Ethiopia's debt relief request to put other DSSI nations under scrutiny

LONDON: Ethiopia's request for debt relief in recent days is likely to put other poor countries also eligible for the G20's Debt Service Suspension Initiative (DSSI) under bond market pressure, Morgan Stanley analysts said on Monday.

Ethiopia has said it plans to seek a restructuring of its sovereign debt under a new common framework of the G20 group of major economies designed to help with the financial pressures of COVID-19, and is examining all options.

The news pushed its government bonds to their biggest ever daily fall on Friday amid worries that their private sector holders will be forced to take a writedown and also trigger a default in the eyes of the main credit rating agencies.

"G20 DSSI-eligible sovereigns and those requesting IMF programmes may come under additional scrutiny following Ethiopia's request for debt relief," Morgan Stanley analysts wrote in a note to clients.

"The key issue would be how insistent bilateral creditors would be on the private sector participating. A potentially tougher stance by the bilateral sector could weigh on emerging market high yield (countries with weaker credit ratings)."

In all, 73 countries are eligible for a temporary suspension of debt service payments owed to their official bilateral creditors. So far, around 40 have requested to benefit.

The G20 has also called on private creditors such as investment funds to participate in the initiative on comparable terms. The suspension period, originally set to end on Dec. 31, 2020, has current been extended until June and could be lengthened further.

DEBT CATEGORIES

Morgan Stanley said it was putting the DSSI countries in focus and other lowly-rated countries into three main groups.

The first includes those that still have manageable debt levels, access to borrowing markets or can tap existing International Monetary Fund (IMF) programmes such as Egypt, Jordan, Nigeria, Ivory Coast and Senegal.

A second category where fiscal finances are worsening - requiring either an "extremely supportive" external backdrop or new IMF support to get through - includes Pakistan, Kenya, Costa Rica and recently-defaulted Argentina and Ecuador.

The final group has those currently in default like Zambia and Lebanon as well as those seen as at risk for a while like Sri Lanka which faces a $1 billion redemption in July followed by $500 million-$1 billion ones every 6-9 months thereafter.

Tunisia was also now in that category with ongoing protests now making budget savings even more difficult, along with heavily-indebted Mozambique and Congo, and finally Laos and Maldives where COVID-19 has hammered their tourism sectors.

"In theory, a common (G20 debt relief) framework should speed up the debt restructuring process, but it remains to be tested," Morgan Stanley said.

"This unexpected turn of events in Ethiopia may bring in increased differentiation among EM HY sovereigns based on the perceived risk of tail events."