Ethiopian Eurobond Yields Surge as Fitch Sees Default Risk

ADDIS ABABA (Capital Markets in Africa) — Ethiopia’s Eurobonds slumped, sending yields to their highest levels in more than eight months after Fitch Ratings said the nation’s decision to seek debt relief raised the risk of default.

The yield on $1 billion of notes due in December 2024 jumped 68 basis points to 9.16% by the close in London on Tuesday. Fitch downgraded the Horn of Africa nation’s long-term foreign currency debt rating by one notch to CCC, three levels below investment grade.

“The downgrade reflects the government’s announcement that it is looking to make use of the Group of 20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative, which, although still an untested mechanism, explicitly raises the risk of a default event,” Fitch said in a statement on Tuesday.

Ethiopia’s government announced on Jan. 29 it will seek to restructure its external debt under the G-20 relief program. The state said it may approach private creditors for talks after it reviews liabilities with official lenders. China is Ethiopia’s biggest bilateral creditor, accounting for 23% of the total public debt burden of $27.8 billion, according to World Bank data for 2019.

The Fitch downgrade is “the first negative spillover” from the decision to go for the G-20 Common Framework, “a process that no Eurobond issuer has been though yet, and one that could take some time, especially as private sector creditors have to be included,” said Simon Quijano-Evans, chief economist at Gemcorp Capital LLP in London.

Moody’s Investors Service said earlier on Tuesday that its current rating captures any potential debt-relief risks and that it will closely monitor negotiations on the restructuring.

Credit Rating Profile
The G-20 framework aims to bring creditors including China into an agreement to rework the debt of countries in danger of defaulting. Under the program, debtors are committed to seeking similar terms of the resulting bilateral restructuring with private creditors.

“Even if Ethiopia receives the debt relief it seeks, it will still require fiscal consolidation to reduce the economy’s vulnerability to future exogenous shocks,” Ed Hobey-Hamsher, a senior Africa analyst at Bath, England-based Verisk Maplecroft, said in an email. “With an election coming in June, the government is unlikely to embark on these politically unpalatable reforms until 2022 at the earliest.”

Source: Bloomberg Business News