Friday, October 10, 2014

P&M: ​Ethiopia eyes step up in financing

Ethiopia aims to significantly increase the amount of debt it takes on over the next five years by tapping a variety of international sources, including the capital markets.

The government, which is hoping to issue its debut bond either by the end of this year or early 2015, is seeking to raise up to US$10bn through private sources as part of a US$50bn investment plan to transform the east African nation’s economy.

The country confirmed last week that it was meeting banks, including Barclays, Citigroup and BNP Paribas, to discuss possibilities such as a debut Eurobond of “at least 10 years” maturity, possibly in the next few months.

Sufian Ahmed Beker, the highly experienced minister of finance and economic development for the last 16 years, told IFR: “We are exploring options but have no specific date. We might issue before the end of the year or early next year.”

Ethiopia had already started preparing the ground for this fundraising process earlier in the year. In May the country obtained its first credit ratings from Moody’s, S&P and Fitch. The latter two were single B and the former B1.

Seeing the hot demand for neighbouring Kenya’s two-tranche US$2bn issue in June may also have spurred the country into action. Ethiopia will hope to attract similar interest, citing improvements in its economic prospects.

Over the last two decades the country has experienced a sharp recovery from the bleak times of the Mengistu military dictatorship, which blighted the historic state until the early 1990s. In the last fiscal year the economy grew 10.5% and has grown on average by 10.3% annually over the last 11.

Ethiopia remains predominantly agricultural and fragile, with its 10m subsistence farmers frequently facing drought. The uplift could also help the government, in power since 1995, win next year’s elections.

Ahmed Beker, 56, is also confident his new five-year investment plan will get support from prospective financial partners. He wants to diversity the economy, so it is less reliant on state spending and traditional exports such as coffee.

The potential is huge since the country, with over 90m people, is the second most populous in Africa after Nigeria. “In 10 years’ time we could become the third largest economy in Africa after South Africa and Nigeria.”
Energy projects

The main effort so far has been initiating major clean energy projects, such as the US$4bn Corbetti geothermal plant and US$4.8bn Grand Renaissance hydropower one. The latter involves building a politically controversial mega-dam across the mighty river Nile, which rises in Ethiopia’s highlands.

These projects have already attracted backing. Icelandic group Reykjavik Geothermal was signed up this March for Corbetti. And Ahmed Beker says over a third of the envisaged financing has been found, from domestic sources, for Grand Renaissance since its announcement at the start of 2013.

He is also confident political difficulties that have dogged the project have been overcome with Ethiopia’s downstream neighbours, Sudan and Egypt. Both were worried water might be diverted away from their farmland.

“We have had international experts who have said the project is safe. And we have made clear that we will use the river water only to generate power and then allow it all to pass on for farmers to use further north,” he told IFR. “The Nile is a source of cooperation not a source of tension”.

He declined to say how the remainder would be financed but said the plan was still to complete the dam over the next two years so it would generate power by 2018.

As well as creating cheap energy for domestic use, the aim is for any surplus from these major projects to be exported, boosting state revenues at the same time.

However, that will require an up-to-date transmission network to be built. The country also wants to extend its meagre rail network, untouched for a hundred years, and initiate a series of road projects. All are earmarked in the five-year development plan.

“We have other smaller energy projects, as well as road and rail development plans,” said the minister. “We also aim to set up some industrial parks and develop sugar refining plants.” The US$50bn required in total for all these schemes is four times Ethiopia’s current US$12.2bn external debt.

Much of that comes from bilateral and multilateral sources. Both will continue to be central to the future plan, with half the money earmarked to come from either bilateral investors such as China, India, Turkey and Middle Eastern countries, or multilaterals like the African Development Bank.

Ahmed Beker also wants to tap domestic sources, such as banks, investors and taxpayers. Finally an estimated US$10bn will come from the private sector, via loans and bonds, including some unsecured finance via eurobonds for instance.
Stable attractions

Ahmed Beker said investors should be attracted to the ancient country, which was never colonised, because of its stable and cohesive nature, thankfully devoid of the extremism seen elsewhere.

“We are the best example in the region of political stability. Our country is over 3,000 years old. We were the first to accept Christianity and the first to accept Islam. We have always been at the centre of things and welcomed interest from east, west, north and south. We want to keep it that way,” he said.

Part of the modernisation process will also see another wave of privatisations. A few years ago the state brewing industry was sold off in pieces, principally to a string of Western companies, such as Diageo and Heineken. They have then used these purchases as springboards to enter the country.

Ahmed Beker aims to replicate this process with other state industries. “We aim to privatise more state enterprises over the next few years in order to get competition into the economy.  You need to do it properly so you create competition and not just replace state monopolies with private ones,” he said.

He believes international companies will continue to be attracted to the country as labour costs remain very low too.

One state jewel which is not going to be up for auction is Ethiopian Airlines, which has in the past been the subject of possible takeover talk in a grand tie-up with Kenya’s and South Africa’s flag carriers. “This is 100% state-owned but commercially managed,” said the minister.

Addis Ababa has become a hub for central and Eastern Africa, and Ethiopian now flies to 80 destinations including London, Washington and Brazil.

Overall the debt-financed investment plans will likely see Ethiopia’s debt-to-GDP rise from its current low level of 23% but, if that in turn means the economy continues to grow rapidly, then that ratio should be contained.