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.
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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 ZTE and 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.
