Bondholders push back against the IMF’s Ethiopia debt assessment

Is the IMF undermining Ethiopia’s creditors in negotiations over the country’s defaulted USD bond? A group of investors holding Ethiopia’s defaulted USD 1 bn bond is accusing the IMF of downplaying the country’s economic recovery as a means to force the country’s creditors to offer Ethiopia a larger haircut on its debt, the Financial Times and Reuters report. The investors argue that a rise in gold and coffee exports has significantly strengthened Ethiopia’s financial position, making the IMF’s assessment of the country’s debt outlook unnecessarily pessimistic.

IN CONTEXT- Ethiopia went into default in December 2023 after skipping a USD 33 mn coupon payment on its only international government bond, which came amid a period of intense financial strain related to the country’s two-year civil war that ended in 2022 and the Covid pandemic. The country received a USD 3.4 bn IMF bailout in July 2024 to help with its default, with the key stipulations that the country liberalize its exchange rates and reduce its debt levels in line with its exports.

The IMF’s export estimates lie at the core of the current dispute: The bondholder committee — which represents investors holding some 40% of the defaulted USD bonds — says the IMF has “significantly undervalued” Ethiopia’s export rebound following the country’s currency devaluation last year. The Fund’s economic forecasts, they argue, “artificially imply a solvency issue which requires Ethiopia to seek greater concessions from its stakeholders in order to meet the IMF’s lending criteria,” essentially forcing lenders to accept a haircut on their payout.

It’s true that Ethiopia’s export numbers show signs of a recovery: Ethiopia’s exports more than doubled in 2H 2024 after the devaluation, reaching USD 3 bn off the back of a 60% rise in coffee exports to nearly USD 1 bn and a 700% jump in gold exports to USD 1.3 bn. Meanwhile, imports dipped slightly to USD 8.6 bn over the same period.

Still, the IMF has concerns about long-term debt sustainability: IMF staff have acknowledged that exports are ticking up, but insist that medium- to long-term growth will remain at 9-10% of GDP, leaving Ethiopia’s debt still “unsustainable and in distress,” according to a January press release (pdf). Because the IMF’s USD 3.4 bn bailout for Ethiopia requires the government to cut debts relative to exports, slower estimated export growth has provided the Ethiopian government a rationale to ask creditors to take larger losses on its defaulted bonds.

Ethiopia’s creditors, for their part, are refusing to take a haircut on the country’s debt. Last year, bondholders rejected the Ethiopian government’s offer to take an 18% haircut on its outstanding debt, arguing that the country's recovery didn’t warrant such a deep loss. However, debt advocacy groups — including Debt Justice, the Horn Economic and Social Policy Institute, and the African Forum and Network on Debt and Development — argue that bondholders turned down an “extremely generous” offer that would have still yielded returns of about a third on the bondholder’s investment.

The clash over Ethiopia’s debt highlights a growing divide in resolving sovereign defaults, with investors pushing back against the IMF’s influence on restructuring efforts from Sri Lanka to Zambia, the salmon-backed paper highlighted. While the Fund doesn’t involve itself in debt restructuring negotiations directly, its economic forecasts set their tone, shaping creditor expectations and — investors argue — tilting the balance toward deeper writedowns.

MARKETS THIS MORNING-

Asian markets are mixed in early trading this morning — Japan’s Nikkei is up 0.4% and the Hang Send is looking at gains of 1.0%, meanwhile the Shanghai Composite is down 0.3% and the Kospi is down 0.1%.

THE CLOSING BELL-

The ADX fell 0.7% yesterday on turnover of AED 970.4 mn. The index is up 1.5% YTD.

In the green: Rapco Investment (+12.9%), Sudatel Telecommunications Group (+9.9%) and E7 Group (+5.9%).

In the red: Burjeel Holdings (-9.7%), Umm Al Qaiwain General Investment (-6.4%) and Mair Group (-5.5%).

Over on the DFM, the index rose 0.4% on turnover of AED 962.2 mn. Meanwhile Nasdaq Dubai closed down 0.8%.

CORPORATE ACTIONS-

Burjeel mulls share buyback: Healthcare services provider Burjeel Holdings will evaluate the feasibility of a share buyback during its board meeting on 20 February, according to an ADX disclosure (pdf). The buyback would be contingent on shareholder and regulatory approvals.