Ethiopia has always been a reliable but modest borrower (even though its debt to GDP has gone past 40%). It is now upping the stakes and going to private banks for more loans. It’s considering to issue its first-ever bonds to private foreign investors in London or New York. Given that Ethiopia remains one of the poorest countries in the globe, and still in need of some kind of debt forgiveness, access to private lenders may look unnatural. But then again Ethiopia’s B- or so status by Moody’s, Fitch and Standard & Poor is today considered good enough to run to the banks. I suppose some would view this as a sign of great investor confidence in Ethiopia’s economy.
What do you expect? Things have changed … today a B- grade is no more considered a warning sign!
Still, access to private lenders comes with risks.
For starters, there is a difference when issuing debt in one’s own currency, such as bonds for the Renaissance Dam, and debt issued in international currency like the one the government intends to do. The distinct advantages to issuing debt in one’s own currency is its dispensation. If the government has trouble repaying bonds when they mature, the treasury can simply print more money. Problem solved, up to a certain limit that is.
For bonds issued in international currency, payments have to be made in more stable, marketable currencies. Borrowing in a foreign currency exposes the country to exchange rate risk. If the Birr drops in value, paying down international debt becomes considerably more expensive. And the US will not allow Ethiopia to print dollars!
So yes, it’s important to understand the potential risks before deciding to issue bonds, particularly when they are issued in a currency that the government can’t control.
By the way, do we know what the bonds are going to be used for? … Any urgent need which came up lately … roads, airports, power stations? … For whom, exactly? Or is it simply the case of establishing Ethiopia’s presence in the international bond market?
We don’t know, but it would be good to know.
Debt, remember, is the duty that the future pays to the past. It has to be carried, serviced … and paid. It has to be dealt with … one way or another. In the ancient world, when people got themselves into debt, they were often forced to sell their children into slavery. In the Middle Ages even a dead debtor’s children could be sent to prison.
So yes, this is a rather delicate business.
Today, the ‘low’ interest rates (if you consider 7% low) that many developed countries are actually offering, remain risky and may require major sacrifices from the poorest segment of the population, particularly if the current near-zero interest rates in developed economies go up.  In such situation debt burden most harms the country’s poorest citizens. When Argentina, for example, defaulted in 2001, one in five citizens fell under the poverty line. Argentina is to this day struggling to regain its financial footing. What is clear today is the temptation to grab at easy money offered by yield-hungry private investors is proving too great to resist, even for countries like Ethiopia.
Dear readers, a healthy economy is one based on a limited amount of credit. So debt is something you need to avoid as much as possible, because once you’re used to it, it continues to build up. And as time goes by the whole economy can depend on it to the extent where the government can pretend it has income it doesn’t really have. Of course we’ve not reached that level, but it will not take us time to get there. My guess is, if not cautious, we may soon see more men drive big cars … and buy big houses … on money that is not theirs and eat up wealth they never created.
In his recent article, Marcelo Giugale of the World Bank explains how difficult future debt workouts can become. He argues that ‘Traditionally, low-income countries’ creditors were rich-world governments and multilateral organizations that found it politically unfeasible to call in debts if this meant that borrowers had to cut vital public services such as education or health. In a process that has already taken 15 years – and remains unfinished – the debts of 35 highly indebted poor countries (HIPCs) have been forgiven, at a cost of more than $100 billion.’ Recent court rulings over Argentina in the United States permitting bondholders to reject debt workouts and sue for full payment can be seen as indication of things to come. The whole game is changing.
All we’re sure about is that debt works the same way for countries as for families and individuals. That is, if you borrow too much, your life begins to suck. And we all know paying off debt is painful. It doesn’t matter what you say… It won’t go away. You may try to put it off as long as you can, but it still won’t leave. It’s the same with the government. If it has been buying things it cannot afford, it [the government] will have to pay its debts, say, by increasing revenues or lower its level of spending over time.
As they say debt is slavery. We must avoid considering it as capital. Still, we’re going to keep an open mind, supporting debt generating a positive cash-flow (good debt), and contesting those generating negative ones (bad debt). Hopefully the top brass will know how to differentiate between the two!
Stay tuned!