Ethiopia defaults on sovereign debt after deadline expires on $33mn payment

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Ethiopia has become the third African country to formally default on its debt in as many years, after missing the deadline this week to make a $33mn interest payment on its only international bond.

Fitch Ratings on Wednesday downgraded the country’s credit rating to “restricted default” after a grace period expired for a payment originally due on December 11.

Africa’s second most populous country first sought debt relief in 2021 as pressures from the coronavirus pandemic and conflict in the northern Tigray region hampered economic growth.

Despite a truce to end its two-year civil war late last year, its economy is under pressure with an annual inflation rate of 28 per cent, foreign currency shortages and growing debt repayments.

Ethiopia reached an agreement in principle with sovereign creditors including China last month to suspend debt payments and restructure its $1bn international bond, but the government said parallel talks with pension funds and other private creditors had stalled.

“Statements by the Ministry of Finance suggest that the non-payment reflects the effort to provide equal treatment to private creditors following agreements with official creditors to suspend debt service,” Fitch said in a statement.

The finance ministry had told bondholders earlier this month that the payment was “an affordable amount” but that it had decided to withhold the payment so it could treat different groups of creditors equitably.

The default puts the east African country among a growing number of emerging economies that have defaulted on their debt in the aftermath of the pandemic. According to the World Bank, there have been 18 sovereign defaults in 10 developing countries in the past three years — greater than the number recorded in all of the previous two decades.

Ethiopia is seeking to renegotiate its obligations through the G20’s common framework, which co-ordinates debt relief across public as well as private lenders and has been used by two other African countries, Zambia and Ghana, with mixed success.

Credit rating agency S&P Global downgraded Ethiopia’s debt to default on December 15 after the initial deadline for payment was missed.

Fitch has kept its rating on Ethiopia’s local currency long-term bonds at triple C minus as the government has continued payments on that debt and has not announced any intention for domestic debt restructuring.

Ethiopian officials expect an IMF programme, necessary to start negotiating a comprehensive debt treatment under the common framework, will come in the first quarter of next year, according to Fitch, but the rating agency said “this may still be optimistic”.