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Wednesday June 7th, 2023

Ethiopia in debt restructuring, downgrade after printing money, despite low deficit

ECONOMYNEXT – Ethiopia had been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings after it applied for ‘Paris Club’ debt relief having printing money through central bank advances, despite relatively low government debt and a budget deficit of only 2.8 percent of gross domestic product.

The “Common Framework for Debt Treatments (G20 CF) goes beyond a May 2020 announced Debt Service Suspension Initiative for sovereign debt and “explicitly raises the risk’ of extending capital payments or interest for private debt under its conditions, Fitch said.

Ethiopia’s government has maintained “considerable budgetary discipline” with what Fitch said was a “moderate” increase in the budget deficit to 2.8 percent of GDP.

Government debt to GDP was 31.5 percent while total state enterprise debt to GDP was 25.6 percent. There could be pressure on state finances due to Coronavirus, Fitch said.

Central Bank Credit

An International Monetary Fund program has been attempting to wean Ethiopia’s central bank away from money printing, and starting Treasury bill auctions, after the currency fell and inflation rose.

“Government financing has continued its transition towards market-based T-bill auctions and away from the long-standing system of direct advances from the National Bank of Ethiopia (NBE, the central bank),” Fitch said.

“This is a core part of the IMF programme, which seeks to promote monetary policy reforms to help gradually tackle inflation that has remained extremely high at close to 20 percent.”

In Sri Lanka despite having a well-functioning Treasury bill market, bids are now rejected and large volumes of cash are injected to trigger forex losses amid high deficit.

In 2015 and 2018 the central bank triggered currency crises, mostly with aggressive open market operations and ‘operations twist’ style activity, critics have said.

Despite low debt and low deficits, money printing has pushed the Ethiopian Birr from 29.11 to the US dollar in November 2019 to 39.3 to the US dollar by February 2021.

Analysts have also warned that IMF programs usually encourage a ‘flexible exchange rate’, a highly inconsistent money regime with money exchange rate and money policy which are at loggerheads with each other.

It involves neither a fully floating rate (no interventions, no sterilization) nor a consistent peg (unsterilized interventions), leading to rapid depreciation as the monetary authority switches rapidly back and forth rapidly from a peg to a float and back within the same trading session.

The extent of how debt will be affected will be decided by an IMF debt sustainability analysis of Ethiopia which is currently being done, Fitch said.

Ethiopia Debt

The bulk of Ethiopia’s public external debt is official multilateral and bilateral debt.

Government and government-guaranteed external debt was 25 billion US dollars in fiscal year to June 2020.

Of this, 3.3 billion dollar was owed to private creditors. There was a billion dollar Eurobond (1 percent of GDP) due in December 2024, with minimal annual debt service of 66 million dollar until the maturity.

There were 2.3 billion dollars of government-guaranteed debt owed to foreign commercial banks and suppliers.

State enterprise debt owed to private creditors came from Ethio Telecom and Ethiopian Airlines was 3.3 billion dollars.

“While this is not guaranteed by the government, it represents a potential contingent liability,” Fitch said.

Ethiopian Airlines is one of the most profitable airlines in the world.

Ethiopia’s external financing requirements were more than 5 billion on average from financial years to 2021 to 2022 including federal government and state enterprise amortization.

Foreign reserves are expected to remain around 3.0 billion dollars or two months of current external payments.

Debt Re-profiling

The extent of debt treatment required will be based upon the outcome of an International Monetary Fund Debt Sustainability Analysis for Ethiopia, which is currently being updated, Fitch said.

“The G20 CF, agreed in November 2020 by the G20 and Paris Club, goes beyond the DSSI that took effect in May 2020, in that it requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors,” the rating agency said.

“This could mean that Ethiopia’s one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch’s sovereign rating criteria.

“There remains uncertainty over how the G20 CF will be implemented in practice, including the requirement for private sector participation and comparable treatment.

“Fitch’s sovereign ratings apply to borrowing from the private sector, so official bilateral debt relief does not constitute a default, although it can point to increasing credit stress.”

“Within the context of Paris Club agreements, comparable treatment requirements are not always enforced and the scope of debt included can vary.

“The Paris Club states that the requirement for comparable treatment by other creditors can be waived in some circumstances, including when the debt represents only a small proportion of the country’s debt burden.

The focus will instead be on some combination of lowering coupons and lengthening grace periods and maturities.

However, any material change of terms for private creditors, including the lowering of coupons or the extension of maturities, would be consistent with the definition of default in Fitch’s criteria.

There was also a conflict in Tigray region.

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  1. Nimal says:

    We must not follow Ethiopia and print money, down on the government’s extravagance.

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  1. Nimal says:

    We must not follow Ethiopia and print money, down on the government’s extravagance.

Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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