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.
(Colombo/Feb11/2021)