Ethiopia Stops Servicing its Eurobond a Year Ahead of Maturity; Why?

The Ethiopian Government failed to make a $33 million coupon payment due (December 11, 2023) to bondholders, signaling a potential default when the 14-day grace period expires.

This missed payment comes in the wake of discussions with bond investors for restructuring and official bilateral creditors agreeing to suspend debt service until the end of 2024.

The standstill is a precursor to a broader debt treatment under the G-20 Common Framework, offering temporary relief until a more sustainable debt solution is established.

Ethiopia’s intention to restructure the Eurobond aligns with Moody’s Caa3 foreign currency rating, with anticipated losses at default ranging between 20% and 35%.

“The missed payment pertains to Ethiopia’s sole Eurobond, which is set to mature on 11 December 2024, with an outstanding principal amount of $1 billion, following a debt standstill agreed with official bilateral creditors,” said Moody’s.

China suspended Ethiopia’s debt payments until the end of 2024 in August, with other official lenders following suit on November 30, 2023, covering all government and government-guaranteed external debt, accounting for 17% of GDP as of the end of June 2023.

Despite the relatively manageable size of the debt stock, the challenge lies in the substantial flow of payments due, which surpasses the country’s foreign exchange reserves – according to Moody’s.

Ethiopia’s weak foreign-exchange reserve position, totaling $1.1 billion as of June 2023 and covering just one month of imports, underscores the critical role of the external debt suspension in supporting the country’s balance of payments.

The implications of Ethiopia’s debt default and restructuring are significant. The missed payment and potential default could impact investor confidence, raise borrowing costs, and hinder access to international capital markets.

Furthermore, the restructuring process may lead to losses for bondholders and could strain the country’s credit rating, potentially affecting its ability to attract investment and manage future debt obligations.

Ethiopia’s engagement with the G-20 Common Framework for debt treatment provides a platform for transparent and coordinated debt restructuring efforts, aiming to achieve a sustainable debt trajectory and support the country’s long-term economic stability.

By leveraging international frameworks, engaging in transparent dialogue, and pursuing prudent fiscal policies, Ethiopia can navigate this period of financial uncertainty and emerge with a strengthened foundation for future growth and prosperity.

Moving forward, Ethiopia will need to navigate the debt restructuring process carefully, balancing the need for fiscal sustainability with the imperative of maintaining essential public services and infrastructure investment.