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World Bank concerns about ‘unrest in Ethiopia’

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Anadolu Agency | It would engage with relevant officials ‘to safeguard the rights and interests of all Ethiopians,’ says World Bank Group-

The World Bank Group (WBG) on Friday expressed “great concern” about unrest in Ethiopia, saying the situation would undermine economic and social development outcomes achieved in the African nation in recent years.

“Ethiopia is currently facing challenging times and the World Bank Group is keenly following the latest developments in the country. The unrest in Ethiopia is unfortunate and of great concern,” it said in a statement. “The World Bank does not have the mandate to get involved in the internal governance issues of its member states. However, human rights principles are prominently embedded in our Environmental and Social Framework through explicit requirements for nondiscrimination, meaningful consultation, effective public participation, property rights, accountability, transparency and good governance.”

It said as a member of the Development Assistance Group, it would keep engaging in dialogue with relevant Ethiopian authorities “to safeguard the rights and interests of all Ethiopians.”

The Tigray region has been the scene of fighting since November when Ethiopian Prime Minister Abiy Ahmed announced military operations against the Tigray People’s Liberation Front (TPLF), who he accused of attacking federal army camps.

Government troops took control of the regional capital, Mekele, in late November, but the TPLF vowed to fight, and clashes have persisted in the Horn of Africa country, hampering efforts to deliver humanitarian aid.

UN High Commissioner for Human Rights Michelle Bachelet said on Thursday that her office received information about ongoing fighting across the region, particularly in the center of Tigray region, as well as incidents of looting by “various armed actors.”

Bachelet’s office said it has information about the killing of eight protestors by security forces on Feb. 9-10 in Adigrat, Mekelle, Shire and Wukro.

More than 136 cases of rape have also been reported in hospitals in Mekelle, Ayder, Adigrat and Wukro in the eastern Tigray region between December and January, said the office.

Washington’s United Nations Ambassador Linda Thomas-Greenfield, said on Thursday that the US has deployed a disaster assistance response team to Ethiopia to bolster the humanitarian response, “and our hope is that others will join us in this urgent, necessary life-saving effort.”

Uganda, Ethiopia, Egypt… the hidden cost of internet blackouts

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African Report | Communication technology is a double-edged sword. It can empower people to access and share information globally, or be used as an instrument of political and economic control. While hopes were raised by the Arab Spring a decade ago, the years since have seen multiple internet blackouts in many African countries.

In the past ten years, the practice of jamming cyber communication has become a new tool by certain nations and governments.

Perhaps the most famous example of all is Egypt during the Arab Spring in 2011. For five days, the Egyptian government shut down all internet communication, to disrupt the 2011 protests.

Eventually, this cost the Egyptian economy $90m, according to the Organisation for Economic Co-operation and Development (OECD). Had the blackout gone for a whole year, it would have put a dent in Egypt’s GDP of around 3-4%.

“Most of the blackouts were across the entire [country] so it affected every person, business, and organisation. They were not targeted on particular institutions but affected everyone in that place,” says Darrell M. West, the vice president and director of governance studies at the Brookings Institute.

Mohamed Basiouny, an owner of a cyber cafe confirms what West says, adding that the shutdown did trickle down to impact everyone: “Cyber cafes [were] playing a central role at the time so, it was not just kids fooling around on the internet. ” Like many others, Basiouny’s business relied on internet communications. “No internet, no money – it’s as simple as that,” he adds.

Ethiopia’s blackout history

In the same vein, the Ethiopian government cut off internet across most of the country after the fatal shooting of musician and activist Hachalu Hundessa.

The singer is affiliated with the Oromo movement that took down the previous prime minister.

The blackout took place on 30 June 2020 and went on for 23 straight days, interfering with Ethiopians’ rights to access information and muzzling any vestige of freedom of expression.

As for the country’s economy, NetBlocks estimated the losses to surpass Br3bn ($102m). Later in the year, the northern region of Tigray witnessed another blackout as Ethiopia’s prime minister and Nobel peace prize laureate Abiy Ahmed announced a “red line” had been crossed by the TPLF leadership.

The ensuing internet blockage curtailed media coverage of the Tigray region that saw thousands killed or displaced. Businesses largely reliant on internet connections and communication also suffered the financial consequences of being shutdown during the conflict.

“These shutdowns are not, and will never be, haphazard. They are well planned and specifically targeting the people in question. In this instance, it is the people of Tigray and their businesses,” says IT consultant and former employee at the Ethiopian Chamber of Commerce and Sectorial Associations (ECCSA), Samuel Maasho*.

According to Maasho, Abiy was intentionally targeting the region’s gold producer and a huge textile factory, both of which funnel funds to the Tigray People’s Liberation Front. “This alone can paralyse a whole country, let alone a region like Tigray,” he says.

New tactical response

The scale of such practices is a much bigger problem today than it was a few years ago says West. According to his research in 2016: “Many of the shutdowns are occurring on a nationwide level as opposed to what used to be in local communities. Shutdowns are being put in place to quell political protests, stop coverage of human rights abuses, and to limit some economic activities.”

Similarly, Ramy Raoof, a privacy and digital security researcher and tactical technologist at Amnesty International, sees internet shutdowns more as a tactical response, than a tool itself, to have instant control-impact.

“Internet shutdowns are by design unsustainable, technically speaking, and it’s meant as a temporary response with either gradual shutdown or gradual restoration. And even during blackouts the states sometimes only apply 80-90 % of shutdowns because they might want to keep national institutions online to avoid financial disasters,” he tells The Africa Report.

Alternatives for businesses?

Beyond building a reliable system based on offline practices or returning to old habits from phone calls to fax machines, one has to wonder, is there a more sustainable alternative?

“All the tips and approaches the activists would engage with, such as international sim cards, satellite phones and connections, are highly dependent on the context,” says Raoof. “The telecommunication infrastructure works differently [de]pending on the ownership. So infrastructure ownership determines how surveillance and controls take place. In many scenarios these tips are valid momentarily for a limited amount of time until those frequencies are also targeted/shutdown.” He points to the example of Egypt in 2011 when the internet crackdown targeted different parts of the communications infrastructure at different times.

“The whole point of internet shutdowns by governments is to keep individuals and organisations from communicating,” says West. He echos Raoof’s concerns, adding such alternative tools would need to be available to all, otherwise they would be futile.

One example to spark answers are how bigger companies can manage to avoid the worst of the crackdowns.

“We were never impacted,” says *Ahmed Bayoumi, operations manager at one of Egypt’s towering outsourcing call centres, in reference to the internet blackout in 2011. “The government cut off the internet for networks and domestic internet providers. But big corporations like ours that are based on leased lines or direct cables were not impacted,” recalls Byoumi.

Following from that experience, one of the projects he set up in 2015 involves using a microwave tower that is fed directly from the mother source. “This tower is linked to a Synchronous Transport Module 1 (STM1),” he explains. It allows companies to remain connected despite any government-imposed blockage, but it comes with a price tag. STM1 is a network transmission of around 155.5Mbit/s and costs about LE12m ($768,296).

For those companies that cannot afford such access, it’s a lose-lose situation: “It’s very costly for small enterprises. Imagine paying for a marketing campaign via Facebook. And suddenly the internet stops. You can’t possibly retrieve that money,” he adds.

World Bank questions Ethiopia’s stance in telecoms competition

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Capacity | The World Bank has warned the government of Ethiopia not to take measures that hinder the development of telecoms in the country.

It is criticising the restriction of digital financial services to Ethiopian firms and nationals and a ruling limiting investment by independent cell tower companies, obliging the new entrants to use the infrastructure provided by Ethio Telecom.

This “may slow down network roll out, particularly in rural areas”, warns Ousmane Dione (pictured), the World Bank’s country director for Eritrea, Ethiopia, South Sudan and Sudan in a hard-hitting blog published by the bank.

Dione, who has been with the bank for more than 16 years, took on his present role in August 2020, just as the present government of Ethiopia was advancing its plans to licence new operators in the country and to sell a stake in Ethio Telecom.

The World Bank has a key role in this process, points out Dione. The International Finance Corporation (IFC), the private sector arm of the bank, is assisting the Ethiopian Communications Authority (ECA) with the licence awards. “The World Bank itself is supporting the partial privatisation of Ethio Telecom and the strengthening of ECA as an independent sector regulator.”

The ECA has set 5 April as its deadline for bids for the two new licences. A number of companies have said they are interested in either new licences or in stakes in Ethio Telecom. Airtel has said it will not bid.

“The two new operators would compete with Ethio Telecom in mobile communications, internet and other telecom services,” says Dione in his blog.

“Ethiopia is one of the last countries in the world to have retained a state-owned monopoly provider of telecom network and services, a market which is dominated by the private sector in most countries.”

He says: “Opening the market to private sector competition, and foreign investment, is expected to bring lower prices, higher quality of service and more choice for consumers. It will also lay the foundations for Ethiopia’s future digital transformation.”

But while Ethio Telecom has the most to gain from the expansion of the digital economy, “it is also at risk from losing market share if it fails to compete effectively”, he says. The government of Ethiopia appears to be trying to shelter Ethio Telecom from competition, he notes. “This seems to be the motivation behind policy announcements that seek to restrict the operation of digital financial services to Ethiopian firms and nationals. But this may slow down innovation and investment in the market and may actually hinder Ethio Telecom’s own ambitions to attract a strategic investment partner from abroad.”

He suggests that “a better strategy would be to encourage Ethio Telecom to compete on equal terms with the new market entrants in providing mobile money services, without ownership restrictions”.

In the cell tower market, he advises that “Ethio Telecom will need to collaborate as well as compete with the new entrants. But this is best done by allowing for open commercial negotiations in which the new entrants can make rational decisions whether to build their own infrastructure or buy capacity from Ethio Telecom.”

The government’s policies will allow the state company to charge high prices, and that “will end up harming the company”, he says.

“The new operators will be Ethio Telecom’s biggest customers if prices are set fairly, through market competition,” says Dione. “Ethio Telecom has the potential to become a regional powerhouse, but only if it is well-prepared for the competitive environment.

S&P joins Fitch in downgrade of Ethiopia on potential debt restructuring

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(Reuters) – S&P Global Ratings on Friday downgraded Ethiopia’s long-term foreign and local currency sovereign credit ratings to ‘B-’ from ‘B’ on potential debt restructuring, announcing the move days after Fitch Ratings downgraded the country.

“Exacerbated by the effects of the COVID-19 pandemic, Ethiopia’s structurally weak external balance sheet has deteriorated further, in our view”, S&P Global Ratings said.

On Tuesday, Ethiopia’s sovereign dollar bonds dropped nearly 2 cents as Fitch chopped Ethiopia’s credit score by two notches after Addis Ababa signaled it could be the first with an international government bond to use a new G20 ‘Common Framework’ plan.

The scheme, which is open to over 70 of the world’s poorest countries, encourages their governments to defer or negotiate down their external debt as part of a wider debt relief program.

S&P said it estimated Ethiopia’s public debt repayment needs at about $5.5 billion over 2021-2024, including a $1 billion Eurobond due in 2024.

The ratings agency added that the economic effects of the COVID-19 pandemic have slowed Ethiopia’s economic activity in the services and industry sectors, including retail trade, hospitality, transportation, and construction.

S&P described the Tigray conflict in November 2020 that followed increased tensions between the federal and local authorities as “the most significant (conflict) since Prime Minister Abby Ahmed took office in 2018.”

“Another outbreak of armed conflict could spur wider ethnic tensions, weakening Ethiopia’s political and institutional framework and threatening the government’s transformative reform agenda”, it added.

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Fitch Downgrades Ethiopia To ‘CCC’ – Rating Action Commentary

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.

Ethiopia In Debt Restructuring, Downgrade After Printing Money, Despite Low Deficit

Ethiopia had been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings after it applied for ‘Paris Club’ debt relief having printing money through central bank advances, despite relatively low government debt and a budget deficit of only 2.8 percent of gross domestic product.

Ethiopia Dollar Bonds Drop After Fitch Downgrade

Ethiopia’s sovereign dollar bonds dropped nearly 2 cents after Fitch downgraded the country to CCC, citing the government’s plan to make use of the new G20 common framework to overhaul its debt burden.

Exclusive: Ethiopia To Seek Debt Relief Under G20 Debt Framework – Ministry

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.

Ethiopia Debt Restructuring Plan Faces Hurdles Of Transparency

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.

All about debt (restructuring)

Ethiopia in debt restructuring, downgrade after printing money, despite low deficit

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ECONOMYNEXT – Ethiopia had been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings after it applied for ‘Paris Club’ debt relief having printing money through central bank advances, despite relatively low government debt and a budget deficit of only 2.8 percent of gross domestic product.

The “Common Framework for Debt Treatments (G20 CF) goes beyond a May 2020 announced Debt Service Suspension Initiative for sovereign debt and “explicitly raises the risk’ of extending capital payments or interest for private debt under its conditions, Fitch said.

Ethiopia’s government has maintained “considerable budgetary discipline” with what Fitch said was a “moderate” increase in the budget deficit to 2.8 percent of GDP.

Government debt to GDP was 31.5 percent while total state enterprise debt to GDP was 25.6 percent. There could be pressure on state finances due to Coronavirus, Fitch said.

Central Bank Credit

An International Monetary Fund program has been attempting to wean Ethiopia’s central bank away from money printing, and starting Treasury bill auctions, after the currency fell and inflation rose.

“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),” Fitch said.

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 percent.”

In Sri Lanka despite having a well-functioning Treasury bill market, bids are now rejected and large volumes of cash are injected to trigger forex losses amid high deficit.

In 2015 and 2018 the central bank triggered currency crises, mostly with aggressive open market operations and ‘operations twist’ style activity, critics have said.

Despite low debt and low deficits, money printing has pushed the Ethiopian Birr from 29.11 to the US dollar in November 2019 to 39.3 to the US dollar by February 2021.

Analysts have also warned that IMF programs usually encourage a ‘flexible exchange rate’, a highly inconsistent money regime with money exchange rate and money policy which are at loggerheads with each other.

It involves neither a fully floating rate (no interventions, no sterilization) nor a consistent peg (unsterilized interventions), leading to rapid depreciation as the monetary authority switches rapidly back and forth rapidly from a peg to a float and back within the same trading session.

The extent of how debt will be affected will be decided by an IMF debt sustainability analysis of Ethiopia which is currently being done, Fitch said.

Ethiopia Debt

The bulk of Ethiopia’s public external debt is official multilateral and bilateral debt.

Government and government-guaranteed external debt was 25 billion US dollars in fiscal year to June 2020.

Of this, 3.3 billion dollar was owed to private creditors. There was a billion dollar Eurobond (1 percent of GDP) due in December 2024, with minimal annual debt service of 66 million dollar until the maturity.

There were 2.3 billion dollars of government-guaranteed debt owed to foreign commercial banks and suppliers.

State enterprise debt owed to private creditors came from Ethio Telecom and Ethiopian Airlines was 3.3 billion dollars.

“While this is not guaranteed by the government, it represents a potential contingent liability,” Fitch said.

Ethiopian Airlines is one of the most profitable airlines in the world.

Ethiopia’s external financing requirements were more than 5 billion on average from financial years to 2021 to 2022 including federal government and state enterprise amortization.

Foreign reserves are expected to remain around 3.0 billion dollars or two months of current external payments.

Debt Re-profiling

The extent of debt treatment required will be based upon the outcome of an International Monetary Fund Debt Sustainability Analysis for Ethiopia, which is currently being updated, Fitch said.

“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,” the rating agency said.

“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 will instead be on some combination of lowering coupons and lengthening grace periods and maturities.

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.

There was also a conflict in Tigray region.

Conflict in Tigray: Implications for Ethiopia’s International Standing

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Charged Affairs | Since Ethiopian Prime Minister Abiy Ahmed assumed office in April 2018, experts have optimistically predicted the country’s emergence as a regional power. Factors such as a large population, rapid economic growth, and a reform-minded head of government seemed to support this proposition, until recent instability in federal relations threatened an upset to Ethiopia’s position as an emerging power.

After the federal government’s recent incursion into the Tigray region of Ethiopia and subsequent fighting, reports suggest that several thousand citizens are dead and upwards of 40,000 are displaced. The conflict has drawn attention from the African Union and various other international actors. The crisis in Tigray is not an isolated event, but a manifestation of the security threats and political instability plaguing Prime Minister Ahmed Abiy in his campaign for national unity. Should Addis Ababa fail to resolve Ethiopia’s underlying grievances, Ethiopia risks losing both its position as a regional power and its cache as an international partner.

Violence in Tigray commenced in early November 2020 when Abiy ordered federal troops into the region. While the invasion was ostensibly a reaction to looting by the Tigray People’s Liberation Front (TPLF), most observers agree that the military action was intended as punishment after regional leaders held elections last September in defiance of a federal ban. Abiy declared victory on November 28th after federal troops took control of Tigray’s capital, Mekelle. However, fighting in the region remains heavy. International observers have also raised concerns of war crimes after Ethiopian armed forces threatened to target civilians.

At the heart of this contest between Abiy and the TPLF is a debate around Ethiopian governance and the extent to which Addis Ababa should exercise centralized control. The Tigray conflict has highlighted Ethiopia’s unique system of ethnic federalism, which gives semi-autonomous power to the country’s states, each of which was created along ethnic lines. Since this system was first implemented in 1995, certain ethnic groups – notably the Tigray – have enjoyed a degree of political control disproportionate to their demographic representation.

Abiy’s 2018 election marked a challenge to Ethiopia’s status quo. As the country’s first Oromo prime minister, an ethnic group which is demographically dominant but historically marginalized, Abiy has prioritized the blurring of ethnic lines. His program of “Ethiopianization” envisions a unified national identity that would take precedence over ethnic divisions. But after enjoying 15 years of special advantages achieved through their political clout, powerful ethnic groups fear losing their superior position to homogeneity. The resulting discontent has destabilized Ethiopian governance, as regional leaders fight to maintain their power and autonomy while Abiy tries to solidify central control.

The degree of violence seen in Tigray and the seeming intransigence on both sides of the federalism debate has led some analysts to warn of a broader civil war in Ethiopia. These fears are likely overblown. Two months of intense conflict in Tigray have strained TPLF resistance, and no other state in Ethiopia has the economic or military assets to successfully launch a revolt at this scale. However, it is clear that tensions between Addis Ababa and powerful regional contingents are not going away.

Although it received the most press coverage, what happened in Tigray is not an isolated event. Amhara’s attempted regional coup and the Sidama region’s vote for autonomy from the Southern Nationalities, Nations, and People’s Region, both in 2019, represented earlier challenges to Abiy’s anti-federalist agenda. Nationwide, escalating violence from ethnic paramilitary groups has also threatened Ethiopianization. In the face of continuing resistance, Abiy must be prepared to use force to retain control over the country. Tigray demonstrated his military willingness towards this end, and recent purges of opponents from top positions have shorn up his political might. Abiy should also realize that ruling under martial law may seriously jeopardize Ethiopia’s position as a regional leader and international power.

Ethiopia has some natural advantages that set it up as a regional power, including its size and resource wealth. But the country’s leadership has also sought out an expanded role in recent years: Addis Ababa hosts the African Union headquarters; the country’s National Defense Force coordinates and oversees multilateral peace and security operations in the region; and Ethiopian heads of government have mediated conflicts among neighboring states. Today, as Kenyan-Somali ties disintegrate and the U.S. withdrawal from Somalia generates ill-will in the region, strong leadership over the Horn of Africa is more important than ever.

The Tigray situation is already having harmful effects on regional relations. Federal troops came into direct conflict with Ethiopia’s western neighbor after patrol operations “ambushed” Sudanese forces. The burdens that come with mass refugee flows also threaten regional ties, as Tigrayan civilians surge over the border into Sudan and Eritrea. Perhaps the most serious consequence for Ethiopia’s position in East Africa, however, are the indirect effects of Abiy’s battle for centralized control. The guarded militarism inherent in this fight against state autonomy does not lend itself to legitimate leadership, raising the potential for increased distance from neighbors and regional institutions.

Of even greater concern to world leaders is the risk that an Ethiopian implosion could disrupt international security operations in the Horn of Africa. Prime Minister Abiy and his predecessors have operated in close partnership to American and European powers in counterterrorism and anti-piracy initiatives. With terrorist capabilities surging in the region and piracy ramping up off the coast of Somalia, international actors depend on capable, stable partners like Ethiopia. Unless Abiy finds a peaceful and sustainable solution to conflict over federalist governance, Ethiopia will lose its position as that go-to ally

Ethiopia dollar bonds drop after Fitch downgrade

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NASDAQ | Ethiopia’s sovereign dollar bonds dropped nearly 2 cents after Fitch downgraded the country to CCC, citing the government’s plan to make use of the new G20 common framework to overhaul its debt burden.

The country’s outstanding 2024 bond XS1151974877=TE dropped to as low as 92.06 cents in the dollar, according to Tradeweb data, trading close to record lows hit in late January when Ethiopia surprised markets with its announcement to seek debt relief.

“(This is) the first negative spillover from last week’s decision to go for the G20 Common Framework, a process that no eurobond issuer has been though yet, and one that could take some time, especially as private sector creditors have to be included,” said Simon Quijano-Evans, chief economist at Gemcorp Capital.

Fitch said earlier that the downgrade reflects the government’s announcement that it is looking to make use of the G20 framework, “which although still an untested mechanism, explicitly raises the risk of a default event.”

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

DISCLAIMER

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SOLICITATION STATUS

The ratings above were solicited and assigned or maintained at the request of the rated entity/issuer or a related third party. Any exceptions follow below.

ENDORSEMENT POLICY

Fitch’s international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch’s approach to endorsement in the EU and the UK can be found on Fitch’s Regulatory Affairs page on Fitch’s website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured finance transactions on the Fitch website. These disclosures are updated on a daily basis

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.