Countries seeking to renegotiate their debt are in a bind: the G20 insists that governments must apply the same treatment to the private sector, and ratings agencies say that they could declare governments to be in default if private-sector debts are involved. Being in default would raise governments’ borrowing costs and deter investors.
Down and downgraded
There are fears of political tensions arising related to the June 2021 legislative elections. These include border disputes with Sudan, notably over the Grand Ethiopian Renaissance Dam, and the risk of a resurgence of conflict in Tigray.
However, it was Addis Ababa’s decision – announced on 29 January – to use the Common Framework drawn up by the G20 to negotiate its debt that prompted ratings agency S&P Global to downgrade Ethiopia’s rating from B to B- on 12 February.
The US agency even made adjustments to its pre-established schedule – according to which it had not planned to look into Ethiopia’s case until 26 March. However, sovereign rating activity is highly regulated and agencies can deviate from their programme only in “limited circumstances”.
Are countries being forced to seek agreements with the private sector?
S&P Global may not stop there. The agency has placed the country’s new rating under review and warns that it will be changed to SD (selective default) if the country’s commercial debt is renegotiated or if the country appears unwilling or unable to meet its next private maturities. In other words, the 11 June meeting centred around the single Ethiopian Eurobond (due to mature in 2024) will be closely scrutinised by analysts.
Despite the tough negotiations conducted in November 2020 by the G20 to ensure that the common renegotiation framework includes an offer “at least as favourable” from private creditors as what would be proposed by public creditors, the rating agencies still doubt the private sector’s real involvement in the process.
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In question are the terms used in the text, which state that stakeholders are “required to seek” such an agreement with their private lenders. “It is unclear whether they will be obliged to do so,” says S&P.
Maturity deferral or rate cut: a typical default
Moody’s has the same doubts, having neither downgraded nor even placed Addis Ababa’s rating (B2, with a negative outlook) under review in the wake of its statements at the end of January.
According to the agency’s press release on 8 February, even if the semantic change caused by the G20’s introduction of a debt moratorium – in which private lenders were unsuccessfully “called” to participate – suggests an “increased risk of loss” for private-sector creditors, it seems “unlikely” that the situation has in fact changed significantly, with the private sector sticking to its positions.
“The Paris Club indicates that the stipulation requiring comparable treatment by other creditors may be waived in certain circumstances, notably when the debt represents only a small proportion of the country’s debt burden. In Ethiopia’s case, however, it is the reprofiling of official bilateral debt that will have the greatest impact on overall debt sustainability,” says ratings agency Fitch. It nonetheless downgraded Ethiopia’s rating from B to CCC on 9 February, as it says that there is a real risk for private lenders.
The three agencies agree on one point. If the private sector is involved, whether it is a matter of extending maturities or revising interest rates downwards – not to mention outright cancellation of debt – they will consider this as a default and the downgrading of sovereign ratings will inevitably follow. This is an “obvious” measure, according to Stanislas Zézé, CEO of the pan-African rating agency Bloomfield.
A challenge for the entire continent
“The rule of the game is: we have a debt, we must repay it within the terms and deadlines agreed, whatever the circumstances,” said the Abidjan-based executive, who says that “even without an agreement with the private sector, the public sector will always end up signing because, for him, the explanation put forward will justify the default.”
“If the eurobond component of Ethiopia’s external debt is small, and including it in the negotiations will make little difference in practice, I have a feeling that some G20 members are likely to push Ethiopia to extend their debt-relief agreements to the private sector,” says Charles Robertson, Renaissance Capital’s chief economist.
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Robertson has said that if Ethiopia – which pledged to protect its private creditors during the negotiations – stands firm and avoids penalising holders of its eurobond, “investors in all African assets will be reassured, and borrowing costs for the continent are likely to be lower.” The economist cites the case of Peru, which can borrow at an interest rate of 3% (in dollars) over 100 years. African countries, on the other hand, are struggling to reach 5% for long-term bonds.
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