Ethiopia’s Ratings Boost to Economy

Sufian Ahmed, the long serving Minister of Finance amp Economic Development (MoFED), looked happy and vindicated by the sovereign credit default rating that Ethiopia was assigned by three international ratings agencies, during the press conference he gave at his office on King George VI Street, on the morning of May 14.

“The results have confirmed the convictions and beliefs the government had all along,” he told the local and international press present at the event, called to express the Government’s stance on the results that Moody’s, Standard amp Poor (SampP) and Fitch rating agencies released a few days earlier on the country’s sovereign credit default risk.

“This shows the reality on the ground,” Sufian said, lauding the analysis of the rating companies. Better economic performance with declining poverty and improving access to infrastructure, which the credit rating reports attribute the nation’s status, are in sync with what the government believes to have achieved, according to the Minister.

“This proves the country’s suitability for investment and tourism,” Sufian mentioned in the press briefing.

Sovereign credit ratings give investors an insight into the level of risk associated with investing in a particular country. At the request of the country, a credit rating agency will evaluate the country’s economic and political environment to determine a representative credit rating. Obtaining a good sovereign credit rating is usually essential for developing countries in order to access funding in international bonds markets.

Another common reason for obtaining sovereign credit ratings, other than issuing bonds in external debt markets, is to attract Foreign Direct Investment (FDI). To give investors confidence in investing in their country, many countries seek ratings from credit rating agencies like SampP, Moody’s and Fitch to provide financial transparency and demonstrate their credit standing.

Over the years, credit ratings have achieved wide investor acceptance as convenient tools for differentiating credit quality. But in recent years, the reputation of the rating companies and their ratings have hit a slump following the financial crisis, which they were not able to predict and in fact they helped to create by providing good ratings for institutions that were on the verge of collapse, like the Lehman Brothers bank in 2008, prompting the US Congress to launch an official inquiry to check if there was a breach of code of ethics and conduct from the side of the agencies.

The ratings by these main agencies range from ‘Prime’ with a triple-A rating to ‘In-default’ with a D rating. Besides Ethiopia, 28 African countries are already rated by one or more rating agencies, the results of most of which are on par with what Ethiopia has received.

According to SampP, Ethiopia was rated B, while the politically unstable Egypt was rated ‘B-‘. Ghana, a country that will start drilling for oil in the near future, is rated ‘B+’, whereas other African countries, like Nigeria and Kenya, are rated ‘BB-‘. China, the second largest economy in the world, is rated ‘A-‘, while the economically and politically troubled Ukraine is rated ‘CCC’.

Besides SampP, Moody’s corporation, which gives credit ratings and consultancy services, and reported a revenue of three billion dollars in 2013, is another influential ratings company that analyses the credit standings of 115 countries. Fitch Rating, the other New York-based company hired by the Ethiopian government to analyse the country’s default risk, is famous for introducing the now familiar ‘AAA to D’ rating scales in 1924. The ratings agency is one of the first recognised by the Securities amp Exchange Commission (SEC) of the US government as a nationally recognised rating organisation.

The Government of Ethiopia (GoE) hired the three international ratings companies to analyse and rate the sovereign default risk of the country, paying 40,000 dollars for each. These ratings are normally done on a yearly basis. After a process of research, which took around six months, Moody’s gave the country’s credit worthiness a ‘B+’, while SampP and Fitch gave it a ‘B’.

The government has accepted the results with no reservations, even though it may not agree on all results of the reports, according to the minister, who cannot help but state the governments hopes and expectation of achieving an even better standing.

The Ethiopian government, which believes that the country can be a workshop for light industries, if energy and logistical services are sufficiently available, hopes these ratings will attract more FDI.

“We are in it mainly to attract investors,” Sufian said, stating the intentions of the government.

For the government, the reports of these ratings companies have confirmed the success of the ‘Ethiopian economic model’ – a huge public infrastructural investment driving growth and development. But not everyone is impressed with the results.

This is not that big an accomplishment in light of the standings of other countries in the region. The results state that the country is somewhat a frontier market that is highly speculative for investors, according to a macroeconomist who used to be among the economic policymakers of the country, but who requested anonymity.

The companies used the World Bank (WB) and the IMF, as well as government data while analysing the country. The rating assignments of Moody’s are based on a relatively small economy of 43 billion dollars in nominal GDP, balanced by g economic growth, weak institutional strength and moderate fiscal strength. The high level of donor funds, the biggest in the continent, stable at around 900 million dollars a year for the last 10 years, was noted by the agencies.

The ratings carry a stable outlook and reflect Ethiopia’s prospects for continuing economic growth in the medium term, supported by investments in the country’s infrastructure and power generating sectors, which are likely to be supported by improving trade conditions.

The reports stated the peace and stability in the country as the main positive indicator for the country. Fitch expected Ethiopia to achieve a GDP expansion of nine percent in 2014 and eight percent in 2015 – significantly above the average of the region. But, it warned that the private sector remains weak, “reflecting the country’s fairly recent transition to a market economy and its inadequate access to domestic credit.”

Better standings could develop for the country as a result of improving business conditions that would attract more FDI. Whereas the standing of the country will be deteriorated with an acceleration of external debt that does not support growth or a significant escalation of political and social tensions, according to the report by Moody’s.

Fitch has stated that weak structural features indicate vulnerability to shocks. The country ranked among the weakest Fitch-rated sovereigns on UN human development indicators. The rating agency estimated that the total debt of state-owned enterprises amounted to at least 25pc of the GDP at the end of June 2013. Rising external vulnerability related to declining international reserves are Ethiopia’s challenges, and a positive future depends on the continuity in the development model of the country and no major change in the political regime in the coming years.

Net external debt of the country as a percentage of the GDP is forecasted to reach 21.2pc in 2015 – up from the 13.9 pc that it was in 2011.

Sufian, who has been at the helm of the Finance Ministry for around fourteen years, was extra sensitive when talking about whether the government plans to issue international bonds following these results.

Even though the Minister said the government has not decided and says it is not in a hurry to issue international bonds and utilise global capital markets, he has given hints that the government may join the market soon.

“The government has financial problems and it is trying to send a signal to the international market and see if they are interested in buying the bonds that the government will issue,” according to the readings of the macroeconomist.

Prime Minister Hailemariam Desalegn, in his visit to the US, said last year that the country was planning a Eurobond once it had secured a credit rating. Bilateral finances, like the easy flow of cash from developing countries such as China, is no more, as well as multilateral funds, and this has prompted the government to look for sources from the private market, experts argue. This is aisable from some economists.

The country should start to appeal to the economic brain of actors in the global economy, rather than always sticking to political comradeship or selling its poverty to the western world, according to Seid Nuru (PhD), head of the macroeconomics division of the Ethiopian Economists Association (EEA).

“There will be a conflict of interest in the region, as the country aspires to go along the path of development, so the country should diversify its sources of finance to maintain its growth,” Seid argues. “Aid and development can only go a certain distance together.”

Normally, the cost of finance in this market is also expected to be higher than other sources of funds, like concessional loans, which are cheaper but sometimes unreliable, according to experts that Fortune spoken to.

But the technical expertise and capacity of the National Bank of Ethiopia (NBE) to issue and manage internationally floated bonds and the worrying foreign currency position of the country are the concerns raised as a challenge to access the needed finance from the global capital market.

This is, of course, in addition to the need to liberalise the capital account of the country and reform foreign currency markets.

“Buyers of the bonds will require the free flow of capital in and out of the economy and this requires a g Central Bank,” the macroeconomist said, anticipating the risks.

The government also expects the results of the rating to trigger a decrease in the cost of finance for investors and, in return, make them globally competitive with lower insurance premiums.

International bankers expected Ethiopia to use the rating more as a marketing tool to attract FDI into the economy, benchmarking the country against neighbouring Kenya and Uganda, rather than to issue a bond immediately, according to Capital Market – an online publication based in London that follows the international financial market.

But Ethiopia’s first sovereign rating comes amid a bond spree in Africa, states the publication. Last year, issues from countries, including Gabon and Rwanda, helped the region to issue a record 11 billion dollars in sovereign bonds – up from six billion dollars in 2012. A decade ago, Africa was issuing bonds worth about one billion dollars a year.

When Ethiopia will join this trend of its African counterparts in issuing sovereign bonds, Sufian left the market guessing.

Source : Addis Fortune

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