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Rating Action:

Moody's assigns B1 issuer ratings to the Government of Ethiopia; stable outlook

Global Credit Research - 09 May 2014

London, 09 May 2014 -- Moody's Investors Service has today assigned first-time local and foreign-currency issuer ratings of B1 to the Government of Ethiopia. The ratings carry a stable outlook.

The rating assignment is based on the following key drivers:

(1) Ethiopia's relatively small economy and low per-capita income, balanced by a track-record of strong economic growth over the past decade.

(2) Weak institutional strength, in line with B-rated peers.

(3) Moderate fiscal strength, with the debt burden and related financing cost remaining low given a largely concessional funding base, balanced by its increasing reliance on non-concessional financing.

(4) Moderate susceptibility to event risk, which balances (i) credit strengths such as an adequately capitalised banking sector and low government liquidity risk given stable inflows of grants and concessional lending; against (ii) credit constraints, such as political risks stemming from Ethiopia's geographic location in the Horn of Africa, and low levels of foreign-exchange reserves and low foreign direct investment flows into the economy.

Moody's has also assigned a Ba3 ceiling for local-currency bonds and deposits, a B1 ceiling for foreign-currency bonds and a B2 ceiling for foreign-currency deposits.

RATINGS RATIONALE

--SMALL ECONOMY WITH LOW PER CAPITA INCOME BUT CONTINUING STRONG GROWTH PROSPECTS

The first driver underlying Moody's assignment of a B1 sovereign rating to Ethiopia is (1) the economy's small size (with a nominal GDP of $43 billion); (2) its low per capita income ($1,256 on a purchasing power parity basis); (3) the country's substantial reliance on the volatile agricultural sector, which represents almost half of gross value added and is susceptible to reduced harvests due to extended periods of drought.

Moody's notes that Ethiopia has made significant progress in developing the country over the past decade, mainly supported by significant public sector investment, and has reached key targets set out in the Millennium Development Goals. Nevertheless, 30% of the population were living from less than $1 per day in 2011 and the country ranks at the bottom of the United Nation's Human Development Index. However, the ratings agency notes that per capita GDP income is rising quickly (having almost tripled in just 10 years), and growth prospects remain favourable given the investment in developing the country's power-generating capacity and infrastructure, mainly through public sector investment. The share of private-sector investment remains small, currently ranking among the lowest in the region which could hamper growth in the medium-term.

--WEAK INSTITUTIONAL STRENGTH

The second key driver of today's assignment of a B1 sovereign rating to Ethiopia is the country's weak institutional strength. Similar to many Sub-Saharan African sovereigns, Ethiopia scores low on the World Bank's Governance Indicators and underperforms many B-rated peers. However, the country performs in line with the median of B-rated peers in the field of government effectiveness, rule of law and control of corruption. The government produces five-year plans which support policy continuity and the administration shows a strong track-record of fulfilling or even outperforming the targets set in these plans. That being said, the country's monetary policy track-record is mixed with inflation remaining volatile and elevated, averaging 16.7% over the past decade. Inflation performance is susceptible to food-price shocks during prolonged periods of drought.

--MODERATE FISCAL STRENGTH DUE TO SMALL AND STABLE FISCAL DEFICITS AND LARGELY CONCESSIONAL DEBT

The third driver for Moody's decision to assign a B1 rating to Ethiopia is its moderate fiscal strength. The government has been able to keep budget deficits low, averaging just -2.5% of GDP in the past 10 years, broadly in line with the median for B-rated peers. More than 75% of government expenditure is targeted at poverty-reducing programmes. Capital spending overall reached 14% of GDP last year -- one of the highest in the region. Ethiopia benefits from substantial donor support, with grants making up 11% of total central government revenue. In fact, Ethiopia is the largest aid recipient in nominal terms in Africa mainly on account of its critical geopolitical role that it plays in the Horn of Africa -- a region that is prone to political upheaval -- but also driven by the notable achievements donor funds have had on the key social indicators. Over the past decade, donor funds have been very stable at around $900 million per year. Moody's also notes that the government's tax revenue is low compared to peers, mainly on account of a weak tax collection framework and the large, informal sector of the economy.

The ratings agency notes that Ethiopia has benefited from debt-relief initiatives and continued donor support over the past decade, resulting in a low debt level of 21% of GDP in 2012, with a favourable debt structure. Debt-servicing costs remain relatively moderate due to concessional funding, with the interest accounting for 2% of revenue in 2012. However, Moody's expects debt-servicing costs will increase as the share of non-concessional (private) funding will increase over the next few years in order to finance large infrastructure projects. This is concurrently leading to a build-up in contingent liabilities in the state owned enterprises estimated by the IMF to stand around 10% of GDP.

-- MODERATE SUSCEPTIBILITY TO EVENT RISK

The fourth driver is Moody's assessment of the country's moderate susceptibility to event risk, primarily political event risk. This stems largely from the country's geographic location in the Horn of Africa, with neighbouring countries such as Somalia, Sudan and South Sudan. In addition, there is an unresolved border conflict with Eritrea that adds to geopolitical event risk. While domestic politics have been stable -- with the dominant Ethiopian People's Revolutionary Democratic Front (EPRDF) remaining dominant and holding 91% of seats in parliament -- the rating agency sees some risk of demonstrations and instability in the period leading to and following the elections in 2015. This view is based on an outbreak of violence during previous elections in 2005, itself due to allegations of potential voting irregularities.

Event risk is also heightened by (1) limited foreign-exchange reserves; (2) low levels of foreign direct investment; and (3) susceptibility to price shocks for its main export commodities, coffee and gold, which made up around 30% and 6% of total exports in 2012, respectively. Moreover, the current account deficit (averaging of 4.8% of GDP over the past five years) is also a source of risk and is mainly due to a large trade deficit (which has widened considerably in recent years) but balanced by transfers and remittances.

These risks are balanced by low government liquidity risk due to the large share of concessional borrowing, and the banking system's relatively small size and good level of capitalisation. However, the rating agency notes the high concentration in the banking sector and the dominance of state-owned banks, with the three public banks accounting for 73% of total assets and the dominant Commercial Bank of Ethiopia alone accounting for 63% of total assets as of end-June 2013. Government policies also undermine the process of credit allocation by commercial banks to the private sector which, in addition, has a negative effect on the development of the financial sector. In Moody's opinion, directed lending by the government through the financial sector risks crowding out private investment. For instance, by law, banks must buy 27% of any new loan commitment in bills issued by the central bank on behalf of the government.

RATING OUTLOOK

The stable outlook reflects Moody's assessment of Ethiopia's prospects for continuing economic growth in the medium term, supported by investments in the country's infrastructure and power generating sectors, which are likely to be supported by improving trade conditions.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Upward pressure on the B1 ratings could develop as a result of improving business conditions that would attract more foreign direct investment and boost economic diversification.

Downward pressure would be exerted on the rating in the event of (1) an acceleration of external debt that does not support growth; or (2) 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$): 1330.1 (2013 estimate) (also known as Per Capita Income)

Real GDP growth (% change): 7.0 (2013 estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 8.1 (2013 actual)

Gen. Gov. Financial Balance/GDP: -2.8 (2013 estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.4 (2013 estimate) (also known as External Balance)

External debt/GDP: 25.6 (2013 estimate)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 07 April 2014, a rating committee was called to discuss the rating of Ethiopia, Government of. The main points raised during the discussion were: the issuer's economic fundamentals, including its economic strength; institutional strength/ framework; fiscal or financial strength, including its debt profile and susceptibility to event risk. The rating level was also considered relative to its peers.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Alexandra Marie Elisabeth Mousavizadeh
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

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns B1 issuer ratings to the Government of Ethiopia; stable outlook
No Related Data.

 

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