Ethiopia’s Peace Rally All But Gone as Default Possibility Grows

Colleen Goko, Timothy Rangongo and Simon Marks
·4 min read
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(Bloomberg) -- Ethiopia’s sole eurobond is close to erasing gains made since a peace process started to end its catastrophic civil war, as investors increase bets that the Horn of Africa nation will default.

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The price on its $1 billion in debt due December 2024 fell 0.8 cents on the dollar to 63.88 cents as of 8:55 a.m. in London, the biggest drop in two months to the lowest since January. The securities have declined for nine of the past ten days as optimism about the nation’s future dissipates.

Ethiopia’s foreign debt rallied strongly in January when investor hopes were high that it could quickly reach an agreement with the International Monetary Fund following progress in ending the fighting between government forces and dissident Tigrayan fighters. A prospective end to that two-year conflict had revived hopes that Ethiopia could return to form as one of Africa’s best growth prospects.

“Ethiopia was one of the names we entered quite substantially upon the peace process but have since phased out,” said Maciej Woznica, a fixed-income portfolio manager at Coeli Frontier Markets AB. “It’s currently none. There is lack of progress on the proactive approach from the bondholders to actually deal with the debt maturity next year. The risk of default is increasing.”

Talk of default marks a remarkable turnaround in the economic and political trajectory of Ethiopia, a growing regional power with a population of 120 million. Until recently, it was one of the continent’s most exciting success stories, expanding its economy at an average annual pace of 9.1% in the five years to 2020. That’s the year the war broke out — about 13 months after Prime Minister Abiy Ahmed won the Nobel Peace Prize for his work to end two decades of conflict with neighboring Eritrea.

No Timeline

Ethiopia has been in talks with the International Monetary Fund for a loan of at least $2 billion. While the Washington-based multilateral lender has confirmed that the Ethiopian authorities have requested a program, there is no clear indication of timelines, Sam Singh-Jami, Africa Strategist at Rand Merchant Bank, said in a note to clients.

“It should be noted that Ethiopian authorities need a programme that will anchor their discussions around debt restructuring,” Singh-Jami said. “Barring the conflict in Tigray, the country is recovering from a six-year drought, food scarcity, effects of the pandemic and spillover factors from the Russia-Ukraine war.”

Requests for comment to Governor of the National Bank of Ethiopia Mamo Mihretu, Ethiopia’s State Minister of Finance for Economic Cooperation Semereta Sewasew, and State Minister of Finance Eyob Tekalign on Thursday went unanswered as of early Friday.

The premium investors demand to hold Ethiopian debt over US Treasuries has been rising since March and now trades at its highest on record at 4,325 basis points, or more than 43 percentage points — well above the 1,000 basis-points level regarded as the threshold for debt distress. The country has a $33 million coupon payment due on December 11. The principal amount of $1 billion is due a year after that.

Reconstruction Costs

The government would need to initiate a new funding program to proceed with a requested overhaul of its debt under the Group of 20’s so-called Common Framework. Ethiopia has about $28 billion of external debt and has said it would need $20 billion for post-war reconstruction.

Moody’s Investors Service last month downgraded Ethiopia’s credit rating to Caa3, warning of the “increasingly high likelihood of default” on its foreign currency private-sector debt. It said foreign investors were likely to see losses in the range of 20%-35% as the government sought liquidity relief.

Meanwhile, a United Nations panel this week said Ethiopia faces a high risk of further atrocities because of instability in several regions and the failure to fully implement the peace deal. The warning comes almost a year after the signing of a cease-fire agreement between Abiy’s government and the Tigray People’s Liberation Front. The conflict left hundreds of thousands dead and forced millions more to flee, according to US and European Union estimates.

In Amhara, Ethiopia’s second-most populous region, a local militia known as the Fano has fought fierce battles with federal soldiers recently after Abiy ordered all such groups to be integrated into the national army.

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