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Private sector involvement in the African debt renegotiation process, a prerequisite for the G20, remains uncertain, according to various rating agencies. Ethiopia will serve as a test case.
Countries looking to renegotiate their debt are in a bind: The G20 insists governments should apply the same treatment to the private sector, and rating agencies say they could declare governments in default if private sector debts are involved. Being in default would increase the borrowing costs of governments and deter investors.
Down and gradient
Political tensions are feared related to the legislative elections in June 2021. These include border disputes with Sudan, particularly over Ethiopia’s Great Renaissance Dam, and the risk of a resurgence of the conflict in Tigray.
However, it was Addis Ababa’s decision, announced on January 29, to use the Common Framework drawn up by the G20 to negotiate its debt that prompted rating agency S&P Global to downgrade Ethiopia’s rating from B to B- February 12.
The US agency even made adjustments to its preset timetable, according to which it had not planned to investigate the Ethiopia case until March 26. However, sovereign rating activity is highly regulated and agencies can deviate from their program 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 put 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 seems unwilling or unable to meet its next private maturities. In other words, the June 11 meeting focused on the single Ethiopian Eurobond (due 2024) will be closely scrutinized by analysts.
Despite tough negotiations carried out in November 2020 by the G20 to ensure that the common renegotiation framework includes an offer “at least as favorable” from private creditors as would be proposed by public creditors, rating agencies still doubt of the real participation of the private sector in the process.
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The terms used in the text, which establish that interested parties are “obliged to seek” such an agreement with their private lenders, are questioned. “It is not clear if they will be required to do so,” says S&P.
Deferral of maturity or rate cut – a typical default
Moody’s has the same doubts, having not downgraded or even reviewed Addis Ababa’s rating (B2, with a negative outlook) as a result of its statements at the end of January.
According to the agency’s February 8 press release, even if the semantic shift brought about by the G20’s introduction of a debt moratorium, in which private lenders were “called in” to participate without success, suggests a ” increased risk of loss “for private sector creditors. It seems “unlikely” that the situation has changed significantly, with the private sector holding onto its positions.
“The Paris Club indicates that the stipulation requiring comparable treatment from other creditors may not apply in certain circumstances, especially when debt represents only a small proportion of the country’s debt burden. In the case of Ethiopia, however, it is the modification of the official bilateral debt profile that will have the greatest impact on overall debt sustainability, ”says rating agency Fitch. However, it downgraded Ethiopia’s rating from B to CCC on February 9, as it says there is a real risk for private lenders.
All three agencies agree on one point. If the private sector is involved, whether it’s a matter of extending maturities or revising interest rates down, not to mention full debt cancellation, they will consider it a default and the downgrade 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 pay it off in the agreed terms and deadlines, whatever the circumstances,” said the Abidjan-based executive, who assures that “even without an agreement with the private sector, the El The public sector will always end up signing because, for him, the explanation that is presented 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 will probably pressure Ethiopia to extend its debt relief agreements. to the private sector, ”says Charles Robertson, chief economist at Renaissance Capital.
Robertson has said that if Ethiopia, which pledged to protect its private creditors during the negotiations, stands firm and avoids penalizing the holders of its Eurobonds, “investors in all African assets will be reassured and the costs of indebtedness for the continent are lower. “The economist cites the case of Peru, which can borrow at an interest rate of 3% (in dollars) for 100 years. African countries, on the other hand, are struggling to reach 5% for long-term bonds.
