Ethiopia: Debt sustainability remains largest risk to MLT political risk outlook

Event

From 25 to 27 April, the second edition of the Belt and Road Forum took place in Beijing. In the sidelines of the forum, Chinese President Xi Jinping met with multiple African heads of state among whom Ethiopian prime minister Abiy Ahmed. During the forum, multiple new infrastructure projects were announced, most importantly a USD 1.8 billion investment deal between Ethiopia and the State Grid Corporation of China to provide power lines. At the same time, China announced an undisclosed restructuring of part of the Ethiopian debt. This restructuring comes on top of the already announced restructuring of the loan for the Addis Ababa-Djibouti railway, the maturity of which was extended from 10 to 30 years.

Impact

For Ethiopia, external debt sustainability remains one of the largest risks to the medium-/long-term political risk outlook, which is currently in category 6/7. This is because the country heavily borrowed in recent years to fund multiple infrastructure projects. A large number of these projects such as the Addis Ababa-Djibouti railway have been funded by China. While these projects have helped to spur economic development and have been a strong driver of GDP growth, they significantly pushed up debt levels in recent years. The main issue behind the debt build-up remains that Ethiopia has a small export base and total current account receipts are only 15% of GDP, which is relatively small compared to Kenya for example where it is still low but already around 20%. Therefore, although the size of the Ethiopian external debt is not very large relative to the size of its economy, it was above 215% compared to exports in 2017, which is a high ratio. An additional weakness is that Ethiopian current account receipts are highly concentrated as the export of agriculture products, air passenger transportation and most importantly private transfers provide the bulk of total export receipts. Nevertheless, the future should look brighter as currently the IMF projects stronger export growth as a result of multiple export-oriented infrastructure projects that should come on stream. For example, the Hawassa Industrial Park, the new railway to Djibouti and a number of power lines that should allow for the export of electricity to neighbouring countries. Additionally, since Ethiopia has been flagged as at high risk of debt distress by the IMF in 2017, it scaled back non-concessional borrowing, limited borrowing by state-owned enterprises and implemented a new Public Debt Management and Guarantee Issuance Directive which should strengthen debt management. This has slowed down the build-up of external debt. The main risk for Ethiopia currently remains whether the infrastructure projects will be able to generate the export receipts that justified the investments as is currently still expected.

The announcements during the Belt and Road Forum indicate that China will continue to be one of Ethiopia’s most important economic partners, and continues to be willing to fund large infrastructure projects on the African continent. While the restructured debt is expected to cover only a small share of the estimated USD 13 billion of Chinese debt Ethiopia took on, it should nevertheless reduce short-term pressure on the country. Still, in the longer term, it could increase the overall interest burden. On China’s side, the restructuring serves as a way to diffuse the criticism that it does not sufficiently take into account the sustainability of its lending when announcing large infrastructure projects in the framework of the Belt and Road initiative. To this aim, Beijing also announced that it would increase transparency and apply a better debt sustainability framework. In Ethiopia’s case, it will be interesting to see if they effectively stick to these principles.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com