Ethiopia's Weak Credit Profile Unchanged Ahead of Debt Restructuring
Sahle-Work Zewde, President of Ethiopia

Moody’s Ratings said it completed a periodic review of the ratings of Ethiopia and other ratings that are associated with this issuer. The economic, credit profile assessment comes ahead of the country’s plan to restructure its debt.

Ethiopia’s ratings, including the long-term issuer local currency (LC) and foreign currency (FC) ratings of Caa2 and Caa3 with a stable outlook, remain unchanged, Moody said.

Ethiopia’s credit profile largely reflects the government’s pending debt restructuring under the G20 Common Framework, a process initiated in February 2021 in the face of increasingly strained external liquidity.

The reviewed note stated that since the formation of the Common Framework Committee in September 2021 there have been few signs of progress in debt treatment discussions, which depend on parallel, ongoing negotiations with the IMF for a funding programme.

On 11 December 2023, the government stopped servicing its Eurobond, officially defaulting at the end of the grace period, on 25 December 2023. The $1 billion maturity of the Eurobond is due 11 December 2024.

The default on the Eurobond followed an agreement with bilateral creditors in November 2023 to suspend debt payments during the fiscal year ending in July 2024.

Moody’s continues to expect that the losses for private-sector creditors will likely be consistent with the Caa3, with an indicative range of 20%-35%; this is lower than the historical average of losses for sovereigns of about 50% because the government primarily seeks liquidity relief.

Ethiopia’s economic strength assessment is supported by high growth momentum but is constrained by low per capita income and a high reliance on the agricultural sector, according to Moody’s. Its institutions and governance strength highlight low scores in the Worldwide Governance Indicators and is adjusted downward to reflect Ethiopia’s default on its Eurobond in December 2024, according to latest Moody’s commentary note.

Ethiopia’s “b1” fiscal strength assessment reflects weakening revenue generation capacity and high contingent liabilities stemming from guaranteed debts of state-owned enterprises, and a high share of foreign-currency debt. Moody’s said Ethiopia’s susceptibility to event risk is “ca”, driven by political, government liquidity, and external vulnerability risk.

A lower environment, social, and governance (ESG) score reflects highly negative exposure to environmental risks, very highly negative exposure to social risks, and very weak governance. It was noted that the country’s very low-income levels constrain the issuer’s resilience to mount environmental and social risks. According to Moody’s, the stable outlook reflects balanced risks at the Caa2 (LC) and Caa3 (FC) rating levels.

Moody’s stated that while improved domestic stability since the end of the Tigray war has paved the way for renewed engagement with the IMF over a funding programme and official-sector support, the debt restructuring and negotiation of conditions and disbursements attached to the programme may prove to be a lengthy process.

The commentary note stated that a return to extensive armed conflict in Ethiopia or marked disagreements between the parties involved in the debt relief also threaten progress in negotiations.

Delays in obtaining a programme with the IMF and negotiating liquidity relief would result in further deterioration of the external liquidity position of the government and the Ethiopian economy. Ethiopia’s credit profile will likely remain very weak until foreign currency debt relief has been achieved and official-sector support under the umbrella of the IMF programme is provided.

Albeit unlikely, should Moody’s expect smaller losses for private sector creditors than currently implied by the Caa3 rating as part of the anticipated debt restructuring, it could upgrade the foreign currency rating.

Post-debt relief being achieved, the government’s progress in addressing its credit weaknesses, such as by building foreign exchange reserves and improving government revenue generation, would in time lower future re-default risk and support both local and foreign currency ratings. #Ethiopia’s Weak Credit Profile Unchanged Ahead of Debt Restructuring Naira Devaluation Deepens Economic Crisis in Nigeria

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