Fitch Downgrades Ethiopia Eurobond After Interest Payment Default

Fitch Ratings has downgraded Ethiopia’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) as well as the issue rating on Ethiopia’s single outstanding Eurobond to ‘C’ from ‘CC’.

The downgrade of Ethiopia’s LTFC IDR reflects Fitch’s understanding that the USD33 million coupon payment on Ethiopia’s single outstanding USD1 billion Eurobond, maturing in 2024, was not made by the due date on 11 December 2023.

The government announced on 8 December that Ethiopia was not in a position to make the coupon payment. Fitch views the failure to make the coupon payment as the beginning of a sovereign default process and consistent with a ‘C’ rating.

“We will downgrade the LTFC IDR to ‘RD’ if the coupon payment is not made within the stipulated 14-day grace period”, analysts at Fitch said in the rating note.

Fitch downgraded Ethiopia’s LT FC IDR to ‘CC’ from ‘CCC-‘ on 2 November 2023 to reflect the increased likelihood of a default event amid the material decline in external liquidity, significant external financing gaps, and the government’s participation in the G20 Common Framework (CF) debt relief initiative, given the mechanism’s guiding principle of comparable treatment for official and private creditors.

In November, the government reached an agreement in principle with its official bilateral creditors on a suspension of debt service due from 1 January 2023 to 31 December 2024.

The debt treatment applies to direct obligations or explicitly guaranteed debt of the Ethiopian government to all Official Credit Committee (OCC) members except for China. Naira Devaluation Deepens Economic Crisis in Nigeria

Ethiopia reached an agreement with China earlier. The OCC retains the right to suspend the agreement if Ethiopia does not secure an IMF programme by the end of March 2024.

Official-sector debt treatment would not be judged a distressed debt exchange under Fitch’s sovereign rating criteria but official creditors may seek comparable treatment for private-creditor claims under the CF.

Ethiopia failed to reach an agreement on debt suspension with Eurobond holders in meetings before the 8 December announcement but the government is set to launch further negotiations with bondholders on 14 December.

Fitch has affirmed the LT Local-Currency (LC) IDR at ‘CCC-‘ as the government has continued to service its LC debt and has made no indication that it plans to include domestic debt in any potential debt restructuring.

However, the ‘CCC-‘ rating reflects the significant risk of default arising from heightened macroeconomic imbalances and liquidity strains.