Sovereign Credit Rating Dictates Less to Cheer, More to Reform

If there is one thing that the ruling Revolutionary Democrats would not feel easy about, it is international credibility. It has been their typical character, regardless of the sphere they take a policy action in. Over the years, therefore, this sense of them has grown too big in both dimension as well as magnitude.

In their formative years, this inclination used to largely exist in the political sphere. And it has largely to do with the need for legitimacy from the movers and shakers of global politics. As natural as this action is for a government with huge stakes to develop consensus within the political sphere of a war-torn nation, it was telling of the cognitive traits of the ruling elite.

What used to be manifested within the political sphere has progressively diffused to the economic sphere, and has of late become the order of the day. The turning point happened after the processes of creating consensus, consolidating power and leveraging sizeable political capital succeeded, at least in the eyes of the EPRDFites.

To be exact, the year was 2001. After the historic split within the ruling coalition, the faction that maintained the grip came to see the risk policy confusion could impose on the rather volatile political economy of the nation. Immediately after the historic political earthquake came the introduction of the development policy documents of the ruling party, indicative of both the preferences of the winning faction and the future of the nation.

Surely, almost all of the documents were clearly sourced from the books of the Developmental State Theory. A theory largely dependent on the weaknesses of the liberal economic paradigm and that proposes a strong and rent maximising state as a panacea to the political, economic, social and cultural problems of aspiring least developed countries (LDCs), (especially African countries) the theory has received some customisation closer, especially in the line of embracing democratic values, through the engagement of the chief policy guru – Meles Zenawi.

Confusing as the theoretical basis and practical applications of the Democratic Developmental State model of the ruling Revolutionary Democrats are, it seems that it has both the ability to deliver results in the economic front. Evidencing this very fact is the 10.5pc average gross domestic product (GDP) expansion that the Ethiopian economy managed to achieve under the rough terrains of the global economic system, marred with tumbling consumer demand, financial crises, regulatory tightening and systemic trade protectionism. Way far from the five percent average for Africa, the growth seems to have given the ruling elite a rare confidence to seek for more.

It largely is with this confidence that the ambitious Growth & Transformation Plan (GTP), an economic blueprint spanning from 2010 to 2015, was introduced. Pushy in investment, grand in aspiration, overstretched in targets and demanding in political requirement, the plan continues to serve as an economic contract between the EPRDFites and the public. The past three years of the implementation of the plan had been contentious as they witnessed failures in meeting the promises.

It is both to pave way to mobilise more finance for the capital projects they contemplate under the existing and the oncoming transformation plans as well as to implicitly buy credibility in the eyes of their rather uneasy western allies (thanks to the heavy China factor) that the ruling Revolutionary Democrats commissioned three famous global credit rating agencies – Fitch, Moody’s and Standard & Poor (S&P) – to evaluate their sovereign credit default risk. As if to justify the 120,000 dollars commission the rating exercise demanded from the state’s treasury, then, the rating agencies have assigned the nation’s economy with B and B1, with an outlook of largely stable.

If one is to go by the tone and phrasing of the press briefing by the long serving finance minister, Sufian Ahmed, made after the disclosure of the ratings, it could be seen that the ruling EPRDFites are happy about the outcome. It seems that they have expected anything less, suspicious of the influence the long overdue structural weakness of the very economy they lead may have on the rating result.

In deciding to open their books to the global rating agencies, which continue to face serious credibility deficit in the global capital markets after their failure to foresee the bankruptcy of mega banks in 2008, the ruling EPRDFites seem to aspire to follow the footprints of upper low-income and lower middle-income African nations, such as Botswana, Ghana, Egypt and Nigeria. In letting Ethiopia join this club of nations, whose rating assignment is either B or more, the Revolutionary Democrats seems to have a rather short-term ambition to test the waters of the global capital market.

After all, credit rating is a signal of creditworthiness in the global capital markets. Better rating gives investors the confidence to invest in the various investment vehicles, largely bond vigilantes, issued by governments of the rated countries. By virtue of defining the level of confidence, then, the rating will have a role in defining the yield over a sovereign bond issued by the states.

As much as the latest rating has assigned Ethiopia with stable status, however, it has also highlighted the persisting structural challenges of the economy. This is where the attention of the ruling Revolutionary Democrats is highly sought for, then.

Structurally, the Ethiopian economy is weak. Almost all available researches show this very fact, no matter how much the EPRDFites try to sideline it.

The economy lacks effective structural means to transfer the rapid growth to wide reaching development results. This is exactly why Fitch, the rating agency, noted that Ethiopia is one of the economies that it has rated which sees low human development indicators. What this could tell to the policymakers closer is the fact that the mechanisms of translating the growth to development need significant improvement. One area to do this is improving public service provision and streamlining good governance.

On purely economic fronts, the economy is overburdened with public investment. This seems to have limited the positive linkages that the growth could have had. It also remains to challenge the sustainability of the growth. Any ambition to access the capital markets of the developed world would, then, require to give due attention to development of the private sector.

Expanding trade and current account deficit, coupled with the serious challenge in the foreign exchange regime, also continue to impose their own burden on the economy of the nation. This seems to have a higher negative multiplier effect in both the real economy as well as on the perception of investors.

Another structural challenge comes from the growing debt burden of state owned enterprises (SOEs). As these enterprises compete with the mainstream private sector for loans in the domestic market, it seems that their growth is coming at the expense of the private sector. This is worsening the overall economic bias.

Looking beyond the mere facts of the rating, then, it seems that it is now time for the Revolutionary Democrats to embrace more aggressive economic reforms tailored to redress the multitudes of structural challenges the economy they lead faces. Cheering less and reforming more ought to, then, be the order of the day.


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