The drastic increase of Ethiopia's debt stock has been a source of debate among policymakers, researchers and political analysts in Ethiopia for the last half a decade. As the country's total debt surpassed 50 billion dollars since 2017, the country has become among the most indebted economies in Africa.
Especially the tendency of the central government to undertake mega projects with finance secured from external creditors, even with a high interest, coupled with the critical foreign currency shortage in the country have weighed negatively on the country's ability to meet its debt obligations.
The low return from external financier funded public projects, which is incomparably small compared to their original cost, has made debt servicing easier said than done. The situation has become direr for the government especially after the impacts of the Coronavirus hit climax.
The pandemic, which has already killed the tourism industry and highly devastated businesses dependent on the external sector, still wreaked havoc on what was an already-shaky economy. The economy suffered the biggest slump in a decade during the last fiscal year. This is keeping aside the ugly side of the "law enforcement operations" in Tigray, which many fear would further worsen the macroeconomic stability of the country.
It was in the midst of such unfortunate circumstances that the government of Ethiopia announced its intention to request debt treatment under the common framework, which was agreed and signed by the G20 countries and the Paris club creditors in a bid to offer borrowing countries request for rescheduling or reduction of debt if it deemed to be unsustainable.
"The possible implementation of the debt treatment under the common framework will address the debt vulnerabilities of the country, while preserving long-term access to international financial markets, thus unlocking more growth potential," said the Ministry of Finance, while clarifying its intention to restructure its debt under the common framework.
Credit rating agencies were the first to react to Ethiopia's decision. Fitch downgraded the country's long-term foreign currency sovereign credit rating a notch from B to CCC, which means there is a real possibility of default. Ethiopia's keenness to restructure its debt under the framework agreement represents a distressed debt exchange under its sovereign rating criteria.
"The downgrading of Ethiopia's rating to CCC taints the country's credit standing. The lower rating sends a message that Ethiopia is a riskier borrower than before. This affects future borrowings on commercial terms," said Abdulmenan Mohammed, a Financial Expert with over 17 years of experience. He added that the terms of the deal will be expensive. "Whether lenders are reluctant to lend or charge higher interest, it will affect Ethiopia in one way or another."
Likewise, another well-accepted global credit agency, Standard & Poor's (S&P) also downgraded Ethiopia's long-term foreign and local currency sovereign credit ratings to 'B-' from 'B' on potential debt restructuring. "Exacerbated by the effects of the COVID-19 pandemic, Ethiopia's structurally weak external balance sheet has deteriorated further," S&P Global Ratings said.
IHS Markit also followed the path of the two agencies, downgrading Ethiopia's short-term sovereign risk rating after assessing that an improvement in its liquidity position is unlikely in the near term. The rating company believes the possible debt restructuring under the G20 initiative could push up Ethiopia's yields on private-sector debt and the overall debt-servicing obligation.
According to experts, the rating made by these agencies shows the country is vulnerable to default and its ability to meet its debt obligations depends upon business, economic and financial conditions. "This will also reduce the appetite of lenders to give long term loans to Ethiopia," Alisa Strobel, Senior Economist at IHS Markit, told The Reporter.
In other words, there is the possibility that the downgrading of the rating may erode credit reputation and lead to less access to conventional credit markets or encourage investors to request a higher rate of interest for lending, which is also likely to raise borrowing costs.
For Patrick Heinisch, an Economist who is also experienced in credit rating, Ethiopia had no choice but to request for debt structuring or relief. He has justifications for saying so.
"The second quarter of 2020 saw a large outflow of reserves. Even if the third quarter may have seen some improvement due to the recovery of the global economy in the summer and the effects of the suspension of debt servicing, the last quarter of 2020 and first three months of 2021 have been disastrous due to the Tigray military operation and the effects of the second Corona wave," Patrick told the Reporter.
Meanwhile, although the government is pushing ahead with privatization to satisfy its need for foreign currency to pay its debt and meet other needs, the decision of the Ministry of Finance that privatization revenue will go to the newly created company in charge of liquidating high corporate debt shows asking the creditors for debt relief is the only option left, according to Patrick.
Yet experts say this still won't be without a cost. There is fear that private creditors will adversely be impacted by Ethiopia's decision, especially if other indebted country in Africa and beyond, follows its suit. "Other countries that may express similar interest are now at a higher risk to be downgraded by the rating agencies. And, any material changes of terms for private creditors, including the lowering of coupons or the extension of maturities would be consistent with a default," Alisa said.
Ethiopia's external debt stock is made up of official multilateral and bilateral debt. Government and government-guaranteed external debt stood at 25 billion dollars until the end of last fiscal year. From this, the share of private creditors is 3.3 billion dollars, of which Ethiopia's outstanding Eurobond (equal to almost one percent of GDP) amounts to one billion dollars and is due in December 2024, while the remaining 2.3 billion dollars is government-guaranteed debt borrowed from foreign commercial banks and suppliers. Although not guaranteed by the government, ethio telecom and Ethiopian Airlines also owe private creditors 3.3 billion dollars, according to Fitch.
For Patrick, the impact of the debt restructuring on private creditors is not yet clear; the figure indicates the immediate impact of the downgrading of the country's credit rating should be minimal.
"Ethiopia has only one outstanding Eurobond with a face value of one billion dollar maturing in 2024, accounting for less than four percent of the total external debt stock at the end of 2019 based on a World Bank statistics. The government is not expected to tap the international capital market in the short term. The budget deficits will be financed by domestic debt issuance and external loans, mostly at advantageous concessionary terms," the expert remarked.
Patrick further argues the rating downgrade itself will not hamper Ethiopia's chances of obtaining loans from international financial institutions.
"Credit ratings are not criteria for getting IMF or World Bank loans. The IMF typically asks for comprehensive reforms, especially exchange rate flexibility and enhancing competitiveness. If Ethiopia makes enough progress, the IMF will be willing to disburse its loan tranches," suggested the Economist.
He has also affirmed that once debt sustainability is restored and ratings are upgraded, investor interest could reemerge. "The case of Argentina shows that regardless of past defaults, governments have the ability to issue debt on the international market as soon as investors deem economic policy and commitment to pay as sufficiently credible," he concludes.
Meanwhile the African Peer Review Mechanism (APRM), a specialized entity under the auspices of the African Union (AU), mentioned Ethiopia's risk of falling into debt distress is significantly minimal, pledged to provide technical and operational support to Ethiopia's credit rating liaison team to engage Fitch on its newly assigned credit rating with the aim of attaining a rating upgrade in future review.
"The downgrade of the Government of Ethiopia's long-term foreign currency sovereign credit rating by Fitch to CCC is an incorrect reflection of the country's creditworthiness. The rating downgrade, in fact, counters the efforts by the G20 to assist the Government of Ethiopia and other developing countries to address the impact of the COVID-19 pandemic as it immediately leads to increase in the cost of servicing existing debt," it concludes.