopia may be banking on the Grand Ethiopia Renaissance Dam (GERD) to help power homes with electricity generated there. But filling the dam has elicited further dispute with Egypt, which sees the project as a potential risk to its water source, the Nile.
Last week, Cairo and Addis Ababa traded blame after talks on how to fill it collapsed. The Fourth Round of the Tripartite negotiations on the GERD was conducted in Addis Ababa from December 17 to 19. But Egyptian Ministry of Water Resources and Irrigation said, in a statement, that the talks failed due to Ethiopia’s “persistent refusal ... to accept any of the technical or legal compromise solutions that would safeguard the interests of all three countries.”
“It has become evident that Ethiopia elects to continue exploiting the negotiation process as a cover to solidify a fait accompli on the ground,” the statement said. Ethiopia’s Foreign Ministry said it has “keenly engaged” with its neighbours Egypt and Sudan “to address the major issues of difference and reach an amicable agreement.” But then it accused Egypt of a “colonial era mentality and erected roadblocks against efforts toward convergence.”
Meanwhile, the Interim Regional Administration in Tigray now says 91 percent of the population there is “exposed to risk of starvation and death.”
“Since the signing of the Pretoria Agreement, thousands of Tigrayans have perished due to lack of food,” Getachew Reda, interim president for Tigray said on Friday.
Ethiopia was wracked by drought for five consecutive years leaving an estimated 15.4 million people food insecure in the second half of 2023. According to the UN, the lingering impact of previous dry seasons contributed to worsening food insecurity in the southern and southeastern parts of the country. There are concerns of deteriorating food security situation in Amhara region, besides Tigray. Food insecurity is expected to worsen in low-lying areas in southern and southeastern parts of the country, due to wetter than normal October-December season, resulting in flooding. At least 892,620 people are projected to be food insecure due to flooding, including 372,000 who are likely to be displaced in flood risk regions, the UN said.
Prices of staple food — maize, sorghum and teff —sustained an upward trend across most markets throughout the third quarter of 2023, due to combined effects of a challenging macroeconomic environment, consecutive below-average harvests in previous seasons and conflicts.
