Ethiopia’s Bondholders Concerned Over Unexpected Loss Call
Ethiopia has recently announced a proposal that has caught its bondholders off-guard, causing concern and setting the stage for tense negotiations. The government’s suggestion to introduce a 20% haircut in the nation’s debt-restructuring process has raised eyebrows and uncertainty among creditors. This unexpected move contrasts with previous proposals made by creditors last year, which would have seen them receive the principal in full, albeit over a longer period and at lower interest rates.
According to Kevin Daly, the emerging markets investment director at Abrdn Investment Management Ltd, the terms offered by the government this year are significantly different from those discussed in previous negotiations. Daly expressed skepticism that the bondholders committee would accept the proposed haircut, citing the stark contrast to the terms previously offered by Ethiopia.
While Prime Minister Abiy Ahmed did not explicitly use the term “haircut,” he hinted at a reduction in the value of the $1 billion eurobonds due in December during a speech to lawmakers on August 1. Eyob Tekalign Tolina, the state minister in the finance ministry, refrained from providing detailed information about the proposal, leaving bondholders and investors in a state of uncertainty.
Ethiopia recently reached an agreement on an economic reform plan with the International Monetary Fund (IMF), following the removal of foreign exchange controls. This move unlocked over $20 billion in financing and paved the way for complex debt restructuring negotiations to move forward. The government now faces the challenge of negotiating deals with various categories of lenders, including Chinese state banks, commercial bondholders, and the creditor group of wealthy nations known as the Paris Club.
Ethiopia’s Debt Restructuring Under the Common Framework
Ethiopia is utilizing the Common Framework established by the Group of 20 (G20) for its debt restructuring talks. This framework aims to assist developing nations in bringing together diverse sets of creditors to restructure debts that have become burdensome, particularly in the aftermath of the pandemic. Countries like Zambia and Ghana have also utilized this template in their debt negotiations, albeit facing hurdles and delays in reaching conclusive agreements.
The Common Framework requires private creditors to offer as much debt relief as bilateral creditors. In Ethiopia’s case, China holds a significant portion of the nation’s official bilateral debt, amounting to $7.4 billion out of the total $12.4 billion. China chairs the official creditor committee alongside France, overseeing the negotiation process with Ethiopia.
State Minister Eyob mentioned that the committee has developed a working paper outlining how to address the bilateral debt in line with the IMF’s parameters. The government’s advisers have presented a firm proposal based on these principles to their counterparts representing bondholders. Talks are expected to commence later in August, signaling a crucial phase in the debt restructuring process.
Despite the government’s proactive approach, two sources close to the bondholders committee revealed on August 7 that they had not yet received the new proposal. They expressed skepticism about the premature comments made by the government regarding proposed cuts, suggesting that negotiations may face challenges due to the lack of clarity and communication.
Challenges and Opportunities in Debt Negotiations
The announcement of a 20% haircut by the Ethiopian government has surprised bondholders and investors, leading to speculation and resistance. While a 20% loss may not be considered excessive in a typical African sovereign debt restructuring, the unexpected nature of the proposal has raised concerns among creditors.
Lutz Roehmeyer, the chief investment officer at Capitulum Asset Management GmbH, highlighted the lack of sympathy among bondholders for any haircut, emphasizing the need for transparent and constructive negotiations. He noted that there is currently no apparent reason for a default, underscoring the importance of finding mutually beneficial solutions during the restructuring process.
Abrdn’s Kevin Daly suggested that one way to garner bondholders’ acceptance of potential losses could be to include a clause that obligates the government to pay additional amounts if Ethiopia’s exports surpass the IMF’s forecasts. With Ethiopia’s liberalized currency regime expected to boost exports, there is room for optimism regarding the nation’s economic prospects amidst the restructuring challenges.
As negotiations unfold and stakeholders engage in dialogue, it is essential for all parties involved to prioritize transparency, cooperation, and the long-term sustainability of Ethiopia’s financial stability. The outcome of these negotiations will not only impact the country’s economic trajectory but also set a precedent for debt restructuring processes in the region and beyond.
In conclusion, Ethiopia’s debt restructuring journey presents both challenges and opportunities for the government, bondholders, and other stakeholders. By embracing open communication, flexibility, and a shared commitment to sustainable financial practices, Ethiopia can navigate through the complexities of debt negotiations and emerge stronger on the path to economic recovery and growth.
