Date: Wednesday, 22 November 2023
Ethiopia’s civil war in Tigray lasted two years before a formal truce, and official-private debt restructuring under the G20’s comprehensive framework has now marked the same duration without a decisive outcome. A 10–15-year maturity extension seems a shared objective, after China cut an undisclosed deal with state enterprise borrowers delaying 2023-24 payments.
The sole $1bn sovereign bond has a $35mn coupon due in December and matures at the end of 2024. It is thinly traded with pricing stuck in the mid-60s, and the index spread at the 4,000-basis point blaring default risk range. Fitch in November slashed the long-term foreign currency rating to CC from CCC, without an outlook for such a near-bust category.
The math is scary with international reserves at $1bn, less than one-month import cover, and the same amount in government debt service owed through the July 2024 fiscal year, leaving aside another $1bn in public sector quasi-sovereign lines. In FY 25 the load rises to $2 bn with the Eurobond, and the country must also finance a 3% current account deficit and absorb 15% average annual birr depreciation against the dollar in recent years.
Overall public debt is only 40% of gross domestic product, around half the level of the distressed C-rated tier. External creditors hold half the total and are 90% bilateral and multilateral offering concessional terms but were out of the picture over the war period when Western aid and lending was halted. Interest service is now one-tenth of government revenue, as the central bank and domestic commercial banks have funded the repeat 3% fiscal hole. Banks are obligated to buy less than 10% yield Treasury bonds with inflation at 30%, and the monetary authority has 40% of the total outstanding on its books.
Addis Ababa has calculated war damage at $30bn and approached donors for a five-year, $20bn rebuilding plan. Before committing to this end-decade vision alongside immediate debt help, an International Monetary Fund (IMF) arrangement must first be in place. The sides remain at loggerheads over the currency regime, state company selloff, and other mainstay economic aspects, and the status quo plus preference of Prime Minister Abiy Ahmed and his team will continue to dampen investor sentiment post-conflict after a compromise is struck.
Before the Tigray conflagration, Ethiopia was heralded for its Africa-beating streak of consecutive 10% GDP growth on a three-quarters agriculture and services base. In the near term, it is still projected at an impressive 6-7% annual clip, with a dire legacy of slaughter and displacement to overcome. At least 0.5mn were killed and 5mn fled their homes, and sporadic fighting lingers although outright war has shifted to neighbouring provinces with longstanding ethnic and geographic grievances.
Eritrea with a notorious human rights record under President Isaias Afwerki has never explicitly honoured the ceasefire with rebels and has now also turned against collaboration with Addis Ababa after Prime Minister Ahmed demanded renewed access to Red Sea ports lost three decades ago with Eritrea’s independence. As a landlocked country, Ethiopia has turned to Djibouti to handle 95% of trade through a dedicated railroad built and financed by China, with $1.5bn spent in annual logistics-maritime fees.
These tensions fester as US and EU aid slowly resumes after a lengthy cutoff. Washington ended duty-free entry for $175mn in textile exports under the African Growth and Opportunity Act (AGOA) up for general renewal in Congress, and food delivery was again briefly postponed in the truce aftermath on the discovery of widespread warehouse supply diversion. Brussels resumed $700mn in multi-year assistance, and the United Arab Emirates maintains development and humanitarian support alongside $5bn in trade and investment over the past five years, with a current focus on renewable energy projects.
Under its “homegrown” economic strategy the government opposes IMF recommendations on exchange rate flexibility, with the official 50 birr/dollar level set against the parallel market 100. Private sector and foreign competition lag behind region norms, with telecoms just opened to the Kenya entrant Safaricom, and a handful of banking licences to be issued to international applicants confined to minority stakes in local counterparts. The central bank has capped system private credit growth at 15% this year, as the African Development Bank (AfDB) tries to expand its small business footprint through its own franchise. A sovereign fund holds stakes in 25 companies that could be floated on the stock exchange due to launch next year, after prolonged preparation with foreign partners led by the World Bank’s IFC arm. Both equity and bonds will eventually trade, but the annual Africa Financial Markets Index compiled by the UK-based OMFIF think tank and pan-Africa bank Absa places the country at the very bottom with its startup status and glaring lack of available institutional and regulatory capacity to presage an uneven, ultra-cautious first phase.
Mogadishu battling remnants of Al Shabab terror network
Somalia’s civil war has stretched three decades, and now pits the government in Mogadishu against remnants of the Al Shabab terror network mainly in control of rural areas. Bombings still occur regularly at hotels around the capital, but US special forces have stepped up army training after a delayed Presidential election was held to allow security cooperation to resume alongside UN peacekeeping forces with a renewed mandate. They have gained ground with anti-terror operations, but the Prime Minister and Finance Minister routinely repeat that anti-poverty strides are equally crucial with half the population living on less than two dollars/day.
Before the poll delay and in the early stage of an epic drought Somalia reached the so-called decision point under the 1990s era Heavily Indebted Poor Country (HIPC) initiative, designed to cancel the overhang of bilateral and multilateral obligations. In that first phase, outstanding debt was cut to $3.5 bn from $5 bn accompanied by an IMF program, which was suspended as the previous President unilaterally extended his term another year and was then reinstated.
A successor $100mn Extended Credit Facility will go before the board soon so that the HIPC completion point can be reached in December, bringing the remaining load to $550mn. Already agreements representing a 75% reduction have been inked with the Paris Club, Kuwait, and Saudi Arabia as main creditors. At the Africa-Russia summit hosted by President Putin several months ago, Moscow separately wrote off $650mn dating from the Siad Barre dictatorship, when it was a Soviet ally.
This year the Fund predicts 3% growth, 6% inflation, and rough fiscal balance. The 2024 budget passes the $1bn mark for the first time, with one-third of funds to be raised domestically, and half the total earmarked for the public sector administration and salaries after ghost employees are removed through a comprehensive audit. The central bank has signed on to international anti-money laundering and counter-terror provisions and is to roll out fresh banknotes next year with widespread counterfeiting both of the local currency and the dollar. The country will also formally join the East Africa community trade and finance block starting with a customs union, following in the footsteps of other fragile states Burundi and South Sudan that have yet to pay their entry dues.
Against this backdrop, natural disaster has again struck with the worst flooding in 30 years, after the UN’s drought fundraising brought in $1bn to pre-empt mass starvation. Western donors interrupted the flow and imposed additional safeguards after local government officials working with gangs were found to engage in widespread extortion of vulnerable communities.
These numbers swelled another 50,000 as border fighting broke out in the Puntland region town of Las Anod formally in independent Somaliland. The dominant clan there demanded self-rule and mounted attacks against businesses and government offices, as President Muse Bihi Abdi, up for re-election next year, responded with blanket shelling from security forces. The fighting has subsided but the bad blood between the two states again spiked after reconciliation overtures from both sides.
Somaliland has scant international recognition with Taiwan a notable ally, and the US considering a small military presence without diplomatic implication. A UK firm has discovered oil in territory Somalia also claims, and the UAE’s DP World runs the strategic Berbera port. Ethiopia in its Red Sea rush has expressed interest in a long-term lease in Zeila, and Hargeisa has reportedly countered with the desire for a stake in the country’s pan-African well-respected airline, and such a breakthrough deal could relax the grip of the pervasive climate, poverty, and a debt vise.
– Gary Kleiman, senior partner, Kleiman International Consultants, Inc.