January 29, 2021


ETHIOPIA: Bondholders might be collateral, not target, of restructuring bid

BY Malte Liewerscheidt

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State Minister of Finance Eyob Tekalign has signaled that Ethiopia will try to restructure its external debt under the G20’s ‘Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)’. Without a formal notification of creditors, the parameters of any restructuring measures are extremely difficult to anticipate, beyond the broad principles outlined in the G20 framework.

It is not immediately clear why Ethiopia, which is already benefiting from the DSSI of official debt (currently in place till mid-year but likely to be extended through 2021), would already need to trigger a restructuring under the Common Framework, which is envisioned as a last resort for the toughest debt cases.

The metrics outlined in the most recent International Monetary Fund (IMF) review (of May 2020) do not paint an alarming enough picture that would seem to justify Ethiopia immediately resorting to a Common Framework approach. Nevertheless, it is still unclear to what extent the sovereign’s fundamentals have deteriorated in recent months on account of the pandemic, the mid-2020 unrest, and the Tigray war. While long-term solvency concerns will now receive scrutiny, short term liquidity concerns could be the main driver of Ethiopia’s restructuring move.

The first step based on which the need for a debt treatment is to be assessed is an IMF-World Bank Debt Sustainability Analysis (DSA). Eurobond holders are unlikely to be the main target of Ethiopia’s debt move. They account for a very small proportion of Ethiopia’s outstanding public sector debt, whereas multilaterals, particularly the World Bank’s International Development Association (IDA), are the largest lenders, followed by non-Paris Club lenders (see graphs below).

Given that the G20 Framework has yet to be tested, it is too early to tell how exactly it may be applied in the case of Ethiopia, beyond the basic principles envisaged by the G20. The Framework envisages official bilateral creditors jointly finalizing the key parameters of the debt treatment. In theory, these parameters are to include: “i) changes in nominal debt service over the IMF program period; ii) where applicable, the debt reduction in net present value terms; and iii) the extension of the duration of the treated debt.” Debt write-offs or cancellations are not envisaged in any but the most extreme cases. While official creditors will be in the drivers’ seat and are called upon to ensure “fair burden sharing” via terms agreed in a (legally non-binding) memorandum of understanding (MoU), the debtor country “will be required to seek from all its other official bilateral creditors and private creditors a treatment at least as favorable as the one agreed in the MoU.”

ETHIOPIA: Bondholders might be collateral, not target, of restructuring bid 1

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