Uncertainties Keep Ethiopia at Edge Amidst Debt Shakeup
Ethiopia’s economic growth expectation remains under threat due to a series of macroeconomic pressures facing the country even after the International Monetary Fund (IMF) extended a helping hand.
Fiscal performance remains weak with negative impacts on government spending. Low revenue generation had resulted in borrowing until an external borrowing window was locked against Ethiopia due to a high interest rate in the global market and blockage due to payment default.
With a subtle currency crisis, inflation, and unemployment rate, the government has been working tirelessly to push the country’s economic pole to a new level, albeit, unsuccessfully.
The heat in the economy rendered the country’s policy moves ineffective as external pressure exert additional pressure. Economic policy has been tested to be unfit to drive growth to a level that makes life much easier for the majority of the Ethiopians.
Low FX inflows has kept the country’s foreign reserves tight and this has remain tailwind for the struggling local currency recently depreciated by the authority.
In a review, Moody’s said the government of Ethiopia’s ratings, including its Caa3 foreign currency and Caa2 local currency issuer ratings, reflect its expectation of losses to private-sector creditors as a result of the government’s ongoing debt restructuring under the G-20 Common Framework.
Recall that Ethiopia initiated debt restructuring in February 2021 in the face of increasingly strained external liquidity.
Despite slow progress so far, the approval of an IMF program in July 2024, the looming expiration of the debt repayment suspension by bilateral creditors and the maturity of the defaulted Eurobond on 11 December 2024 will likely motivate the government to accelerate negotiations, Moody’s said in review note.
In July 2024, the IMF and the World Bank approved their financial support package for Ethiopia, a development analysts saw as a pivotal step in the country’s ongoing debt restructuring efforts.
Concurrently, the authorities introduced foreign-exchange reforms that have led to a 50% depreciation of the birr against the US dollar since.
Moody’s stated that the shift to a market-driven exchange rate is a key aspect of the program designed to rectify Ethiopia’s enduring external imbalances and foreign-exchange shortages.
Ethiopia’s economic strength assessment is supported by high growth momentum, but is constrained by its low per capita income and a high reliance on the agricultural sector.
In a review note, Moody’s stated that Ethiopia’s “b1” fiscal strength assessment reflects its weakening revenue generation capacity and high contingent liabilities stemming from guaranteed debts of state-owned enterprises, and its high foreign-currency denominated debt.
The stable outlook reflects balanced risks at the current rating levels. On the one hand, improved domestic stability has finally resulted into the renewed engagement with the IMF on a funding program and official-sector support.
The global rating agency stated that the country’s debt restructuring and finalizing of the program conditions and disbursements may prove to be a lengthy process.
“This could result in a less orderly form of default on the Eurobond than we currently expect, leading to potentially higher losses for private-sector creditors than currently reflected in our ratings”.
Emphatically, Moody’s said Ethiopia’s credit profile will likely remain very weak until the ongoing debt restructuring provides sufficient foreign currency debt relief, and, the official sector support under the umbrella of the IMF program meaningful support.
It stated that after the debt restructuring is completed, the government’s progress in addressing its key credit weaknesses, including by rebuilding foreign exchange reserves and improving government revenue generation, would over time lower future re-default risk and exert upward pressure on both foreign and local currency ratings.
Similarly, the local currency rating would come under pressure if domestic liquidity deteriorated substantially, as for instance suggested by a sharp rise in domestic interest rates, implying a higher risk of default. #Uncertainties Keep Ethiopia at Edge Amidst Debt Shakeup FG Earmarks N47.5bn for Upgrade of 50 Selected Schools
