Ethiopia is facing mounting concerns over its debt profile as its dollar bonds come under pressure. The nation's risk premium over US Treasuries has been steadily rising since March and is now trading at its highest level in nearly nine months. This level is well above the threshold of 1,000 basis points that is generally considered to indicate debt distress.
In contrast, the average risk premium for African bonds, all of which are rated junk, has been decreasing and recently reached lows not seen since June 2022. This disparity has raised alarms about Ethiopia's debt stability and overall financial well-being, according to Robert Besseling, the CEO of Pangea-Risk, an advisory firm specializing in African economies.
One of the immediate concerns for Ethiopia is its upcoming coupon payment on its eurobond, which is due on December 11 and amounts to $33 million. Furthermore, the principal amount of $1 billion is set to mature in December next year. The 2024 bond has already experienced a decline of 0.5 cents on the dollar, reaching a value of 68.02 cents on Wednesday.
To address its financial challenges, Ethiopia is currently in discussions with the International Monetary Fund (IMF) regarding a potential loan of at least $2 billion. However, the approval of this loan has not yet been granted. Ethiopia currently has total debt of $31.6 billion and its foreign-exchange reserves are only sufficient to cover half a month's worth of imports, according to IMF data.
Even if the IMF loan is approved, Ethiopia would still face a financing gap of $4 billion through 2026. To avoid default, Pangea-Risk suggests that the country would need to undergo a comprehensive debt restructuring.
As Ethiopia navigates its debt concerns, investors will closely monitor any developments surrounding the IMF loan approval and the nation's ability to meet its coupon payment obligations.