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Rate similar to US in 2000
Ethiopia’s international bond market foray registered success after government officials met with potential buyers in Europe and the US last week.

The statement by Ministry of Finance and Economic Development (MoFED) sent to Capital on Friday December 5, stated that Ethiopia completed its inaugural Eurobond exercise, pricing a 10-year USD 1 billion benchmark, at a coupon of 6.625 percent.
“This landmark financing affirms widespread positive receptivity to Ethiopia’s track record of significant economic growth, prudent fiscal management and a targeted reform agenda,” the ministry stated.   
The transaction successfully crystallized the positive momentum generated from Ethiopia’s international roadshow, during which over 80 institutional investors were visited in the United States and Europe. A senior delegation from MoFED and the National Bank of Ethiopia led by Sufian Ahmed, Minister of MoFED, conducted the meetings with potential investors.
Ethiopia attracted a high amount of investor interest despite a challenging market environment. The statement indicated that investors remained engaged throughout the process and showed a sizeable appetite for participating in the deal.
“Initial price thoughts were released at a yield level of 6.750 percent, and this was later formalized into a guideline of 6.625 percent – 6.750 percent. The Bond was oversubscribed by 260 percent. Ethiopia locked in pricing for the USD 1 billion at a yield of 6.625 percent,” the statement added.   
Ethiopia focused on a 10-year maturity to create a strong benchmark which matched its preference for the duration given its infrastructure-driven use of proceeds. The transaction was distributed primarily to US investors (50 percent), followed by those in the UK (35 percent), Europe (14 percent) and others (1 percent). Fund Managers dominated allocations (receiving 96 percent), underscoring the high caliber of demand.
The document sent by Ethiopia to international investors ahead of its foray into the global sovereign bond market is somewhat different, according to some reports. It stressed that the investors consider problems such as famine, political tension and war.
Zemedeneh Negatu Managing Partner – Ethiopia and Head of Transaction Advisory Services of Ernst & Young, told Capital that international investors review public bond offering documents, called a prospectus, all the time and are sophisticated enough to evaluate opportunities and risks. “That’s why a USD 1.0 billion offering was oversubscribed by 2.7 times and the purchasers of the bond were more than 100 very high quality institutions. About 50 percent of the offering was purchased by U.S. investors and the rest by European and other international investors. In fact, Ethiopia had a great week and the rate it got at 6.625 percent was very good” Zemedeneh said.
In the 108-page prospectus, issued ahead of its expected USD 1 billion bond, Ethiopia tells investors they need to consider the potential resumption of the Eritrea-Ethiopia war that ended in 2000, although it “does not anticipate future conflict”.
Credit strategist said that the risk of defaults mentioned on the prospectus that the Ethiopian government dispersed for potential buyers is considered to be zero.
Ethiopia is set to wrap up its debut dollar bond sale on Thursday December 4, capping off a record year for frontier market debt issuance. The current foreign bond will be the second for the Horn of Africa. In June this year, Kenya has issued USD two billion worth of sovereign bonds.
Lazard, a company from France acted as financial advisor to the Ethiopian Ministry of Finance and Economic Development. Deutsche Bank and J.P. Morgan acted as Joint Lead Managers for this transaction.
Zemedeneh says there will be a future offering but the success of the debut bond will be one of the key determining factors as to timing and size of the next issue.
The government statement stated that Ethiopia is the first African sovereign nation to include the International  Market Association (ICMA) recommended Collective Action Clause (“CAC”) in the terms and conditions of its Eurobond.
“The interest rate was not high and in fact the investors who bought the bonds said it was appropriately priced. We need to put the interest rate in context. According to an analysis done by the Financial Times (FT), Ethiopia’s Eurobond was priced at the same yield as the U.S. and other major global economies were borrowing at as recently as the year 2000. Furthermore, the rate Ethiopia priced its bonds are very close to what Kenya got a few months ago, even though the market conditions have been less than optimal for African sovereign bonds in recent weeks, due to the decline in oil and commodity prices and other factors, which affected overall market sentiments,” Zemedeneh added.
The statement Fitch released on November 7, indicated that as the government relies heavily on concessional lending from multilateral creditors, maturities are long while interest payments, at 2.1 percent of budget revenues, are extremely low. The foreign-currency share of public debt, at 60.5 percent at end-fiscal year 2014 (FY14), is in line with peers. This moderate level of debt has been made possible by the containment of general government deficit below 4 percent of GDP over the past decade (2.6 percent in FY14), due to spending restraints, and outsourcing of part of its investments to state-owned enterprises (SoEs).
As a result SoEs’ debt has risen significantly in recent years, and accounted for an estimated 22 percent of GDP in FY14 (FY10: 12.1 percent).
The statement indicated that even though the authorities expect this debt to be repaid from SoEs’ commercial receipts, Fitch believes this is a rising contingent liability for the government. Additionally, this rise in debt has been financed by recourse to domestic credit, concentrating bank exposure to SoEs, and increasingly from external sources, sometimes with less favourable financing conditions, which could increase external debt and interest service over the coming years.
Authorities’ strategy of transitioning towards export-led growth has had limited results so far: the current account deficit widened to 8.6percent of GDP in FY14 from 5.9 percent in FY13, as declining commodity prices have penalised exports of coffee and gold, which together with oil seeds, still accounted for 56 percent of goods exports in FY14, while imports of capital goods have continued to grow. As a result net external debt, at 100 percent of current account receipts, is on the rise and coverage of current account payments by international reserves has remained weak, at only 1.8 months at end-FY14.
Prospects for export diversification are positive, however, over the medium term, helped by a slightly improving environment for foreign direct investments (FDI) and potential electricity exports.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently well balanced. The main factors that could, individually or collectively, lead to a positive rating action, are: -Stronger external indicators reflected in higher exports, stronger FDI and international reserves-Further structural improvements, including stronger development and World Bank governance indicators-Further improvement in the macro-policy environment, supporting moderate inflation levels and a transition to broader-based growth.
In its first ever rating Ethiopia got B1 by Moody, and B by Standard &Poors’ and Fitch.