The success of Ethiopia’s debut Eurobond in late 2015 highlights heartening elements of Ethiopia’s economic and financial story. As commodity prices fall, other African countries could do well to emulate the Ethiopian finance ministry’s emphasis on investment over recurrent spending
The past year was one in which the ‘africa rising’ story — so enthusiastically promoted by markets and the media in the years after the 2008 crisis — became more nuanced. One only needs to look at gyration and slump of currencies such as the Ghanaian cedi or the Zambian kwacha to get a sense of the reassessment many African nations are going through in investors’ eyes.
Tougher times for Africa, of course, are in a large part due to declining global demand for commodities, particularly exports of minerals like copper, gold, iron ore and oil. But there is also a sense that many African states over-extended themselves during the good times, when commodity prices were high and money was flowing more easily to emerging markets.
“There has been a lot of wishful thinking in Africa that it would be business as usual — that commodity demand would remain strong and they could borrow against future earnings,” says Angus Downie, head of economic research at Ecobank.
The debut Eurobond late last year by Ethiopia — the continent’s second most populous nation after Nigeria — was therefore a welcome sign that investor optimism in Africa continues. The sovereign gained 10 year funding in its debut, with a $1bn issue providing ample liquidity for investors. Lead managers Deutsche Bank and JP Morgan managed to build an order book that was more than two times subscribed.
“Ethiopia has been smart and measured in its approach to the bond market,” says Adil Kurt-Elli, head of central and eastern Europe and sub-Saharan Africa debt capital markets at HSBC.
Ethiopia’s success in the bond markets is testament to the record of its long-standing minister of finance and economic development, Sufian Ahmed. During Ahmed’s tenure, the 10 year average Ethiopian GDP growth of more than 10% has made it one of the fastest growing economies, not just in Africa but globally. While inflation is relatively low, the budget deficit has remained manageable at less than 3% in recent years, according to the IMF.
“Ethiopia is a great development story,” says Alan Cameron, economist at London frontier markets broker Exotix. Cameron acknowledges sectors such as telecoms and banking remain closed, but he points to strong growth, declining poverty and high levels of investment in the country. “The results [in Ethiopia] have been very good over the past 10 years,” he says.
Ethiopia’s bond deal made it the poorest country in the world to issue a Eurobond in recent years, according to research from Exotix, which notes Ethiopia’s per capita income of only $548 is lower even than the likes of Rwanda, which issued a debut Eurobond in 2013. But Ethiopia’s coupon of 6.625% was cheaper than the 8.97% Zambia received when it returned to the Eurobond market with a $1.25bn deal this year, despite Zambia being a much richer country on a per capita basis.
There are weaknesses in Ethiopia’s political and economic model, which were reflected in the coupon. There is much work to be done, for example, to increase tax revenue, which at less than 15% of GDP, according to the IMF, is low by regional standards. Foreign exchange reserves, according to the IMF, are too low (covering less than two months of imports) and the exchange rate is overvalued.
However, the focus on investment (more than 30% of GDP, according to the IMF) is greatly in Ethiopia’s favour. Especially when commodity prices are hurting revenues in states more reliant on mineral exports, it makes Ethiopia a particularly favourable contrast to other African sovereigns.
For example, Exotix notes forecast Ethiopian government investment in 2015 of between $5bn and $6bn is more than twice the forecast public investment in Nigeria, whose economy is more than 10 times bigger. “Ethiopia is one of the few countries in Africa where investment is more important than recurrent expenditure,” says Cameron.
UP THE VALUE CHAIN
Ethiopia’s debut Eurobond was “to introduce the country to the world, through the private sector, to attract foreign direct investment,” says finance minister Sufian Ahmed. He says the proceeds were for specific projects, above all an industrial zone, which he says will attract foreign manufacturing firms.
He points to “labour-intensive businesses” that might set up in the zone, like shoes, garments and agro-processing. Companies from countries like China, India and Turkey are relocating to Ethiopia, he says. “When their wages are becoming higher, countries that have strong light manufacturing sectors decide to relocate.”
That targeted investment in manufacturing might contrast with Zambia, for example, where exports are heavily dependent on copper prices. Proceeds of a 2015 Zambian Eurobond will fund a swelling budget deficit ahead of a 2016 election, according to a Zambian government spokesperson quoted by Reuters.
“In the case of Ethiopia, investors started to differentiate,” says Ahmed. “Our economy doesn’t depend on commodities; we are diversifying our exports.”
Ahmed says sovereign Eurobond issuance could be useful as a benchmark for local corporates in the long term. However, he says the state will be wary of foreign borrowing by private companies and there are no plans for state owned enterprises to issue.
The sovereign could return to the market in 2016, though he says that will be dependent on the finalisation of the country’s new five year plan and which projects might be included in that plan. “We are very cautious about monitoring the debt of the country,” says Ahmed.