17 May 2014

Ethiopia: Is "B" Satisfactory?

Ethiopia received its first sovereign credit rating from the top global agencies.

Credit ratings agency Fitch last week gave Ethiopia a long-term foreign and local currency Issuer Default Debt Rating (IDR) of 'B' with a stable outlook, putting the country on par with Kenyan and Ugandan ratings. Standard & Poor's (S&P) assigned Ethiopia 'B/B' foreign and local currency ratings. Mood's joined its rivals S&P and Fitch in rating the country as a highly speculative destination by putting the foreign currency sovereign credit rating as "B1", one notch above the "B" given by its rivals. On the aftermath, Sufian Ahmed, Minister of Finance and Economic Development, met with local journalists and foreign correspondents based in Addis Ababa for a press conference to discuss the findings of the rating companies. Yohannes Anberbir of The Reporter attended the press conference. Excerpts:

Question: Can you briefly tell us the process that led to Ethiopia securing a sovereign credit rating for the first time?

Sufian Ahmed: This is the first time that Ethiopia solicited a sovereign credit rating form internationally accepted rating agencies. The three rating companies were furnished with all the necessary data from the Ethiopian government's side and they visited the country a month or so ago. During their visit, they met with several local organizations, embassies and members of the private sector. After looking into the data and the information given to them, they came up with this rating for Ethiopia.

First of all, this is the first time that Ethiopia has been rated by these three major credit rating agencies. So by itself this indicates that we are committed and ready to provide all the necessary information regarding our economy and social sectors and clearly communicate our policies. The reason why the government has decided to undertake this exercise is mainly to help investors, mostly foreign direct investors, to have an objective assessment of the level of risk they would face coming to Ethiopia. Be it in the area of the economy, politics, peace or stability, the rating exercise will give the investors the true reality on the ground. Of course this is the first time, and it will be an annual exercise. Depending on our performance, we would like and expect to maintain our current rating if not show an improvement.

This result offers the government with the opportunity to tap into the international capital market. Of course, that is, if we decide to enter the capital market. As far as the capital market is concerned, the door is more or less open now and if the government decides, it can issue a sovereign bond to diversify our source of finances in our effort to undertake the major projects that we have planned. As to issuing sovereign bond, we have not yet decided because it depends on two things. First, entering into the capital market usually depends on the global financial situations, we don't know what will happen in the future; some of the major economies seems to be recovering from the crisis while some are still in trouble. So in the future, we have the opportunity to issue a bond, but we are exploring our options now.

Finally, the agencies also assessed our fiscal situations and concluded that it is very strong and prudent. Budget deficit is less than two percent persistently over the past decade. They also noted the quality of the budget that it is mainly allocated to poverty reduction, infrastructure development and on provision of basic services.

We are satisfied, and we expect this rating would offer rich insight as to the level of the risk, the perceived risk, that over the years have been associated with Africa; it would and should show that risk has been significantly reduced.

The rating is calculated based on the information obtained from government sources, and when we talk of external debt, there are companies like Ethiopian Airlines that the government does not provide guarantee for when they borrow, so were data for these companies included in the rating? And how long will this rating be valid for? Also why is the government not accessing the international bond market if you say that it can?

Don't get me wrong, I did not say the government is unwilling to access the capital market. It's just that the decision has not been made and it is difficult to speculate now. The government can issue if it wanted to, the door is open and it is up to the government. This will continue every year just like a student examination. Annually, the country will be examined by these agencies. This will help to identify on which rating criteria we are improving and on which we are lagging behind.

As you have said earlier, one of the determining factors would be the timing and the situations of the international financial market to issue sovereign bonds. But domestically, what would drive that decision? Would it be the pressing need for finances?

Not really. If the government decides it will mainly be influenced by external situations. As you know, for most of the major projects that are under implementation we have more or less secured enough financing. Therefore, the government is not in need of raising additional financing. So I think it really depends on the international factors.

Putting the recent international assessment of Ethiopia's economy and the highlighted positive note aside, I just wanted to dwell on a negative assessment and negative aspect. Regarding the issue of growth, for example, we have the International Monetary Fund (IMF) which consistently estimates Ethiopia's growth to be lower than the government's estimates. These institutions would mainly contradict Ethiopia's state-led economic model saying that it is hindering the growth of the private sector. Hence, they conclude that the growth will slow in the years to come. What is your response to this?

Well, overall I don't think the rating has a negative sentiment, if you look at the report of some of the weaknesses that they identify we also share them. One of the major weaknesses at the present is per capita income. Had our per capita income at this stage been more than what it is right now the findings would have been completely different. As I said before, we have our reservations particularly over few issues, but overall we are very much satisfied.

Coming to the economic growth estimates of the IMF, what we are now dealing with is just a matter of forecast. If you look at the historical data, we have the same figure for the past years when it comes to actual growth estimates. Even the IMF, however, forecast the Ethiopian economy to grow by more than seven percent; it is unusual for them to forecast. This rating agencies use most of the World Bank's and IMF's data. As a result, particularly, when it comes to economic growth, poverty reduction and other official statistical data, I think forecast is something else. Still from the historical data, we can see that Ethiopia has one of most credible official data, whether it is economic statistics, fiscal or monetary policy and agricultural production. In forecast, there are always differences. These days, we don't even have major differences when it comes to the forecasting. On the Ethiopia model, if you look into the report of these rating agencies, particularly the one by Fitch and Moody's, they said the Ethiopia model has shown good results. I take that as recognition. If someone is really concerned about the results, putting aside ideology, the model is working fine.

On the role of public investment at this stage of development, generally in Africa and in Ethiopia, infrastructural investments and poverty reduction cannot be sustained without government investment. From experience, and from the result on the ground, we think the role of the government, particularly in certain areas such as in infrastructure, energy, road, transport and investment in manpower development, is very critical. If you look at what the government is doing, here in Ethiopia, it is investing heavily in such very critical sectors. So, we think this is very important and we should continue, we hope public investment in such a critical sector will be crowed in the private sector in the long term, if not in the middle term.

In relation to the status of a capital markets in other African countries, as we know, more than 34 countries have already introduced capital market and it is said to be the beneficiary for the economy. But what about Ethiopia? You think it's time now for Ethiopia to introduce such a market? Do we have some sort of timetable it?

Yes we think it is good to introduce, but the question is really about the timing. The capacity of the government is also limited to regulate such a complex market. Policy implementation has priorities. The stock market is good, is beneficial, we should introduced it. But we should make good preparations before doing that. It requires a strong legal base, we need to discuss with all stakeholders, and we need to draw lessons from others, including our neighboring countries. We are aware that there are only few stock markets in Africa; the National Bank of Ethiopia is doing all the study and the assessment. So, I hope yes one day we will introduce it, but I don't know the details and the timetable. If you are asking me from the perspective priority, there are other things that we should do first.

Could one of these priorities be opening up the banking sector for the international investors?

There are a number of things that the government has to do. So, we will phase it. However, opening banking sector and capital market are not really related to each other. I think having a stock market is already on the table, it is already part of the government's plan. This and opening up the financial sector for foreign investors are not related; they are totally different matters.

What is the government's latest GDP growth forecast for this fiscal year and next? And also with regard to the opening up the retail trade sectors, what concrete conditions are there before opening the market?

Regarding the growth forecast, we expect this year the growth will be around 11 percent. Still I am waiting for what they call the post-harvest data, but we do have the pre-harvest estimates from the Central Statistical agency and it indicates that agricultural production, mainly cereal, is very good this year. So, it is the agricultural sector's growth that determines the overall outcome. Of course, the service sector is also becoming determinant now. Banks' loan disbursement is healthy, and trade, whether it is retail trade or import-export, both are again very strong. So, I hope the growth will be 11 percent this year. The opening of the trade sector is one of the major weaknesses that we have in the system. Our trade and distribution systems are not very competitive; our system is archaic. So, we are doing a number of reforms, probably as you might know, lately, we are in the process of introducing one retail outlet. The study has been conducted by one of these international firms. These are some of the things we are following closely. As we go along, probably for the next GTP, it will be one of the areas that we will focus on and that will be a top priority, which is modernizing and improving our trade sector.

How favorable is the international market at the moment?

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