There was good demand yesterday (4 Dec) when Ethiopia offered its first hard-currency Eurobond to the international market. International investors are increasingly keen to get involved in Ethiopia’s economy, one of the fastest-growing in Africa, spurring interest to learn Amharic in London.
Businesspeople and investors keen to visit Addis have been approaching us for Amharic classes. They join tourists, charity, volunteers and others with strong ties to Ethiopia.
The new bond is denominated in US dollars. Investors bid a total of $2.6bn according to the news reports. Ethiopia issued $1bn at 6.625% interest (towards the lower end of its target range) and will pay the money back after 10 years. The rate was good, similar to that obtained by Zambia.
The Financial Times reported : “The debut sees one of the biggest, most closed — and, some observers say, most promising — African nations joining a number of other countries in the region that have issued similar bonds in the past 5 years. Africa has become a magnet for pension funds, insurers and sovereign wealth funds seeking higher-yielding assets.”

Ethiopia needs $50bn over 5 years

The FT quotes Kevin Daly, senior portfolio manager at Aberdeen Asset Management, that the bond’s yield “is decent value for the deal given the limited knowledge and different nature of the Ethiopian economy and the challenges it faces compared to these countries”. According to a Bloomberg report he said Ethiopia made a strong case for infrastructure development and financing needs at investor meetings, “which suggests they will be looking to come back to the market in near term.”.
Bloomberg added that Finance Minister Sufian Ahmed said on 7 Oct that Ethiopia will probably need to invest about $50bn over the next 5 years, of which $10bn to $15bn may come from foreign investors. Most will be used to develop sugarcane plantations, a 6,000-megawatt hydropower dam on a tributary of the Nile River and the country’s railway network.

Claudia Calich, emerging market bond fund manager at M&G told the FT that Ethiopia was one of the region’s weaker credits: “I am concerned over lack of transparency and levels of SOE [state owned enterprise] debt.” Mark Bohlund, senior economist for sub-Saharan Africa at consultants IHS, said investors were attracted to Ethiopia on the back of “strong economic growth prospects and limited external indebtedness”. He added: “We wish to highlight that there are still non-negligible risks to repayment.”
Deutsche Bank and JPMorgan were the lead managers for the bond and Lazard advised the Federal Government of Ethiopia.

Fast 9% growth, limited foreign reserves

Ethiopia has some of the fastest growth rates in Africa, around 9%, according to the International Monetary Fund. According to Reuters, the IMF said in a September report that the risk of Ethiopia facing external and public “debt distress” remained low but said it was on the “cusp of a transition to moderate” risk. It estimated public debt at 44.7% of GDP in fiscal 2013/14. Ethiopia’s foreign reserves covered only 2.2 months of imports in 2013/14 and capacity to increase this remains under pressure due to limited capacity to increase exports and foreign investment.

African debt warning

According to the African Development Bank’s Making Finance Work for Africa website (www.mfw4a.org), a few weeks ago the IMF warned African States against rushing to issue Eurobonds, saying they may face exchange-rate risks and problems repaying debts. African governments facing falling levels of foreign aid are on a borrowing spree to pay for new roads, power stations and other infrastructure, prompting concern this could raise debt levels and undermine growth.
According to Standard Bank, African governments and big businesses have issued a record $15bn in Eurobonds this year.