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Rating Action:

Moody's affirms Ethiopia's B1 Sovereign Rating, the outlook remains stable

02 Dec 2016

London, 02 December 2016 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Ethiopia's long-term issuer and senior unsecured bond ratings of B1, the outlook remains stable.

The key drivers of the affirmation are:

1. Ethiopia's strong growth momentum, supported by a substantial level of infrastructure spending and rising productivity. The completion of a number of key infrastructure projects will support productivity improvements, exports and the capacity to generate foreign exchange.

2. Fiscal deficits and debt levels remain low and debt highly affordable, underpinned by prudent fiscal management and the strong support of donors. Despite elevated social tensions amid anti-government protests, the risks these present to donor support and foreign direct investment have yet to manifest in any deterioration of key credit metrics.

The stable outlook balances Moody's assessment of Ethiopia's prospects for continuing economic growth in the medium term supported by investments in the country's infrastructure against ongoing institutional constraints and event risk. Furthermore, the affirmation and stable outlook reflect Moody's expectation that higher political risks are unlikely to translate into significant deterioration in key credit metrics over the next 12-18 months.

The long-term local-currency bond and deposit ceilings remain unchanged at Ba3.The long-term foreign-currency bond and deposit ceilings remain unchanged at B1 and B2, respectively.

RATINGS RATIONALE

FIRST DRIVER -- STRONG ECONOMIC GROWTH PROSPECTS

The first driver of the affirmation is the country's strong economic growth prospects. With real growth averaging 10.8% over the past decade, Ethiopia remains the fastest growing country in Moody's sovereign rated universe. Recent growth performance has remained resilient, notwithstanding the severe drought in FY2015/16, with real growth estimated to have decelerated to at least 7.5%. The drought's impact on agricultural production appears to have been less catastrophic compared to previous droughts, the result of timely government interventions and improved agricultural practices. And strong growth in other sectors, notably construction, manufacturing, trade and telecoms, also helped to offset the drought's impact. A number of large scale projects have been completed over the past two years, notably Ethiopia's Light-Rail System, the Ethiopia-Djibouti Railway, the 1,870-MW Gibe III hydroelectric dam and the Hawassa Industrial Park. In addition to supporting trade and economic activity, these projects are likely to boost the country's export capacity and its ability to generate foreign exchange in the near term. Moody's expects growth to rebound in FY2016/17 to 8.5-9.5%, as the weather dependent agriculture sector normalizes and remain at this level for the medium term as the government completes the current public investment program, notably the Grand Renaissance Dam, the electricity transmission infrastructure and industrial parks.

SECOND DRIVER -- LOW AND STABLE FISCAL DEFICITS AND MODERATE DEBT BURDEN

The second driver of the affirmation reflects our expectation that fiscal deficits will remain low and stable, underpinned by prudent fiscal management that prioritizes spending on development objectives, while exercising spending control in the face of fluctuating grant financing and increasing efforts to mobilize additional domestic revenues. In FY2015/16, the budget came under pressure from the severe drought, which necessitated emergency spending on relief efforts and aid by the central government. The government approved a supplementary budget in December 2015 with the additional drought-related spending financed by surpluses from the government's oil stabilization fund. According to official preliminary data, the overall fiscal deficit remained contained, widening to 2.9% of GDP compared to 2.5% of GDP in FY2014/15.

Low deficits have contributed to a low debt burden compared to Ethiopia's peers. Central government debt to GDP reached 27% in 2015 (up from 24% of GDP in 2013), significantly lower than the median for B-rated countries of 42%, even when taking into account the government-guaranteed debt of state owned enterprises (some 8.8% of GDP in 2015).

Ethiopia's favorable debt structure due to the high share of concessional borrowing has helped to keep debt servicing costs low relative to peers. Roughly 90% of the central government's external debt is contracted on concessional terms. As a result, and also due to the country's low debt burden, interest payments as a share of government revenue were equivalent to 4.2% in 2015, compared to the median for B-rated countries of 8%.

Over the past year, Ethiopia has faced a spate of anti-government protests that have escalated from isolated demonstrations outside the capital Addis Ababa, to a series of anti-government rallies across towns in the Oromia and Amhara regions between August and October. On October 9, the Ethiopian government announced a country-wide six month state of emergency, the first in the last 25 years. The unrest is the most severe in Ethiopia's recent history, under the leadership of the ruling coalition (Ethiopian People's Revolutionary Democratic Front (EPRDF)), and has resulted in a tragic loss of lives and property. The scale and duration of the protests points to an increase in domestic political risks compared to when Moody's first assigned Ethiopia's rating two years ago, which informs Moody's assessment of relatively high domestic political risk compared to B1-rated peers. Nonetheless, there is as yet no evidence of elevated political risks manifesting in lower donor support or flows of foreign direct investment, or a broader deterioration of key credit metrics.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook balances Moody's assessment of Ethiopia's prospects for continuing economic growth in the medium term supported by investments in the country's infrastructure against ongoing institutional constraints and event risk.

WHAT COULD CHANGE THE RATING -- UP

Upward pressure on the B1 rating could develop as a result of (1) improving business conditions that attract more FDI inflows and boost the private sector; and (2) a successful shift from a public sector-led investment model to a private sector driven one.

WHAT COULD CHANGE THE RATING -- DOWN

Downward pressure would be exerted on the rating in the event of (1) a substantial withdrawal of donor support; (2) an acceleration in external debt build-up without a compensatory increase in potential growth and hard currency earning capacity; or (3) a significant escalation of political and social tensions that would in turn hinder the country's medium-term growth prospects.

GDP per capita (PPP basis, US$): 1,804 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 10.8% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 10% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -3.1% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -12.1% (2015 Actual) (also known as External Balance)

External debt/GDP: 28.2%

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 29 November 2016, a rating committee was called to discuss the rating of the Ethiopia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rita Babihuga
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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