London, 07 May 2020 -- Moody's Investors Service ("Moody's") has today downgraded the long-term
issuer and senior unsecured ratings of the Government of Ethiopia to B2
from B1 and placed the ratings on review for further downgrade.
The downgrade to B2 reflects heightened external and government liquidity
risks further aggravated by the coronavirus outbreak which has severely
hit the economy's foreign currency receipts, raised the government's
spending needs and curtailed its financing options. Ethiopia is
more exposed to these shocks than many peers due to its high ratio of
external public sector debt to foreign exchange reserves.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and financial
market turmoil are creating a severe and extensive economic and financial
shock. Moody's regards the coronavirus outbreak as a social risk
under its ESG framework. For Ethiopia, this shock manifests
mainly in lower exports and foreign direct investment receipts and larger
external financing needs.
The review for downgrade reflects Ethiopia's stated intention to
seek official sector debt service relief under the recently announced
G20 initiative. Suspension of debt service obligations to official
creditors would be unlikely to have rating implications; indeed relief
from official debt service obligations would allow fiscal resources to
be devoted to essential health efforts and social spending, while
also reducing external and government liquidity pressures. However,
the G20 has called on private sector creditors to participate in that
initiative on comparable terms. The review period will allow Moody's
to understand how the apparent tension will be resolved between the government's
stated desire to engage only with official sector creditors and the G20's
call for private sector creditors to participate. It will assess
whether Ethiopia's participation in that initiative will indeed
be implemented without private sector participation and, if not,
whether any losses expected to arise from that participation would be
consistent with a lower rating.
The long-term local currency bonds and bank deposits ceilings remain
unchanged at Ba3. The long-term foreign currency bonds ceiling
has been lowered to B2 from B1, and the bank deposits ceiling has
been lowered to B3 from B2.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO B2
CORONAVIRUS SHOCK HEIGHTENS EXTERNAL VULNERABILITY RISKS
The downgrade to B2 is prompted by the significantly negative effect of
the coronavirus outbreak on Ethiopia's already fragile external
position. The risks of severe balance of payments stress have increased.
With sectors essential to the country's generation of foreign currency
revenue through exports, such as international travel and transport
and horticulture very severely hit by the slump in international demand
and restrictions to movement of people, Ethiopia's external
financing needs have risen, at the same time at which FDI inflows
have dwindled, privatization receipts will be delayed and emergency
healthcare imports increased.
Moody's expects the current account deficit to widen to 6%
of GDP in fiscal year 2020, from 5.3% in fiscal 2019,
while FDI inflows will likely fall below 2% of GDP. As a
result, Moody's estimates that Ethiopia's external financing
requirements will rise to close to 8% of GDP in fiscal 2020 and
2021. Notwithstanding the country having already secured some financing
with further likely to come from multilateral and bilateral organizations,
there remains a sizeable external financing gap this year and next.
These elevated requirements place pressure on foreign reserves that are
already low at below two months of import cover; total external debt
is more than 8 times the level of foreign exchange reserves at end-2019.
The coronavirus shock also adds downward pressure to Ethiopia's
weak public finances. After years of very strong GDP growth around
8-10%, government revenue to GDP stands at less than
13% of GDP in fiscal 2019 and is likely to fall with the current
sharp growth shock. Moody's forecasts GDP growth to slow
to 4% in 2020. For the early part of fiscal 2020,
expenditure was constrained, but with added health and social spending
related to combating the coronavirus outbreak and its economic effects,
current expenditure will increase. While ongoing government measures
to raise revenue and improve tax administration showed some tentative
positive results in the months leading up to the coronavirus shock,
the effectiveness of these measures will be significantly delayed by the
economic and social impact of the outbreak. The very narrow revenue
base raises significant policy challenges to the government about how
to maintain its debt service commitments while providing essential healthcare
and social spending.
In general, the global shock poses significant hurdles to the government's
reform implementation efforts aimed at arresting the decline in government
revenue generation and the rise in state-owned enterprise external
debt as it pursues its broader strategy to transform the economy from
a state-centred and controlled economy to a market economy and
fortify the country's fiscal strength and foreign-exchange generation
capacity.
RATIONALE FOR INITIATING A REVIEW FOR FURTHER DOWNGRADE ON ETHIOPIA'S
B2 RATINGS
The review for downgrade reflects Ethiopia's stated intention to
seek debt service relief under the recently announced G20 initiative.
This initiative offers benefits for the world's poorest nations,
many of which are highly externally indebted and exposed to outflows of
capital and depreciating exchange rates during an unprecedented crisis.
Additional financial support and liquidity relief will allow precious
fiscal resources to be devoted to essential health efforts and towards
minimising the economic impact of the crisis. However, the
G20 has called on private sector creditors to participate in that initiative
on comparable terms. That suggests that, for the countries
that elect to seek official sector debt service relief, the initiative
may also lead to the suspension of payments or renegotiation of private-sector
debt service obligations.
Ethiopia has a financing plan over the next two fiscal years, which
relies heavily on significant and urgent disbursements from the international
community in order to meet increased government borrowing requirements
and significantly higher external financing needs.
The review period will allow Moody's to understand how the apparent
tension will be resolved between the government's stated desire
to engage only with official sector creditors and the G20's call
for private sector creditors to participate. It will assess whether
Ethiopia's participation in that initiative will indeed be implemented
without private sector participation -- an outcome which could lead
to the rating being confirmed at its current level -- and,
if not, whether any losses expected to arise from that participation
would be consistent with a lower rating.
Beside the considerations about losses to private sector creditors in
debt service relief measures, the risks to Ethiopia's credit
profile are skewed to the downside, relating to the potentially
severe implications of a persistent external financing gap, further
downward pressure on foreign exchange reserves and the exchange rate and
threats to macroeconomic stability.
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 SOE debt which, if left unchecked,
could result in a further deterioration in the credit profile.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
The rating would likely be confirmed at its current level should Moody's
conclude that participation in multilateral or bilateral debt service
relief would be unlikely to entail default on private sector debt or,
if it would, that any losses experienced would be likely to be minimal.
Beside the considerations about losses to private sector creditors in
debt service relief measures, ongoing material pressure on Ethiopia's
external position and fiscal metrics could be consistent with a negative
outlook at B2, while prospects of a durable stabilisation in Ethiopia's
external position would likely be consistent with a stable outlook at
B2.
FACTORS THAT COULD LEAD TO A DOWNGRADE
The rating would likely be downgraded should Moody's conclude that
participation in the G20 debt service relief initiative would probably
entail default on private sector debt and that losses experienced would
be likely to exceed the threshold consistent with a B2 rating.
Moreover, an intensification of external pressure with materially
wider current account deficits than Moody's currently expects and/or
inability to secure sufficient external financing leading to a further
marked erosion of foreign exchange reserves would also likely lead to
a downgrade.
Given the significant increase in Ethiopia's external vulnerability
associated with the coronavirus shock, this event prompted the publication
of this credit rating action 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 May 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 materially decreased. The issuer's
fiscal or financial strength, including its debt profile,
has materially decreased. The issuer's susceptibility to event
risks has materially changed.
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.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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: 852 3758 1350
Client Service: 852 3551 3077
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
