• The official statement by the Office of the Prime Minister outlined a three-point proposal to the G20 states, including the need for an emergency finance and a global Africa health emergency package as well as a debt resolution and restructuring package to deal with the novel coronavirus outbreak on the continent.
• The greatest challenge for African economies is that policy implications to deal with the coronavirus disease 2019 (COVID-19) virus cannot be adequately addressed, such as injecting liquidity to support economic growth during severe disruptions and providing essential safety nets and support for businesses and workers without further accumulation of debt.
• We see increased implementation risks for Ethiopia's 'Home Grown Economic Reform Programme', which was announced on 9 September 2019 and aims to increase foreign-exchange availability. And reaching government revenue targets will remain very challenging for Ethiopia without further debt accumulation and support from the global community as addressed in Abiy's three-point appeal.

The Office of the Prime Minister of Ethiopia Abiy Ahmed released on 24 March 2020 an official appeal that African economies are highly vulnerable to externalities and that the coronavirus disease 2019 (COVID-19) virus will pose a significant threat to their economies if no support from the global community is provided. A three-point proposal with proposed areas and forms of intervention should therefore be considered during the upcoming Extraordinary G-20 Leaders' summit. Furthermore, the greatest challenge for African economies is that policy implications to deal with the COVID-19 virus cannot be adequately addressed, such as injecting liquidity to support economic growth during severe disruptions and providing essential safety nets and support for businesses and workers without further accumulation of debt given the current already existing constraints, such as very high debt burdens as well as high servicing costs.

To provide essential safety nets, the first point of Abiy's appeal calls for supplementary budget support from the World Bank, including the recycling of undistributed IDA resources. An Africa Global COVID-19 emergency financing package of USD150 billion would be required to support depleted foreign exchange reserves, as well as Africa's healthcare system. Working capital support for financing private-sector growth that will be affected by disruptions in supply chains would need additional support from the International Finance Corporation. The second point of Abiy's appeal for strengthening the public health delivery on the continent calls for a global Africa health emergency package with the support from the World Health Organization and other global funds. Abiy's third point highlights the urgent need for a debt resolution and restructuring package. In this package, it is proposed to have all interest payments to government loans written off. Low-income countries' part of the debt should be written off, with the remaining debt to be converted into long-term low-interest loans with a 10-year grace period. Hereby, debt repayments should be limited to 10% of the value of exports.

Reaching government revenue targets will remain very challenging for Ethiopia without further debt accumulation and support from the global community

IHS Markit anticipates an increase in aid inflows to sustain programme implementation moderately and help Ethiopia's health sector. On 23 March, the World Bank announced its consideration of a Fast Track Facility support for Ethiopia in dealing with the COVID-19 virus. The Prime Minister's appeal comes also one day after the Ethiopian government and Germany signed a EUR100-million grant agreement to support Ethiopia's plans to increase the stake of private-sector development in the country's strong state-led growth model. The German grant supports the finance of the second phase of the growth and competitiveness programme.

Furthermore, IHS Markit anticipates Ethiopia's economy's transition from public and foreign-debt-financed investment to equity-based investment via the privatisation of state-owned enterprises and liberalisation of several sectors to be challenged by a severe drop in foreign direct investment (FDI) in the two-year outlook, causing a delay in any greenfield projects to start in 2020/21. According to the latest United Nations Conference on Trade and Development report, global FDI is anticipated to be cut between 5% and 15% in 2020. In February 2020, the global completion rate of cross-border acquisitions fell below USD10 billion, from normal monthly values of around USD50 billion, which has severe implications - not only for Ethiopia, but Africa as a whole, and especially countries that have outlined their medium-term growth strategies to by supported by large influxes of FDI.

IHS Markit changed the outlook from Stable to Negative on Ethiopia's short- and medium-term sovereign credit risk ratings following the third-quarter review round in 2019, while maintaining the ratings at 45/100 (BB+ on the generic scale, in the Likely to Fulfil Obligations category) and 55/100 (B+, High Payments Risk) respectively. While the government's debt burden remains somewhat moderate, weaker export growth and incapability to maintain a tight fiscal policy would potentially lead to a downgrade of the medium-term rating, which is all at higher risk currently due to the COVID-19 outbreak.

Ethiopia would require a loser fiscal stance and additional borrowing while export growth remains depressed. We previously anticipated that the government investment programme will be downsized gradually and the pace of borrowing reduced as key projects are finalised, which will mitigate fiscal risks to our rating. Liquidity pressures are amplified through an expected drop in export growth and forex intakes through weaker FDI inflows and remittances that would affect Ethiopia's medium-term solvency indicators used as denominators in our debt load and service analysis. Hence, Abiy's appeal's success in need for a debt resolution and restructuring package will have an important mitigating role for Ethiopia's solvency capabilities going forward.

Posted 01 April 2020 by Alisa Strobel, Principal Economist, Global Economics SSA, S&P Global Market Intelligence