Ethiopia Defaults on $33M Payment Amid Economic Strain

Ethiopia, Africa’s third country in as many years to default, missed a $33 million payment on its sole international government bond this week. The nation, reeling from the aftermath of the COVID-19 pandemic and a concluded two-year civil war, faced severe financial strain leading to this default.

Originally due on December 11, Ethiopia had a grace period until Tuesday to furnish the $1 billion bond’s payment, yet the funds did not reach bondholders as of the end of Friday, according to sources familiar with the matter.

This anticipated default follows the breakdown of negotiations with private creditors holding the bond, prompting the country to enter into a full-scale restructuring under the “Common Framework,” aligning with Zambia and Ghana’s similar measures.

Ethiopia sought debt relief in early 2021, with progress initially stalled due to the civil conflict. Despite reaching agreements with official creditors, including China, to suspend debt service, talks with private creditors, especially pension funds, hit an impasse.

Credit ratings agencies responded promptly, with S&P Global downgrading the bond to “Default” on December 15, while Fitch Ratings classified the country’s credit rating as a “restricted default” after the grace period elapsed.

The East African nation faces economic challenges, marked by a soaring inflation rate of 28%, currency shortages, and mounting debt repayments, compelling its entry into debt restructuring initiatives.

Ethiopia’s Finance Ministry clarified that the decision to withhold payment aimed at equitable treatment of various creditor groups following agreements to suspend debt service.

This default places Ethiopia among a growing list of emerging economies grappling with debt defaults post-pandemic. The World Bank records 18 sovereign defaults across 10 developing nations in the past three years, a surge compared to the two decades prior.

While Ethiopia seeks to renegotiate obligations through the G20’s common framework, Fitch highlighted expectations for an IMF program to commence negotiations in the first quarter of the upcoming year, yet cautioned about potential delays in this timeline.