Fitch Affirms Ethiopia at ‘Restricted Default’
Global rating agency Fitch has affirmed Ethiopia’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘Restricted Default’ (RD), accorded no outlook to the country’s credit rating.
According to Fitch, the affirmation of Ethiopia’s LTFC IDR at ‘RD’ reflects the country’s continued default on its single Eurobond and other non-bond commercial external debt following the government’s failure to pay the USD33 million Eurobond coupon due on 11 December 2023.
Ethiopia is looking to restructure about USD15 billion of external debt – including arrears, as of end-June 2024 – under the Common Framework, for which it applied in 2021.
The country has reached agreement with official creditors, ratings analysts recalled. Ethiopia concluded a memorandum of understanding with the Official Creditor Committee (OCC) in July 2025, providing USD2.5 billion in debt relief through FY28 – fiscal year ending 7 July 2028.
The official debt treatment entails a 12.5% present value debt relief, three years of duration extension and 34% of debt service reduction during the IMF programme period (through FY28), according to the Ministry of Finance.
These parameters will be used to assess the comparability of treatment clause. Bilateral agreements with OCC members are being signed, with separate talks for non-OCC, bilateral creditors.
Ethiopia has engaged bondholders to restructure its single Eurobond since December 2023, and Fitch ratings analysts expect the process to accelerate following agreement on an official debt restructuring.
A new round of talks with an ad-hoc committee between 25 September and 13 October 2025 did not result in a final agreement.
The ad hoc committee’s final offer proposed a 15% haircut plus a value recovery instrument contingent on achieved exports relative to the IMF baseline forecasts in the third review.
Non-export credit agency-backed commercial claims included in the restructuring perimeter amounted to USD1.3 billion at the restructuring cut-off date, including about USD1.1 billion Eurobond principal plus accrued interest and USD0.2 billion of non-bond commercial debt.
Ethiopia has made notable progress on macroeconomic reforms since July 2024. Exchange rate liberalisation has corrected prior real exchange rate misalignment with official rate depreciation of over 60% since July 2024, reducing the parallel market premium to about 10%.
“We expect inflation to fall to an average of 12% in FY26, from an average of 15.8% in FY25 and 26.6% in FY24”.
Fitch noted that interest rate transmission has improved following the introduction of the interest rate-based framework, with short-term market interest rates tracking the policy rate of 15% and remaining positive in real terms.
The country’s external financing pressures eased as government work out on loopholes. External liquidity strengthened as a greater share of trade and financial flows are routed through official channels following exchange rate liberalisation.
Strong exports, and high remittances and grants inflows enable reserve build up and regular National Bank of Ethiopia (NBE) FX auctions.
The NBE sold USD420 million in FY25 through FX auctions and interbank FX trading is rising from a non-existent base. Fitch said there is a plan to reduce the large net open foreign currency position of banks and enforce prudential net open position limits by end-2025.
Gross official reserves rose to USD4.6 billion by end FY25, about two months of current external payments cover, from USD1.4 billion in FY24, though reserves are negative net of bilateral deposits and liabilities to the IMF and the World Bank.
The current account deficit narrowed sharply in FY25 to about USD300 million (0.2% of GDP), from USD6 billion in FY24, mostly due to a big rise in gold and coffee export receipts.
“We project that current account deficits will widen to 2%-3% of GDP in FY26-FY27 as exports of stockpiled gold moderate and imports rise with improved FX availability”.
Ratings analysts forecast a 7% real GDP growth in FY25 after 8.1% in FY24, driven by good harvests, recovery in construction and manufacturing amid eased FX constraints, and services sector, especially air transport and tourism.
“We expect reform momentum, external debt treatment, enhanced macroeconomic stability, and expanding electricity supply from the newly inaugurated Grand Ethiopian Renaissance Dam and other energy projects to support medium-term growth prospects of 7.0%-7.5%”.
Fitch projects the fiscal deficit to widen to 1.7% of GDP in FY26 from an estimated 1.3% in FY25, as windfall revenue gains from easing FX distortions are outweighed by higher spending, including public-sector wage increases.
The government plans to phase out fuel subsidy by end-2025. Market-based auctions for treasury bills as part of the reforms have eased financial repression and raised borrowing costs into positive real-interest rate territory. Analysts project interest expenditures to rise to 1.3% of GDP from a 0.8% in FY25.
“We expect general government debt to peak at 40.4% of GDP in FY25 and gradually decline in the medium term to 36.6% in FY27. This forecast only factors in an extension of maturity and does not incorporate any other assumption on external debt restructuring terms.
“The government has absorbed most state owned enterprises domestic debt in FY25 and converted all NBE advances to treasury bonds. Under the IMF programme, new non-concessional borrowing is restricted, with an exception granted for the Koysha hydropower project”.
Fitch said continued borrowing restraints by regional governments and state owned enterprises should help contain public sector debt. #Fitch Affirms Ethiopia at ‘Restricted Default’ FX Inflow Spikes as Nigeria Reforms Attract Offshore Investors
