Fitch Upgrades Ethiopia’s Credit Ratings as Financial Pressures Ease
Fitch Ratings upgraded Ethiopia’s credit ratings as financial pressures ease. In its latest rating note, Fitch upgraded the country’s Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC-‘ and affirmed the Long-Term Foreign-Currency IDR at ‘RD’ (Restricted Default).
The upgrade of Ethiopia’s LTLC IDR to ‘CCC+’ from ‘CCC-‘ reflects easing financing pressures, improved macroeconomic stability, and increased confidence that the ongoing debt restructuring will not include local-currency obligations, Fitch said.
It stated that renewed concessional external financing has significantly reduced net domestic financing requirements. Ethiopia aims to phase out non-market-based local financing of fiscal deficits to reduce financial repression and contain inflation.
The National Bank of Ethiopia (NBE) introduced market-based exchange-rate determination on 29 July 2024, leading to an over 50% depreciation of the official rate and closing the gap with the parallel market exchange rate.
The NBE eased several foreign-exchange (FX) restrictions, eliminating FX rationing for importers and increasing FX retention.
The NBE also introduced an interest-rate-based monetary policy regime, set the initial policy rate at 15%, and began conducting regular open market operations to strengthen monetary policy transmission.
The IMF approved a new four-year Extended Credit Facility Arrangement for Ethiopia on 29 July 2024, with an immediate disbursement of USD 1 billion from a total funding of USD 3.4 billion.
This arrangement, together with expected disbursements from the World Bank (totalling USD3.75 billion), will help reduce reliance on domestic financing.
“We estimate net domestic borrowing to decline to 0.5% of GDP in the fiscal year ending in June 2025 (FY25) and 1.3% in FY26, from 2.1% in FY23 and 1.7% in FY24”. Fitch estimates that the general government fiscal deficit narrowed to 2% of GDP in FY24 from 2.5% of GDP in FY23.
The ratings agency also projects the fiscal deficit will rise to 2.7% of GDP in FY25, as windfall revenue gains from easing FX distortions are more than offset by increased spending, including a 1.5% of GDP fiscal package for the vulnerable and public sector wage increases.
Interest expenditure is projected to rise to 1.2% of GDP from a low 0.6% of GDP in previous years. The NBE has started market-based auctions of Treasury bills to address domestic financing needs. “We anticipate that government borrowing costs will rise to positive real interest rates in the medium term, increasing rollover risks”.
All NBE’s direct advances totalling ETB242 billion at the end of FY24 have been converted to long-term government securities, and commercial banks will phase out the mandatory purchase of treasury bonds in FY25.
The government issued ETB266 billion of long-term bonds in exchange for treasury bills held by pension funds.
“We did not view the exercise as a distressed exchange designed to avoid a traditional payment default because the government had no difficulty rolling over the treasury bills at prevailing yields of 9-10%, and the pension funds remain main buyers of newly-issued treasury bills”, Fitch said.
Ethiopia remains in default on its foreign-currency debt obligations since suspending payments on its single outstanding USD1 billion Eurobond in December 2023.
The country has since made progress on its external debt restructuring under the Common Framework, which involves restructuring both its official bilateral and commercial external debt, on comparable terms, although the completion timeline remains uncertain.
Ethiopia is looking to restructure about USD15.1 billion of external debt (including arrears, as of end-June 2024) under the Common Framework, for which it applied in 2021.
An interim debt standstill was agreed upon with the official creditor committee (OCC) and major Chinese creditors in November 2023, suspending bilateral debt service for 2023 and 2024, representing USD1.3 billion of net relief.
“We expect Ethiopia will reach an agreement with the OCC on the terms of the official debt treatment by the end of 2024, succeeding the interim standstill”.
Ethiopia is then expected to negotiate debt treatment with commercial creditors on comparable terms. Commercial creditors hold around 10% of Ethiopia’s total public and publicly guaranteed external debt totaling USD30.9 billion as of end-June 2024, including the USD1 billion Eurobond that was to mature in December 2024.
Official international reserves, barely above USD1 billion in FY24, are expected to rise to USD2.9 billion in FY25 and USD4.5 billion in FY26, partly due to rising multilateral disbursements.
This would represent 1.8 months of current external payments, though it depends on the final terms of the external debt restructuring, Fitch said.
The alignment of official and parallel market exchange rates also boosts gold exports and replenishes official international reserves. #Fitch Upgrades Ethiopia’s Credit Ratings as Financial Pressures Ease Naira Rises against US Dollar Ahead of Sept. FX Auction
