London, 07 August 2020 -- Moody's Investors Service ("Moody's") has today confirmed the B2 issuer
and senior unsecured rating of the Government of Ethiopia, with
the outlook changed to negative. This concludes the review for
downgrade initiated on 7 May 2020.
The review for downgrade reflected Moody's assessment that the country's
participation in the G20 Debt Service Suspension Initiative (DSSI) raised
the risk that private sector creditors would incur losses. In the
last few weeks, Moody's has considered the evidence of implementation
of DSSI for a range of rated sovereigns, and statements by G20 officials.
While Moody's continues to believe that the ongoing implementation
of DSSI poses risks to private creditors, the decision to conclude
the review and confirm the rating reflects Moody's assessment that,
at this stage, for Ethiopia, those risks are adequately reflected
in the current B2 rating.
It remains unclear what influence is being applied to Ethiopia and to
other participating sovereigns to treat private creditors in a comparable
manner to official sector creditors. However, a number of
elements suggest that the probability of broad-ranging private
sector involvement has diminished. These include the apparent absence
of progress in discussions about how private sector involvement ('PSI')
would be effected in DSSI in general; indications by the G20 that
PSI would require the support of the borrowing government; the government
of Ethiopia's continued assertion that PSI is not contemplated;
and evidence of some debt payments being made to private sector creditors
under a DSSI regime.
The risks that remain relate to the possibility that in particular cases
DSSI is implemented with private sector creditors also being drawn in
to provide debt service relief and incurring losses in doing so.
Should the probability of losses to private sector creditors increase
as implementation of DSSI for Ethiopia becomes clearer, Moody's
would reflect any related changes in risks to private creditors in further
rating announcements.
The negative outlook reflects Moody's view that Ethiopia's
fiscal and external vulnerabilities that had increased before the coronavirus
shock will be exacerbated by the shock, and potentially reach a
degree of severity consistent with a lower rating. Delivering on
the government's structural reform agenda and reversing the persistent
deterioration in revenues to low levels will be challenging in the subdued
economic environment that Moody's expects to continue into fiscal
2021. Moreover, Ethiopia remains reliant on recurrent financing
from official lenders to meet its large funding gap and preserve macroeconomic
stability. Uncertainty about the sovereign's capacity to
secure external funding to fully cover the country's needs could
sharply increase the pressure on its liquidity and balance of payments.
The long-term local currency bonds and bank deposits ceilings remain
unchanged at Ba3. The long-term foreign currency bonds ceiling
remains unchanged at B2, and the bank deposits ceiling has remained
unchanged at B3.
RATINGS RATIONALE
RATIONALE FOR CONFIRMING THE B2 RATING
Moody's initiated a review for downgrade for Ethiopia's ratings
following the country's participation in DSSI to reflect the potential
for private sector losses given the call in the G20's 15 April term
sheet for private creditors to participate in debt service relief on comparable
terms to official creditors. The review for downgrade reflected
the tension evident between Ethiopia's stated intention not to seek
relief from private sector debt service obligations, and the clearly-stated
view of the key sponsors of the DSSI, specifically the IMF and World
Bank, that private creditors should participate in the DSSI on comparable
terms. Private sector losses incurred as part of the DSSI would
likely constitute a default under Moody's definition.
There remains considerable uncertainty regarding the treatment of private
sector creditors of the sovereigns which choose to participate in DSSI,
including Ethiopia. Recent statements by the Institute of International
Finance (IIF) suggest that some DSSI participants have had informal discussions
with private sector creditors regarding deferral of interest.
However, the risk of broad-ranging involvement of private
sector creditors in many or most DSSI cases appears to have diminished.
There has not been any material progress in clarifying where and how private
sector creditors would be asked to provide debt service relief.
While the most recent communique issued by the G20 Finance Ministers and
Central Bank Governors on 18 July reiterated that sponsors "strongly
encourage private creditors to participate in the DSSI on comparable terms"
the clarifying language "when requested by eligible countries"
[1] seems to acknowledge the need for support from the borrower for
that to happen. Participating governments, including Ethiopia,
have continued to assert that they do not wish to engage with private
sector creditors. And a number of DSSI-participating governments
have continued to make interest and coupon payments to private creditors
as they fall due.
The risks that prompted the initiation of the review for downgrade for
Ethiopia have not disappeared and there has been limited additional clarification
since the initial DSSI terms were announced. However, the
risks have become more specific to each DSSI implementation case and at
this stage, Moody's assesses the probability that private
sector creditors of Ethiopia incur losses through DSSI to be captured
in the B2 rating. Should the probability of losses to private sector
creditors increase as implementation of DSSI for Ethiopia becomes clearer,
Moody's would reflect any related changes in risks to private creditors
in further rating announcements.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that Ethiopia's
fiscal and external vulnerabilities that had increased before the coronavirus
shock will be exacerbated by the shock, and potentially reach a
degree of severity consistent with a lower rating.
Delivering on the government's structural reform agenda and reversing
the persistent deterioration in revenues to low levels will be challenging
in the subdued economic environment that Moody's expects to continue
into fiscal 2021. From steady real GDP growth rates at high levels
in the past decade, Moody's projects GDP growth to slow to
2% in fiscal 2020 and 2021. As a result, and despite
the government's actions to enhance revenue collection, Moody's
expects government revenue to decline to just 11-11.5%
of GDP and the fiscal deficit to widen to 5% of GDP, from
2.5% in fiscal 2019. As a result, Ethiopia's
government gross financing needs will rise to around 10% of GDP
in fiscal 2021, up from below 7.3% in fiscal 2019.
The sovereign's fiscal vulnerabilities are compounded by a large
and financially weak state-owned entreprise (SOE) sector,
aggravated further by the economic shock.
Moreover, Ethiopia remains reliant on recurrent financing from official
lenders to meet its large funding gap and preserve macroeconomic stability.
Uncertainty about the sovereign's capacity to secure external funding
to fully cover the country's needs could sharply increase the pressure
on its liquidity and balance of payments. Moody's expects
Ethiopia's external financing requirements to amount to 6.6%
of GDP in fiscal 2020 and 7.8% in fiscal 2021, up
from 6.6% in fiscal 2019. Aside from pre-coronavirus
budgeted financing, the government has so far secured about 1.3%
of GDP ($1.3bn) in additional exceptional financing from
development finance institutions, excluding potential DSSI savings,
of which Moody's expects 0.5% of GDP ($500m)
from the World Bank facility to be disbursed in fiscal 2021. While
Moody's expects that Ethiopia is likely to be able to meet its external
commitments with development partner support and some drawdown from reserves,
there is a risk that the full amount cannot be secured in time to avert
a sharp increase in balance of payments pressure.
Ethiopia's main exports, especially coffee and gold, are susceptible
to commodity price shocks during a period of volatile external conditions.
Moody's expects that external debt will rise to above 220% of export
receipts in fiscal 2020 and continue to increase in the near to medium
term. Since 2017, the IMF has classified Ethiopia as being
at "high risk of external debt distress" because of its low level of export
receipts relative to the present value of its stock of external debt.
External vulnerability risks are exacerbated by low foreign exchange reserves.
Moody's projects reserves to hover around $3 billion, covering
less than two months of imports, leaving very limited capacity to
absorb any further shock that may occur.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Ethiopia's economic strength
and credit profile. Given the prominence of agriculture in the
economy and reliance on rainfall for irrigation and hydroelectric plants,
recurring droughts can have a significant negative impact on the agriculture
and energy sectors.
Social considerations are also material to the rating. High income
inequality and high levels of poverty have the potential to fuel social
discontent. Moreover, Moody's regards the coronavirus outbreak
as a social risk under its ESG framework, given the substantial
implications for public health and safety globally. For Ethiopia,
the pandemic shock manifests in heightened external vulnerability.
Governance considerations are material to Ethiopia's credit profile.
Weak governance in particular amongst some state owned enterprises (SOEs)
has contributed to high SOEs debt which, if left unchecked,
could result in a further deterioration in the credit profile.
Given the outstanding review for downgrade initiated on 7 May, the
publication of this credit rating action concluding the review for downgrade
occurs on a date that deviates from the previously scheduled release date
in the sovereign release calendar, published on www.moodys.com
GDP per capita (PPP basis, US$): 2,511 (2019
Estimate) (also known as Per Capita Income)
Real GDP growth (% change): 9.0% (2019 Estimate)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 14.5%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -2.6%
(2019 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.8% (2019 Estimate)
(also known as External Balance)
External debt/GDP: 28.1.2% (2019 Estimate)
Economic resiliency: ba3
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983
On 4 August 2020, a rating committee was called to discuss the rating
of the Government of Ethiopia. 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 weakened. Other views raised included:
The issuer's institutional strength/ framework, have not materially
changed. The issuer's susceptibility to event risks has not materially
changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook suggests an upgrade is unlikely in the near term.
Prospects of a durable stabilisation in Ethiopia's fiscal and external
position would likely be consistent with a stable outlook at B2.
Over time, Moody's would likely upgrade the rating in the
event of a sharp and sustained decline in public debt driven by a decline
state-owned enterprises indebtedness, a reduction in fiscal
risks posed by contingent liabilities, and an improved business
environment, strengthened institutions and competitiveness.
An intensification of fiscal or external pressure with materially higher
fiscal deficits, increasing debt, wider current account deficits
than Moody's currently expects and/or inability to secure sufficient external
financing contributing to further pressure on the exchange rate and foreign
exchange reserves would likely lead to a downgrade. Moreover,
a rising probability of private sector participation in DSSI would likely
point to a lower rating, commensurate with the potential losses
to be incurred.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
REFERENCES/CITATIONS
[1] G20 communique, 18 July 2020
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.
Kelvin Dalrymple
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
