Ethiopia’s growing debt appetite and Eurobond 

By Ezana Kebede 
March 4, 2014

The Ethiopian government has significantly increased its borrowing in recent years. Debt-to-GDP ratio has reached an all-time high of 35 percent and continues to grow. The country has also been shifting slowly from concessional loans to market-based loans in recent years. The Ethiopian Ministry of Finance & Economic Development (MOFED) data shows that, since the beginning of 2008 world financial crisis through 2013 Ethiopia’s external debt has grown by 39 fold from USD 4.35 billion to USD 11.17 billion. The total government outstanding debt in 2013 was at USD 16.11 billion. During the same period, IMF was estimating Ethiopia’s GDP at Birr 877.5 Billion (USD 46 billion).

At the moment, Ethiopia has a government guaranteed soft loan program with a rate below 2 percent, a grace period of up to 10 years and maturity of up to 50 years from multilateral development banks such the World Bank. Looking at the current debt structure, Ethiopia has also borrowed at low rates from non-Paris Club lenders, particularly China and India. But most of the loans with China are floating or adjustable rates ranging between LIBOR 6 month + 1.5 basis points to LIBOR 6month+ 3 basis points with a grace period of up to 6 years and maturity of 15 years. Ethiopia were able to get this low rate due to captive funding from the likes of Huawei and ZTE that have been lending to Ethio-Telecom making the government owned companies solely dependent on Chinese telecommunication equipment providers.

The Prime Minister of Ethiopia, Hailemariam Deslegn, has recently announced that the government has hired the boutique French investment bank Lazard Ltd. to help facilitate the country’s credit rating in order to issue a sovereign bond. Most likely the underwriters will be a consortium of French banks, together with Lazard ltd. having a piece of the action. Credit rating is a mechanism that provides access to the international debt market. But in the end it all boils down to the perception of the country’s ability to pay its debt. Until now Ethiopia had no plan to get a credit rating and so far is unable to issue debt instruments on the international capital market. Lately, there is an indication that Ethiopia is headed towards borrowing at market rate. As reported on Bloomberg news,” the country has plans to issue not only Eurobonds but other bonds as well.”

Eurobond is a foreign currency denominated bond, usually in USD, EURO or JPY. According to Deutsche Bank AG thirteen sub-Saharan African countries, namely Senegal, Zambia, Gabon, Nigeria, Namibia, Tanzania, Republic of Congo, Rwanda, Mozambique, Ghana, Ivory Coast, South Africa, Seychelles and Namibia have issued Eurobond. The average sub-Saharan Eurobond is paying an approximate yield of 6.9 percent, but this low rate will not remain low forever. The main reason for the recent growth in Africa’s sovereign borrowing is due to low yields in Europe and US sovereign bonds resulting in a strong demand from investors to look at emerging market bonds such as Africa. The 2008 global financial crisis and global economy has also made grants harder to come by and donor funds usually come with attached conditions such as good governance.

Thus, inflation and fluctuating exchange rates in African countries have made it more expensive to issue local bond in the local market, luring African countries to explore the Eurobond market as an alternative source of financing, with cheaper funding costs. However, Ethiopia’s story is a different in that Ethiopia does not have a local secondary bond market and the government Agency bonds are not adjusting for inflation.

Furthermore, African countries that are reliant on commodities export to finance debt with Eurobond will be faced with difficulties to meet their debt obligations. Ethiopian is no different, if there is a sharp drop in the world coffee market the Birr will depreciate against major currencies as a consequence and the cost of repaying debt will be higher. Regardless, it seems authorities in Ethiopia are determined to get additional funding by issuing sovereign bond.

Over time, foreign currency denominated bonds issued by African countries will not continue to be less costly. Especially with recent expected development that the US Federal Reserve is tapering its long term asset purchase program setting the US interest rate to rise. Emerging market investors will be flocking back to the US market. In order to attract investors African countries will have to issue their bonds at higher coupon rates. This would mean authorities in Ethiopia also have to pay high borrowing costs.

Obtaining a credit rating and issuing a Eurobond will create greater transparency and encourage sound public debt management policies. Especially as the current Growth Transformation Plan (GTP) 2010-2015 is near its end. Ethiopian authorities should focus on establishing a local secondary market for both government and private debt issuance where bonds are traded.

Moreover, the Ethiopian government is already issuing bonds in the primary market. In 2013 the current domestic public debt outstanding was USD 4.9 billion. The current economic policy in Ethiopia is government lead, and policy makers should make consideration that the growing public borrowing will not cause “crowding out effect” in the private sector funding.

Unless there is a strong commitment by the government of Ethiopia to reform its financial sector, such as updating its commercial code and securities laws, it is least likely that the recently issued government debt instruments, the Millennium Bond and the Diaspora Bond is successful. Indeed, there is a strong case for establishing a domestic debt market in Ethiopia. Good examples are the low subscription of the agency bonds, EEPCO Millennium Corporate Bond Rate (Face Value 100, fixed interest rate between 4-5 percent and maturing between 5-10 years and the Renaissance-Dam Bond ( Face Value USD 50, adjustable rate between LIBOR+125 basis point to LIBOR +200 basis point, maturing between 5-8 years).

Bloomberg news, quoting Berket Simon the former Minister of Information of Ethiopia reported “Birr 5 billion has been raised from the public by selling bond”. USD 263 million is a small percentage of the amount needed to build the Grand Ethiopian Renaissance Dam which is anticipated to cost USD 4.5 billion.

There were several reasons for a meager Ethiopian government bonds subscription. (i) The double digit inflation rate at the time the bonds were issued gives bond holders a negative investment return. Agency bond holders in Ethiopia are unable to realize the true market value of their investments in government bonds and could only redeem the full amount at maturity; (ii) Economic and political risk considerations should be addressed. Dilip Rathaa World Bank Lead Economist and expert on Migration and Remittance, was once quoted on Diaspora Bond and political risk considerations. “The Diaspora purchase bonds as long as they believe they have influence on policies”. (iii) The inadequate bond subscription should have been avoided by establishing, a secondary bond market for both the public and private borrowing, before venturing out to issue government bonds in the primary market.

In conclusion, MOFED of Ethiopia, had a total projected expenditure of Birr 690 billion (USD 36 billion), 80 percent allocated to capital expenditure of which only 27 percent, or Birr 150 billion, was earmarked for road construction during the 2010-15 GTP. Ethiopia policy makers should not focus only on the foreign currency need for capital expenditure, but should rethink the country’s ownership and banking laws as well. The government of Ethiopia is already borrowing 31 percent of its debt locally. On way to achieve a sound public debt management and encourage the public sector to be the driving force in the economic development of the country is by (i) Establishing a capital market that consist of both an Equity and a Bond Market; (ii) having no restriction on private corporations and financial intuitions from issuing debt financing in the local market; (iii) Banking directives and regulation should be predictable and not arbitrary, giving confidence to the private sector to participate in economic development of the country; (iv) The National Bank of Ethiopia (NBE) regulators should be working in consultation with the banking industry and private sector at large; (v) and finally, while policy makers are aggressively looking to obtain credit rating to raise debt capital, they should also continue to strengthen the (NBE) capabilities. The current move toward establishing a centralized credit bureau by NBE is an encouraging sign.


The writer is a graduate student in finance at Johns Hopkins University.

References:

National Bank of Ethiopia USD/Birr exchange rate of 18.8598 on October 10/13/2013 was used 
Source for Borrowing Cost: Public Sector Debt Statistical Bulletin, Ethiopia Ministry of Finance and Economic Development. 
LIBOR is the (London Inter Bank Borrowing Rate) is an index for floating rating or adjustable rate 
FDRE: Growth Transformation Plan (GTP) 2010-2015. Volume 1 Main Text 
http://www.federalreserve.gov/newsevents/press/monetary/20131218a.htm
Bloomberg news http://www.bloomberg.com/news/2013-05-29/ethiopia-to-accommodate- nations-concerned-over-dam-on-nile-river.html 
Deutsche Bank-Capital Markets in Sub-Sahara Africa 
https://www.dbresearch.com/PROD/DBR_INTERNET_EN- PROD/PROD0000000000321468/Capital+markets+in+Sub-Saharan+Africa.pdf 


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