The reform efforts, political situation and external risks in Ethiopia

For the past five years, Ethiopia’s economy and wealth levels have been growing strongly on an average of 9 percent per annum. However, the country risks derailing economic activities due to political tensions which have been caused by wide-ranging reforms that the government intends to use to grow the economy.

The reform efforts has been focused on increasing private-sector involvement in the economy, improving infrastructure, increasing efficiencies in goods and services markets and easing the burden on the government’s balance sheet. These reforms and privatization agenda are mainly focused on the energy, telecoms, logistics airlines, agriculture and banking sectors. At this stage, it will difficult to realize the benefit of this move as it would materialize in the long run and it also has a lot of implementation risks.

According to a report made available to TheNerve Africa by the rating agency, Moody’s, much of the reform’s success will depend on the buy-in of the Ethiopian People Revolution Democratic Front (EPRDF) coalition, of which some members appear sceptical about the prime minister’s market-oriented focus. A broad stabilization was also observed in the last two years, but the attempted coup in Amhara underscores the sovereign’s underlying susceptibility to domestic political risk. The risks are unlikely to dissipate in the run-up to the elections scheduled for 2020, as the government’s reform agenda risk exacerbating ethnic tensions in some parts of the country.

Kelvin Dalrymple, one of Moody’s Vice President’s – Senior Credit Officer and lead sovereign analyst for Ethiopia, said: “In Ethiopia, these persistent political challenges are likely to be felt most prominently via any impact on investor perceptions, given that some sectors of the Ethiopian economy are heavily dependent on foreign direct investment.”

Kelvin also talked about the importance of the flow of concessional loans and extended grace periods for the country’s external and liquidity position. Although the government’s gross borrowing requirements are moderate at around 5 percent of GDP, this conceals a high level of external payments relative to foreign exchange reserves. The fact that only about a quarter of its public external debt was contracted with private creditors mitigates some of the risks. Ethiopia receives significant concessional loans through the World Bank Group’s concessional window IDA as well as loans and grants from the EU as well as bilateral donors.

“We estimate public external debt amortization of $1.7 billion in fiscal 2020, which is equivalent to half of our estimated level of reserves for end fiscal 2019. This is somewhat mitigated by large FDIs. Longer-term, Ethiopia will need to refinance its US$1 billion Eurobond maturing in fiscal 2025. The resilience of significant FDI should allow for the completion of large FX-generating projects in the next few years and ultimately mitigate external vulnerability risks. But in the short term, support from the international community and the reprofiling of external bilateral debt of state-owned enterprises (SOEs) are crucial to the country’s external and liquidity position, especially as its export earnings are volatile,” said Kelvin.

Moody’s is of the opinion that the resilience of significant FDI should allow for the completion of large FX-generating projects in the next few years, which ultimately will mitigate external vulnerability risks. But in the short term, support from the international community and the reprofiling of external bilateral debt of state-owned enterprises (SOEs) are crucial to the country’s external position.