Ethiopia debt restructuring plan faces hurdles of transparency

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The African Report | Ethiopia’s plan to seek debt restructuring under a G20 common framework agreed in November triggered a sell-off in African debt at the end of January on fears of a contagion effect.

The framework enables debtor countries to seek an IMF programme to strengthen their economies and renegotiate their debts with public and private creditors. But such a debt restructuring for Ethiopia would face barriers due a lack of transparency, analysts say.

Any attempt to reconcile balance of payments and published public external debt figures with underlying debt-creating flows shows information gaps and supports “a narrative of opaque lending”, argues Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town.

Along with Djibouti and Zambia, Ethiopia’s dealings with China “raise the probability of higher-than-estimated debt contracted by extra-budgetary units (EBUs) as well as potentially large contingent liabilities,” she writes in a research note.

  • China does not publish official or non-official bilateral debt agreements with central governments or state-owned enterprises, she notes.
  • The channel through which private-sector participation in the framework can be forced is not clear, Erasmus says.

“The agreement of the principles of the G20 Common Framework is positive but negotiations in actual restructurings are likely to be challenging,” says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. Lack of clarity on what is owed to China is one obstacle. While he hasn’t seen any firm evidence of Chinese loans to Ethiopia being understated, there is “less transparency” on Chinese lending, he says.

Chinese loans aren’t the only problem.

  • The fact that India and Turkey, which are non-Paris club G20 lenders, are the largest bilateral creditors after China, may complicate an Ethiopian restructuring, Bohlund says.
  • A further stumbling block is reluctance from debtor nations to participate in fear of adverse credit rating actions. African countries intending to tap international debt markets this year, such as Tunisia, Ghana and Kenya, may be reluctant to join the initiative, Erasmus says.

Unrealistic growth outlook

For Africa, recent sharp declines in external borrowing costs for many countries amid global optimism on emerging markets provides a “silver lining” to the cloud of debt woes, according to Jacques Nel, head of Africa macro at NKC. “Markets are now open to lending to many sub-Saharan African sovereigns, which could provide the necessary fiscal breathing room in 2021.”

  • But official Ethiopian projections for annual economic growth of 8.4% are dismissed by Erasmus. NKC predicts growth of 2.2% given the “dire fiscal position and balance of payments risks.”
  • “The near-term outlook is clouded by political tensions ahead of the June election, reputational risks related to armed conflict in Tigray, an upsurge in desert locust infestation and forex shortages,” Erasmus writes.
  • That means the long-awaited liberalisation of Ethiopia’s high-potential sectors such as telecommunications and banking is now urgent. This would be the “crucial first step in addressing structural vulnerability and lowering government debt dependence,” Erasmus argues.

Dual-track danger

Zambia, heavily indebted to China, in November became the first African country to default on its debt during the COVID-19 pandemic. Even the G20’s less expansive debt service suspension initiative (DSSI), which allows repayments to be deferred but does not provide for writing off debt, is hard to implement in the absence of transparency, says Harry G. Broadman, managing director at Berkeley Research Group LLC in Washington.

  • “The mode and channels through which Chinese lending is made to poor countries present thorny challenges for the effective functioning of the DSSI,” he says.
  • Chinese state-owned entities do not face strong incentives to follow market standards of transparency. And on the borrower side, there can be disincentives or bans on fully disclosing the terms and magnitude of debts to Beijing, he adds.

A DSSI may have only a limited impact if a debtor government is unable to come clean, Broadman says. “Perversely, what may emerge, in effect, is a dual track paradigm for debt relief, one pertaining to bona fide official flows under the auspices of the DSSI, and the other focused on Chinese debt,” he says. “This would hardly be a framework for sound macroeconomic management in recipient countries.”

Bottom Line

As was the case with Zambia, opaque debts to Chinese creditors are likely to continue to hamper attempts to provide African debt relief.

Fitch Downgrades Ethiopia to ‘CCC’ – Rating Action Commentary

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Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC’ or below.

KEY RATING DRIVERS

The downgrade reflects the government’s announcement that it is looking to make use of the G20 “Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)” (G20 CF), which although still an untested mechanism, explicitly raises the risk of a default event.

The G20 CF, agreed in November 2020 by the G20 and Paris Club, goes beyond the DSSI that took effect in May 2020, in that it requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors. This could mean that Ethiopia’s one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch’s sovereign rating criteria. There remains uncertainty over how the G20 CF will be implemented in practice, including the requirement for private sector participation and comparable treatment. Fitch’s sovereign ratings apply to borrowing from the private sector, so official bilateral debt relief does not constitute a default, although it can point to increasing credit stress.

Within the context of Paris Club agreements, comparable treatment requirements are not always enforced and the scope of debt included can vary. The Paris Club states that the requirement for comparable treatment by other creditors can be waived in some circumstances, including when the debt represents only a small proportion of the country’s debt burden.

The focus of Ethiopia’s engagement with the G20 CF will be on official bilateral debt, as reprofiling of this will have the biggest impact on overall debt sustainability. Nonetheless, the terms of the framework clearly create risk that private sector creditors will also be negatively affected. The G20 statement on the G20 CF indicates that debt treatments will not typically involve debt write-offs or cancellation unless deemed necessary. The focus will instead be on some combination of lowering coupons and lengthening grace periods and maturities. The extent of debt treatment required will be based upon the outcome of the IMF’s Debt Sustainability Analysis for Ethiopia, which is currently being updated. However, any material change of terms for private creditors, including the lowering of coupons or the extension of maturities, would be consistent with the definition of default in Fitch’s criteria.

The bulk of Ethiopia’s public external debt is official multilateral and bilateral debt. Government and government-guaranteed external debt was USD25 billion in fiscal year 2020 (FY20, which ended in June 2020). Of this, USD3.3 billion was owed to private creditors. This includes Ethiopia’s outstanding USD1 billion Eurobond (1% of GDP) due in December 2024, with minimal annual debt service of USD66 million until the maturity; and USD2.3 billion government-guaranteed debt owed to foreign commercial banks and suppliers. Other SOE debt to private creditors which relates to Ethio Telecom and Ethiopian Airlines is a further USD3.3 billion. While this is not guaranteed by the government, it represents a potential contingent liability.

Ethiopia’s external finances are a rating weakness and this is the main factor behind the intention of using the G20 CF. Persistent current account deficits (CAD), low FX reserves and rising external debt repayments present risks to external debt sustainability. Ethiopia’s external financing requirements, at more than USD5 billion on average in FY21-FY22 including federal government and SOE amortisation, are high relative to FX reserves, which we forecast to remain at around USD3 billion. Reserves cover only around two months of current external payments.

The CAD narrowed to 4.1% of GDP in FY20 as imports declined, maintaining the trend since FY15 when the CAD was 12.5% of GDP. We forecast the CAD to hover around 4% of GDP, although this does not incorporate potential import costs associated with vaccines to combat the coronavirus pandemic. Smaller CADs have not eased pressure on FX reserves because net FDI has been lacklustre (averaging 2.7% of GDP in FY19-FY20) and net external borrowing has moderated with negative net borrowing by SOEs. The central bank has allowed sharper exchange rate depreciation, but the currency nonetheless remains overvalued, with a weaker rate in the parallel market. Proposed sales of mobile licenses and a stake in Ethio Telecom, the state-owned telecoms company, are an upside risk to FDI inflows and reserves in FY21-FY22.

The IMF assessed Ethiopia at high risk of external debt distress in its latest assessment in 2020, with Ethiopia breaching thresholds on external debt service/exports and the present value of external debt/exports. An improvement from high to moderate risk is a central aim of the three-year arrangement with the IMF agreed in late 2019 under the Extended Credit Facility and the Extended Fund Facility. Given the difficulty of substantially boosting exports in the near term, the main route to achieve this is via reducing debt service costs. Within the IMF programme, the authorities planned by the first review to undertake additional reprofiling of bilateral loans but this has not yet happened. The pandemic has placed further emphasis on debt reprofiling.

Ethiopia and the IMF reached staff-level agreement on the first review of the programme in August 2020, but this awaits board approval. The Fund’s press release recognised that performance had mostly been good, but also emphasised the need for financial support from Ethiopia’s international partners including through debt reprofiling.

Ethiopia’s ‘CCC’ IDRs also reflect the following key rating drivers:

Strong economic growth potential and an improving policy framework support the rating, while double-digit inflation, low development and governance indicators and elevated political risks weigh on the rating.

The coronavirus pandemic continues to present significant risks to Ethiopia, but the negative economic impacts since the onset have been somewhat contained so far. Given that the fiscal year ends in June, we do expect more of a hit to growth in FY21 than FY20, but forecast a return to growth rates in the 6%-7% range over the medium term. The government has maintained considerable budgetary discipline, with moderate increases in the general government budget deficit, to 2.8% of GDP, and government debt/GDP (31.5%), while total SOE debt/GDP (25.6%) has fallen. However, the pandemic presents risks of upward pressure on spending. Government financing has continued its transition towards market-based T-bill auctions and away from the long-standing system of direct advances from the National Bank of Ethiopia (NBE, the central bank). This is a core part of the IMF programme, which seeks to promote monetary policy reforms to help gradually tackle inflation that has remained extremely high at close to 20%.

The military conflict in the Tigray region from November 2020 has underlined ongoing political risks in Ethiopia as well as for Ethiopia’s international relations. Considerable domestic political uncertainty, related to the delayed 2020 parliamentary election (now planned for June) and ongoing ethnic and regional tensions within the country, remains a risk to Ethiopia’s credit metrics, in Fitch’s view. Greater political unrest could, for example, act as a drag on FDI and tax collection and exert further upward pressure on inflation. It could also lead to worsening relations with some bilateral partners and hold up donor flows, as illustrated by the suspension of some flows from the EU in December.

ESG – Governance: Ethiopia has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Ethiopia has a low WBGI ranking in the 25th percentile, reflecting in particular political instability, as well as low scores for voice and accountability and regulatory quality.

RATING SENSITIVITIES

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

– Structural Features: Stronger evidence that Ethiopia’s engagement in the G20 CF will lead to comparable treatment for private sector creditors consistent with a default event under Fitch’s criteria.

– External Finances: Increased external vulnerability that heightens the risk of default irrespective of the G20 CF, such as the emergence of external financing gaps and downward pressure on already low foreign-exchange reserves.

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

– Structural Features: Clarity that the G20 CF will not lead to a default event.

– External Finances: Stronger external finances with acceleration in exports, for example, leading to smaller CADs and higher foreign-currency reserves.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

In accordance with the rating criteria for ratings in the ‘CCC’ range and below, Fitch’s sovereign rating committee has not used the SRM and QO to explain the ratings, which are instead guided by the rating definitions.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].

KEY ASSUMPTIONS

We assume that Ethiopia pursues involvement in the G20 CF.

We expect global economic trends and commodity prices to develop as outlined in Fitch’s Global Economic Outlook.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Ethiopia has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

Ethiopia has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.

Ethiopia has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.

Ethiopia has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver, as for all sovereigns.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

APPLICABLE CRITERIA
Country Ceilings Criteria (pub. 01 Jul 2020)
Sovereign Rating Criteria (pub. 26 Oct 2020) (including rating assumption sensitivity)

APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Country Ceiling Model, v1.7.1 (1)
Debt Dynamics Model, v1.2.1 (1)
Macro-Prudential Indicator Model, v1.5.0 (1)
Sovereign Rating Model, v3.12.1 (1)

ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy

ENDORSEMENT STATUS
Ethiopia EU Endorsed, UK Endorsed

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Desert Locust situation update 4 February 2021 – FAO

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FAO | Numerous immature swarms persist in southern Ethiopia and Kenya. There has been increased swarm movement in Oromia (East Harerge, Bale, Borema, Arsi) and SNNP (South Omo) regions of the south. The few swarms that moved to northern Ethiopia (Afar and Amhara) continued to Eritrea and reached the Red Sea coast where they were controlled. In Kenya, immature swarms continue to spread westwards across northern and central counties where there are currently about 20 small swarms present, mostly about 50 ha in size. Some of the swarms are in community areas and therefore cannot be treated. A small swarm reached Keiyo-Marakwet county in the west and another one was reported today in Turkana county in the northwest; hence, there is a risk that a few swarms could reach eastern Uganda and southeastern South Sudan.

It appears that the peak of the Kenya invasion has now passed as there have been no new reports of incoming swarms in the past two days and no further swarm reports in the east (Wajir, Garissa). Intensive control operations are underway in Kenya and southern Ethiopia to reduce the potential scale of the next generation of breeding. If rains fall in the next week or so, the swarms will quickly mature and lay eggs that will hatch and cause hopper bands to form; otherwise, this will be delayed until the arrival of the seasonal rains in March.

In Somalia, hopper bands are present on the northwest coast and in the northeast where some have started to fledge and will be forming immature swarms. Intensive control operations are underway to reduce the number of new swarms that will form this month. Swarms that form on the northwest coast are likely to move to the plateau and adjacent areas of eastern Ethiopia while swarms in the northeast are expected to spread west along the plateau where they could mature and give rise to another generation of breeding from about mid-March onwards, especially if more rains fall. A few swarms could migrate from the northeast towards southern Somalia where crop damage has been reported from previous swarms.

Control operations continue in winter breeding areas along the Red Sea, mainly against hopper groups and bands that formed along the coast of Saudi Arabia and to a lesser extent against hopper bands on both sides of the Eritrea/Sudan border. Any infestations that escape control in Saudi Arabia could form adult groups and swarms that would most likely move inland to the spring breeding areas of the interior. In Yemen, scattered adults persist mainly along the Red Sea coast and to a lesser extent on the Gulf of Aden coast in the south. There remains a risk that a few swarms may be present in inaccessible areas of the north, which could move to adjacent areas of southwest Saudi Arabia.

The situation remains calm in the other regions.

Ethiopia Faces a New Crisis

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Bloomberg | First there was a war, now Ethiopia faces a debt crisis.

The nation’s request to restructure its external debt under a Group-of-20 program highlights how much circumstances have changed for the country and Prime Minister Abiy Ahmed in just over a year.

In 2019, Abiy won the Nobel Peace Prize for ending two decades of conflict with Eritrea. After coming to power in 2018, he was hailed for pledging to open up the economy and create more space for democratic expression.

The coronavirus outbreak and a war with the rebellious Tigray region, have stifled that. Little progress has been made on privatization, and civilian casualties and displacement in Tigray has seen the leader of one of Africa’s fastest growing economies condemned internationally.

Now the country is worried about meeting its debt obligations and its announcement that it’s discussing liabilities with official lenders has sparked panic among private creditors. The country’s Eurobonds plunged the most on record last week.

“The World Bank has stepped in to fill the gap” in the past, said Mark Bohlund, a senior credit research analyst at REDD Intelligence. That’s “become more politically challenging in the wake of alleged human-rights abuses committed during the war in Tigray,” he said.

For now, there isn’t an immediate way out for Abiy.

The coronavirus has slashed demand for the country’s horticulture and textile exports and tourism has ground to a halt.

The war, which threatens to drag on in the form of guerrilla resistance, hasn’t helped.

Ethiopia asks for debt relief as Covid takes toll

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Financial Times | Pandemic adds to pressure on developing economies trying to meet repayments

Ethiopia has asked for debt relief under a G20 programme to help poor countries reeling under the economic impact of coronavirus, making it the second African country to do so in the past week.

Ethiopia has long been seen as one of Africa’s most promising economies but the pressure the pandemic has placed on healthcare systems and economies means many developing nations are struggling to keep up with debt payments.

In a statement on Monday, its finance ministry said that it was “preparing for upcoming discussions with official creditors” as it looks to reduce “debt vulnerabilities and lower the impact of debt distress”.

“We haven’t even inoculated one individual against Covid, so we need to redirect the resources that we have towards that,” a senior official at the ministry of finance told the Financial Times.

Under its state-led development model, Ethiopia’s economy grew at close to 10 per cent a year for much of the past two decades until the arrival of Prime Minister Abiy Ahmed in 2018. He had promised sweeping liberal reforms, including privatisation of the huge telecoms monopoly, to take the economy towards middle-income status. But ethno-political tensions and a conflict in the northern Tigray region have slowed his plans.

Monday’s statement from Addis Ababa follows a statement by the IMF last Wednesday that Chad had also asked for relief under the G20 programme agreed by the world’s biggest economies. In November, Zambia became the first African country to default on its debt since the start of the pandemic.

The Ethiopian move will be an early test of the G20 debt relief initiative, which requires borrowers to reach agreement on their debt with private creditors as well as official lenders.

Under the initiative, agreed last year by the world’s biggest economies, 73 of the world’s poorest countries can ask for debts to be restructured and, in the most extreme cases, written off. This goes beyond the G20’s debt service suspension initiative (DSSI), which allows the same group of countries to defer debt repayments but does not provide any debt reduction.

The DSSI has been criticised by debt campaigners and others for failing to enlist the participation of private sector creditors. This meant that debt relief secured from official lenders could be used to repay other debts. Several countries benefiting from the DSSI have stressed that they do not want relief from private creditors as this would jeopardise their access to commercial credit markets.

Despite the G20 framework’s requirement to seek a deal with private sector creditors, the finance ministry official sought to play down the impact on private sector lenders. “It would be a fair burden-sharing between all our official bilateral creditors and then, based on that, we will look at whether we need to reach out to private creditors, which is very unlikely,” the official told the FT. The official stressed that the adjustment would be “minor”.

Ethiopia had total public foreign debt of $27.8bn at the end of 2019, according to the World Bank, including $8.5bn owed to official bilateral creditors and $6.8bn to commercial creditors, including $1bn to bondholders. Chad has no outstanding foreign bonds but its total debts of $3.5bn include $1.5bn in commercial debt, about half of which is a loan from Glencore, the commodities trader, and associated banks.

“Ethiopia is trying to explore the options for broader debt relief,” said Kevin Daly, investment director at Aberdeen Standard Investments. “This is their way of saying things are difficult, we need further relief. What we don’t know is how this will work in practice. There is a lack of clarity right now.”

Airtel won’t bid for Ethiopia licence, but China’s Sharing Mobile will

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Capacity | Indian operator Airtel, which has 110 million customers in Africa, will not bid for one of the upcoming Ethiopian licences, China’s Sharing Mobile will do so.

The Xinhua News Agency, the official state-run press agency of the People’s Republic of China, said this morning that Sharing Mobile “is joining the bid for the telecom licence in Ethiopia”.

The company, based in Beijing, is little known outside China, but has been actively exploring overseas markets, said Xinhua. It has had an 80% share in a Nigerian operator, GiCell, since 2016 and has made overtures in South America.

Xinhua said: “With flexible decision-making mechanism and deep accumulation in technological innovation and platform building, Sharing Mobile is expected to be a strong competitor in this transaction, bringing more localised communication products to Ethiopia and introducing the most advanced communication technology and international operation management system to enhance the economic competitiveness of Ethiopia’s communication industry.”

Airtel Africa’s CEO said on Friday that the company will not bid for Ethiopia. Raghunath Mandava (pictured) told the agency that the company sees more room to grow in the 14 countries it has already invested in, including in its biggest market in Nigeria.

He said “our entire current focus” is on Nigeria, Congo, the Democratic Republic of the Congo (DRC), Tanzania and Kenya, so “we are not looking at bidding for Ethiopia at this stage”.

The Ethiopia Communications Authority has set a deadline of 5 March for applications for the two new licences.

Sharing Mobile, also called Sharing Internet Mobile Communications, was established in March 2006. It operates a range of technologies, according to details from the GSMA, the industry trade association.

Ethiopia updates debt sustainability assessment with IMF help

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NAIROBI (Reuters) – Ethiopia is updating its debt sustainability assessment with International Monetary Fund help and will then talk to official creditors, its finance ministry said in an apparent attempt to allay market concerns over a possible restructuring of sovereign debt.

On Friday, a Finance Ministry official told Reuters that Ethiopia planned to seek a restructuring of its sovereign debt under a new G20 common framework and was examining all available options.

This pushed its government bonds to their biggest ever daily fall and analysts said restructuring concerns could spill over to hit other borrowers.

The ministry said in a statement on Monday that once the discussions with official creditors were complete, it will inform other creditors of the need for broader debt treatment.

Read More “EU suspends Ethiopian Budget Support Over Tigray Crisis” 

It also said it was confident that possible implementation of debt treatment under a new G2 framework will address vulnerabilities and preserve long-term access to international financial markets.

Under the new G20 framework, debtor countries are expected to seek an IMF programme to put their economies onto a firmer footing and negotiate a debt reduction from both public and private creditors.

Read About “Tigray War”

Ethiopia has a $1 billion dollar bond outstanding, though only $66 million worth of interest payments on the issue are coming due this year.

Chinese ambassador, Ethiopia capital mayor agree to enhance economic partnership

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ADDIS ABABA, Jan. 29 (Xinhua) — Chinese ambassador to Ethiopia Zhao Zhiyuan and Mayor of Ethiopia’s capital city Adanech Abiebie agreed on Friday to enhance the economic partnership between the two countries.

In a press statement, Abiebie said she has reached an agreement with the Chinese ambassador to Ethiopia on the need to add new Chinese built projects that improve the economic and social lives of Addis Ababa city residents.

Abiebie also said her office discussed with the Chinese ambassador to Ethiopia on the need to further enhance cooperation in road projects in Ethiopia’s capital city.

Addis Ababa, a city of an estimated five million-plus population is Ethiopia’s main social, economic and political hub.

Chinese firms are engaged in various infrastructure projects in the city aimed at meeting the social and economic needs of Addis Ababa’s big population.

These include the multimillion U.S. dollars expansion infrastructure in the Addis Ababa Bole International Airport and the landmark “Beautifying Sheger” project.

“Beautifying Sheger” is a personal initiative of Ethiopian Prime Minister Abiy Ahmed who envisions creating a clean, livable environment for the residents of Addis Ababa.

Exclusive: Ethiopia to seek debt relief under G20 debt framework – ministry

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NAIROBI (Reuters) – Ethiopia plans to seek a restructuring of its sovereign debt under a new G20 common framework and is looking at all the available options, the country’s finance ministry told Reuters on Friday.

Debt

Ethiopia Government Debt as a percent of GDP

Ethiopia’s government bonds saw their biggest ever daily fall on the news and analysts said restructuring concerns could spill over to hit other borrowers.

G20 nations agreed in November for the first time to a common approach for restructuring government debts to help ease the strain on some developing countries driven towards the risk of default by the costs of the coronavirus pandemic.

Chad became on Wednesday the first country to officially request a debt restructuring under the new framework and a French finance ministry told Reuters on Thursday that Zambia and Ethiopia were most likely to follow suit.

Asked if Ethiopia was looking to seek a debt restructuring under the G20 framework, Finance Ministry spokeswoman Semereta Sewasew said: “Yes, Ethiopia will look at all available debt treatment options under the G20 communique issued in November.”

Ethiopia’s government bond due for repayment in 2024, which it issued in late 2014, plunged 8.4 cents on the dollar from roughly par to just under 92 cents.

Ethiopia is already benefiting from a suspension of interest payments to its official sector creditors until the end of June under an initiative between the G20 and the Paris Club of creditor nations.

‘UNCERTAINTY’

Under the new G20 framework, debtor countries are expected to seek an IMF programme to get their economies back onto a firmer footing and negotiate a debt reduction from both public and private creditors.

Ethiopia has a $1 billion dollar bond outstanding, though only $66 million worth of interest payments on the issue are coming due this year.

The news that Ethiopia would seek debt relief left investors wondering whether they would be left to take a hit in the event of a restructuring.

“Given the G20 common framework has not been put to the test yet, we hope the G20 will come out with some sort of explanation as this uncertainty can hit the countries’ rating and spill over into other sub-Saharan African credits,” said Simon Quijano-Evans, chief economist at Gemcorp Capital LLP.

ING emerging market sovereign debt strategist Trieu Pham said the fact that Ethiopia has Eurobonds outstanding was a cause for concern as it could have broader implications.

“Should Ethiopia go this way then that could weigh on overall sentiment as people will wonder if there might be others (following),” he said.

Ethnic conflict could unravel Ethiopia’s valuable garment industry

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Source: The Conversation | Dorothee Baumann-Pauly

Ethiopia has long been considered one of Africa’s economic wunderkinds. Until recently, it had relative political stability in comparison to other countries on the continent. And, with an average GDP growth rate of 10% in the past decade and a government that instituted policies friendly to foreign investors, the country was able to attract South and East Asian clothing manufacturers. These sell to international brands, such as Decathlon and H&M.

But, for the past two months, violent conflict in Ethiopia’s northern Tigray region fuelled by ethnic power politics has threatened the country’s stability. According to the International Crisis Group, the violence has likely killed thousands of people, including many civilians, displaced more than a million people internally, and led some 50,000 to flee to Sudan.

The scale of the conflict could scare off foreign investment in the country’s garment industry. This sector is hugely important to Ethiopia, which aimed to propel its agricultural economy toward a more prosperous future built on providing clothing to consumers in the West.

While the Ethiopian textile and garment industry is still small – its export share is not more than 10% of total exports, and its products only represent 0.6% of total GDP – the sector was expected to grow by around 40% a year in the next few years.

In March 2019, I assessed Ethiopia’s garment industry alongside two colleagues from the New York University’s Stern Center for Business and Human Rights. We wanted to see whether Ethiopia – as the new frontier of garment manufacturing – had learnt from mistakes in other sourcing countries. We analysed the industry’s prospects and the working conditions with a close look at the flagship Hawassa Industrial Park. This is a vast and still only partly filled facility, which currently employs 25,000 workers about 225km south of the capital of Addis Ababa.

What we found was sobering.

Manufacturers told us about the many challenges of doing business in Ethiopia. These included bureaucratic and logistical hurdles and the problems that come with an unskilled workforce that had no prior experience of working in an industrial setting.

Workers reported that they could barely survive with their base monthly wage as low as US$26. The government’s eagerness to attract foreign investment led it to promote the lowest base wage in any garment-producing country.

In addition to this already-strained business context, the report we published points to what we saw as the greatest challenge of all: ethnic tensions.

In Hawassa, ethnic tension erupted in July 2019 and caused disruptions to the industrial park. The new conflict in Ethiopia’s Tigray region could be the tipping point for foreign investors in the garment industry. Manufacturers had told us that further political instability in the country could jeopardise all future business.

The collapse of this sector would be disastrous. Tens of thousands of people would lose their jobs and the investments made in this enterprise wasted. In addition, foreign investors and the Ethiopian government need to understand that its collapse could have a symbolic knock-on effect in the region – Ethiopia’s garment sector is often seen as a pioneering experiment proving that structural transformation in Africa is possible.

Unmet promises

Garment manufacturers were already struggling to do business. We found that workers, unhappy with their working conditions and pay, were increasingly willing to protest by stopping work or even quitting. Attrition was high, and production was low.

There are also problems with raw materials, almost all of which need to be imported into Ethiopia from India or China. The government advertised the availability of more than 3 million hectares for cash crops, including cotton cultivation in 2010. In fact, only about 60,000 hectares were being used by 2019 to grow cotton, and that figure is falling as local farmers switch to sugar, sesame, and other more lucrative cash crops.

Ethnic tensions disrupted factory operations further. When Abiy Ahmed took over as Prime Minister in 2018, his reforms – which aimed to create a more ethnically inclusive government – unsettled the ruling coalition and opened a political space for ethnic tensions to resurface. For instance, in Hawassa, a group of the Sidama people – who are the majority ethnic group in the Hawassa state – pushed for independence in 2019.

The political uncertainty due to ethnic tensions translates into economic uncertainty for investors.

In Hawassa, security concerns emerged for local workers and foreign staff. Night shifts had to be cancelled so that workers could get home safely before nightfall. Political demonstrations at the park’s fence and within the park disrupted production. Sidama people also mobilised within factories and demanded more jobs for their people resulting in short strikes and occasional park-wide closings.

Such disruptions are a wild card beyond the control of investors, which may set back further investments.

By a thread

When the COVID-19 pandemic broke out in early 2020, the sector was hanging by a thread. In June 2020, the International Labour Organisation published a report, which described reduced orders and a situation for workers even more perilous than before.

By the end of 2020, many of the over 60,000 garment workers in Ethiopia had lost their jobs or were too afraid to return to work, fearing they would catch the coronavirus.

The current ethnic conflict could be the straw that breaks the camel’s back. For instance, the industrial park in Mekelle built for 20,000 workers – and with an occupancy in 2020 of around 3,500 workers – is currently closed. The current internet and phone blackout in the Tigray region now also makes any communication between buyers and the factories impossible.

A worsening human rights situation creates reputational and operational risks for investors and buyers. It increases uncertainty over the ability to complete orders and ship them on time. It also increases security risks for staff and workers. This may all cause long-lasting damage to investor confidence and the opportunity for sustainable economic development.

What must change

To assure investors, buyers, and international stakeholders, Prime Minister Abiy Ahmed needs to end the blackout in the Tigray region, better protect journalists and civilians, and allow for independent human rights monitors to assess conditions.

At this critical moment, clothing companies and manufacturers invested in Ethiopia need to double down on their commitments to business in Ethiopia. This means they need to stay in the country and speak up to support human rights.

Once ethnic tensions are defused, more work will still need to be done by both the government and foreign manufacturers to strengthen the sector. This includes developing a domestic supply chain and establishing a minimum wage that ensures decent living conditions for workers.

But first, the future of the industry must be secured.