December
2, 2014 (Financial Times) — Every country tapping the global sovereign
bond market details the dangers investors face in its prospectus, often
in a boilerplate section enumerating possible problems – such as fiscal
deficits or taxation issues – that is largely ignored.
But the document sent by Ethiopia to international investors ahead of its foray into the global sovereign bond market is
somewhat different. Far from a boilerplate, it includes a list of
unfamiliar hazards, such as famine, political tension and war.
The document, seen by the Financial Times, is a sobering reminder of the
risk of investing in one of Africa’s less developed nations. With gross
domestic product per capita at less than $550 per year, Ethiopia is the
poorest country yet to issue global bonds.
In the 108-page prospectus, issued ahead of its expected $1bn bond,
Ethiopia tells investors they need to consider the potential resumption
of the Eritrea-Ethiopia war, which ended in 2000, although it “does not
anticipate future conflict”.
There is also the risk of famine, the “high level of poverty” and
strained public finances, as well as the possible, if unlikely, blocking
of the country’s only access to the sea through neighbouring Djibouti
should relations between the two countries sour.
Addis Ababa, Ethiopia’s capital, also warns that it is ranked close to
the bottom of the UN Human Development Index – 173rd out of 187 nations –
and cautions about the possibility of political turmoil. “The next
general election is due to take place in May 2015 and while the
government expects these elections to be peaceful, there is a risk that
political tension and unrest . . . may occur.”
But the long list of risks is not deterring investors,
as ultra-low interest rates in the US, the UK, eurozone and Japan push
sovereign wealth funds and pension funds into riskier countries in
search of higher-yielding bonds.
Instead, some investors are focusing on the danger of a currency crisis.
Addis Ababa has devalued its currency, the birr, twice over the past
five years – by 23.7 per cent in 2010 and 16.5 per cent in 2011 – in an
effort to win export competitiveness. Since then, the Ethiopian central
bank has managed to slow the currency’s depreciation by intervening
regularly in the market.
Addis Ababa has now told potential investors that “it may not be
possible for the National Bank of Ethiopia to manage the exchange rate
as effectively in the future as it has in the past” because of reduced
hard currency reserves.
The country has reserves to cover only 2.2 months’ worth of imports –
almost half the 4.3 months it had in 2010-11. “Failure to manage a
steadily depreciating exchange rate may adversely affect Ethiopia’s
economy . . . [and its] ability to perform obligations under” the bonds,
it says.
The prospectus also reveals for the first time details of Ethiopia’s
heavy dependence on Chinese loans to finance its infrastructure
investment. Credit lines from China and Chinese entities accounted for
42 per cent of all external loan disbursements in 2013-14, and for 69
per cent in 2012-13.
“China has emerged as a key development partner,” the prospectus says,
“often providing sizeable financing tied to infrastructure projects
undertaken by Chinese firms.” Among those, telecoms groups ZTEand Huawei and a company the prospectus names as China Electric Power have lent Ethiopia more than $2bn over the past few years.
Lazard, the investment bank advising Addis Ababa on financial matters,
declined to comment. The Ethiopian government did not respond to a
request for comment. Investors said the bond was expected to price later
this week at between 6 and 7 per cent.
Source: Financial Times
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