Ronel Oberholzer is Head of Sub-Saharan Africa Economics at S&P Global. Ronel Oberholzer, Head of Sub-Saharan Africa Economics at S&P Global, is an expert in African economies. Her work includes following developments in Ethiopia and the Horn, among other sub-Saharan states. She provides her outlook on key trends like rising debt service costs in developing nations and whether this burden will ease in coming years. Oberholzer also analyzes Ethiopia's engagement with initiatives such as the Common Framework and Debt Relief Roundtable, offering perspective on why these efforts have faced delays and limitations in her interview with BirrMetrics.
BirrMetrics: Recent reports show that debt service costs take up a large share of budgets in least-developed countries, exceeding allocations to important social sectors and hindering growth. Do you expect this trend to continue in coming years, or do you foresee changes as global lenders acknowledge that the international credit system does not favor indebted developing nations?
Ronel Oberholzer: S&P Global Market Intelligence predicts that this trend will continue at least through 2024 and 2025, as interest rates remain high, keeping the cost of commercial debt elevated. After a series of higher-than-expected inflation reports, analysts at S&P Global Market Intelligence now anticipate the Federal Reserve (Fed) to initiate a rate cut only at the end of the year. It is now expected that the Fed funds rate will return to the estimated neutral range of 2.50-2.75 percent by mid-2026. Initial policy rate reductions in the least developed countries, particularly in sub-Saharan Africa, are expected to commence later than anticipated, as central banks in these regions grapple with inflationary pressures and are cautious about currency depreciation considering the slower pace of Fed easing.
Do you expect this trend to continue in coming years, or do you foresee changes as global lenders acknowledge that the international credit system does not favor indebted developing nations?
While the trend of increasing debt burdens in developing countries is likely to continue in the near term, there is growing recognition of the need for systemic changes to the international credit system. This includes debt relief, improved access to affordable financing, and economic reforms to enhance revenue generation and fiscal management. However, the actual changes will depend on various factors, including global economic conditions, policy decisions by international financial institutions and governments, and geopolitical stability.
The Common Framework aimed to deliver timely and adequate debt relief agreed to in 2020 but has not been effective, leading to the creation of the Global Sovereign Debt Roundtable. However, the Roundtable did not fulfill its promises, particularly for Ethiopia. Why do you think this occurred?
One must never forget that debt restructuring involves complex negotiations between debtor countries and various creditors, including official bilateral, multilateral, and private-sector creditors. However, aligning the interests of all these parties can be challenging. One specific challenge is the lack of private sector participation in debt relief initiatives despite the Common Framework calling for comparable treatment of all creditors. Each country also faces unique economic and political circumstances that complicate debt restructuring. In the case of Ethiopia, the 2020-2022 conflict, limited more recent fighting and the ongoing humanitarian crisis in the Tigray region, have added complexity to the situation. The conflict resulted in a severe humanitarian crisis, with millions displaced and needing food aid. This has strained Ethiopia's resources and diverted attention and funds away from debt servicing and economic development. Additionally, Tigray was previously under a de facto blockade, limiting access to cash, fuel, telecommunication, and electricity. This further hindered humanitarian assistance and the delivery of essential supplies. Allegations of aid misuse by Ethiopian authorities led to the suspension of assistance by some international organizations, complicating the debt situation. The conflict has also had a significant impact on families' lives and livelihoods and has inflamed ethnic tensions over fertile agricultural land in the region. This could have long-term implications for Ethiopia's economy and its ability to service its debt. The ongoing conflict has created uncertainty and risk, deterring investment and economic growth, making it more challenging for Ethiopia to attract the financing it needs for debt management and economic stimulation.
What expectations does S&P Global have regarding Ethiopia's eventual debt restructuring and repayment capacity?
Ethiopia's eventual debt restructuring and repayment capacity are influenced by various factors. The Paris Club has agreed to provide Ethiopia with a debt standstill from January 1, 2023, to December 31, 2024, providing temporary liquidity relief before broader debt treatment discussions commence. These discussions will gain momentum once the Ethiopian authorities and the IMF agree on the parameters for an IMF program. Ethiopia seeks to borrow at least two billion dollars from the IMF for a more comprehensive reform program. Still, the IMF estimates financing gaps of at least six billion dollars until 2026, indicating the need for a comprehensive debt restructuring package to avoid defaulting on external liabilities. An international group of bondholders has proposed a landmark agreement for debt suspension and Eurobond restructuring, suggesting an extended maturity for the 2024 bond. While Ethiopia faces significant challenges in managing its debt, there is cautious optimism about the potential for successful debt restructuring and improved repayment capacity. The outcome will depend on factors such as progress in negotiations, implementation of economic reforms, and the global economic environment. Collaboration among stakeholders is crucial to address these challenges and ensure sustainable economic growth in Ethiopia.
Do you foresee Ethiopia missing its next Eurobond payment, or do recent creditor discussions point to a different outcome?
We are optimistic that the abovementioned factors will help Ethiopia avoid missing its next Eurobond payment.
