30 December 2017

Ethiopia: Fitch - Devaluation Pushes Govt Debt

The recent devaluation will push the share of the government debt in the gross domestic product (GDP) of the nation by two percentage points to 31pc in the coming year, signalling that the country is not producing adequately to pay off its debt, according to the latest projection made by Fitch.

This was announced two weeks ago and almost three months after the government devalued the currency in the hope of solving the forex crisis in the country by encouraging export and reducing imports.

The forecast surfaces when the government has abstained from taking any commercial loans with high-interest rates and short maturity period.

In the beginning of the year, Abraham Tekeste (PhD) minister of Finance & Economic Cooperation (MoFEC), while disclosing last fiscal year's report to the parliament, promised its government would not look for such loans due to the soar in external debt distress.

The United States (US)-based rating agency, Fitch, puts the country's Long-term Foreign Currency Issuer Default Rating (IDR) at 'B', one of the lowest amongst countries rated by Fitch.

It shows that there is a noteworthy risk that intermittent outlay, in repaying debts, could occur in the future, but a reasonable margin of safety remains.

"A bulge in government debt is expected whenever there is devaluation," said Tassew Woldehanna (Prof), an economist with three decades of experience.

But, for the economist, the increase in debt to GDP ratio has a positive implication as well.

"As it shows the devaluation has met its goals by making foreign currency expensive, it shows that the foreign exchange crunch will be solved soon," said Tassew, who is also a lecturer and vice president of the country's oldest university, Addis Abeba University (AAU).

His argument is analogous to Christine Lagarde, IMF's director- who had an exclusive interview with Fortune two weeks ago.

"In the short term, we expect the devaluation to help with foreign exchange shortages," she said. "The price effect of devaluation should help increase the supply of foreign currency."

Yet, Fitch analysts projected that the ratio of aggregate debt of the public sector, including state-owned enterprises such as Ethiopian Railway Corporation (ERC), to the GDP will remain constant around 57pc.

The analysts, in their report, attributed the steadiness of the ratio with the attempt of the government to mobilise non-debt financing methods such as privatisation. In the past fiscal year, the government sold Bahir Dar and Kombolcha textile factories to Tiret Corporation for 765 million Br.

Just two weeks ago, the government inked a deal to sell its entire shares to the Japan Tobacco International for 434 million dollars, after the Japanese firm acquired 40pc of the company with half a billion dollars over a year ago.

These actions will help the government, which has planned to privatise 20 state-owned companies, stabilise the public sector aggregate debt, according to Fitch, whose managing director is Tony Stringer.

Furthermore, Fitch forecasted that the domestic financing to cover two-thirds of the budget would be less than 50pc.

Such bulge in predicted despite the failure of the Ethiopian Revenues & Customs Authority to achieve its target in tax collection over the past five quarters. In the first four months this budget year, tax revenues stood at 63 billion Br, nine billion Birr lower than the target.

This, however, seems contradictory for the experienced macroeconomist and policy analyst.

"Fiscal deficit would certainly widen if the government debt rise,s" he said. "Thus, the projection- where domestic financing will rise- does not give any sense from the macroeconomic point of view."

As of March 2017, the national debt, the aggregate debt that the country owes, amounted to 23 billion dollars, showing a 2.5 billion dollar increase from December 2016.

Founded a century ago, Fitch is amongst three international rating companies to rate the sovereign default risk of the country on a yearly basis, besides Moody and S&P.

Moreover, the analysts of the financial firm forecast the headline inflation to reach 15pc in the coming month, up from 13.6pc in the past month- the highest in five years.

They also projected the GDP of the country to grow by 9.5pc in the next two years.

"Growth has proved to be robust in Ethiopia despite drought and political unrest," Fitch's report reads.

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