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Rating Action:

Moody's downgrades Ethiopia's rating to Caa2; outlook negative

20 Oct 2021

NOTE: On September 26, 2022, the press release was corrected as follows: In the economic data section, Default history was added. Revised release follows.

London, 20 October 2021 -- Moody's Investors Service ("Moody's") has today downgraded the long-term issuer and senior unsecured ratings of the Government of Ethiopia to Caa2 from Caa1 under review for downgrade. The outlook is negative. This concludes the review for downgrade initiated on 17 May 2021.

The downgrade to Caa2 reflects increased default risks. In the absence of significant developments in and prospects of a near-term resolution of Ethiopia's application for Common Framework debt treatment, and, partly as a result, without access to official or market-based external funding, external liquidity risks have increased significantly pointing to a possible default. Continued heightened social tensions and conflict in Ethiopia have weakened the quality of the country's institutions and governance and further impair the sovereign's ability to secure external funding, which is essential to shore up its very thin foreign exchange reserves.

The negative outlook reflects heightened uncertainty regarding political risks and the Common Framework's resolution, and the risk of material losses to investors in the event of a default by Ethiopia beyond what would be consistent with a Caa2 rating.

Ethiopia's local currency (LC) country ceiling was lowered to Caa1 from B2. The foreign currency (FC) country ceiling was also lowered to Caa2 from Caa1. Moody's assessment is that non-diversifiable risks are appropriately captured in a LC ceiling one notch above the sovereign rating, taking into account the extensive footprint of government in the economy, with very limited private sector activity, a very large state-owned enterprise sector, and government ownership of the majority of the banking system, as well as a weak institutional framework and high political and external vulnerability risks. The one-notch gap between the FC and LC ceiling reflects Moody's assessment of material Transfer & Convertibility (T&C) risks, given a relatively closed capital account, constrained access to foreign exchange and external imbalances which could lead the government to impose T&C restrictions.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Caa2

PROTRACTED DELAYS WITHOUT COMMON FRAMEWORK RESOLUTION AND ACCESS TO EXTERNAL FUNDING INCREASES LIQUIDITY AND DEFAULT RISK

Since Ethiopia formally entered the Common Framework for Debt Treatment beyond DSSI last February, no tangible developments have occurred other than the formation of a creditor committee in September. Moody's expects the creditor committee's decision on what debt treatment to apply to take some time, during which period Ethiopia has no access to official and market-based external funding. As a result, liquidity risks have heightened and default risk increased to levels more consistent with a Caa2 rating.

Moody's understands that the timing of future deliberations of the creditor committee is circumscribed by at least a staff-level agreement on a new Extended Credit Facility (ECF) with the IMF, as well as a refreshed Debt Sustainability Analysis (DSA), which introduces new delays to the process beyond the control of the authorities.

The protracted period taken for official creditors to start discussing (and eventually agree on) a debt treatment suggests complex negotiations which raises the risk of private sector creditors being involved. While at this stage there is no indication about the potential losses for private sector creditors, Moody's assesses that, since the start of its rating review of Ethiopia in May, the risks have increased with the passage of time without a resolution.

Moreover, the longer the Common Framework conclusion is pending, the longer Ethiopia remains without agreed new external concessional funding and without access to market-based financing. Liquidity risks, which were at the origin of Ethiopia's application for Common Framework debt treatment, are increasing, also contributing to higher default risk.

While the government has issued a first spectrum license and a new bid has been launched for a second license, such measures only provide partial and temporary liquidity relief in the absence of access to external financing. The government finances its deficit through domestic sources, which is has managed to-date through increasing recourse to central bank financing, but external debt and import payments risk eroding further already low foreign exchange reserves - equivalent to less than 2 months of import cover.

CONTINUED HEIGHTENED SOCIAL TENSIONS AND CONFLICT ALSO CONTRIBUTE TO DEFAULT RISK

Continued heightened political risk in Ethiopia also contributes to the downgrade. In the past year, long-standing tensions have escalated to outright conflict. The situation has put the much-needed economic reforms announced by the Prime Minister in 2018 on hold and has reversed some of the early 2020 gains of the IMF's 2019 programme. Domestic political risks are exacerbated by the Covid-19 shock which is projected to slow real GDP growth to 2% in 2021, retarding domestic revenue mobilization and slowing foreign exchange accumulation, worsening two of Ethiopia's longstanding credit challenges of low revenue and thin foreign exchange reserves.

The political situation is complex, reflecting enduring ethnic tensions, which are unlikely to be resolved in the foreseeable future. Heightened domestic political risks manifest in the war in the Tigray region as well as uprisings spreading into the Afar, Amhara, and Oromia regions. There is now a concerning humanitarian situation with over 2 million displaced persons. In response, some development partners are withholding development aid resources while others have threatened sanctions in an attempt to prompt a response from the government.

Such deep tensions and conflict are likely weighing on some creditors' ability and readiness to provide financing or debt relief, further contributing to default risk.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects risks that are tilted to the downside at the Caa2 rating level. While there is a high degree of uncertainty about the potential losses for private sector creditors in the event of a possible default, there is a material possibility that the creditor committee decides on a debt treatment that involves losses consistent with a lower rating; and/or because by the time the creditor committee's decision is taken, liquidity risks have increased further, necessitating a more significant reprofiling of Ethiopia's debt.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Ethiopia's ESG Credit Impact Score is very highly negative (CIS-5), reflecting highly negative exposure to environmental risks and very highly negative exposure to social risks, and very weak governance. Very low-income levels constrain the issuer's resilience to mounting environmental and social risks.

Ethiopia's credit profile is highly exposed to environmental risks, reflected in its E-4 issuer profile score. 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. The environmental profile is also susceptible to bouts of pests such as locusts which can harm the country's economic and social profile.

Exposure to social risks is very high (S-5 issuer profile score), reflecting high income inequality, high levels of unemployment particularly among the youth, as well as high levels of poverty, which all have the potential to fuel social discontent in a country subject to periodic tensions.

Ethiopia's governance is weak (G-4 issuer profile). The conflict which erupted across the country last year reflects a significant weakening of the quality of the country's institutions. In general, Ethiopia is susceptible to frequent bouts of social and political unrest in the Horn of Africa region characterized by political instability, which undermine the strength of the institutions and policy effectiveness. Moreover, weak governance, in particular, among 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 17 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$): 2,772 (2020 Estimate) (also known as Per Capita Income)

Real GDP growth (% change): 6.1% (2020 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 18.2% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -2.8% (2020 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.1% (2020 Estimate) (also known as External Balance)

External debt/GDP: 27.2% (2020 Estimate)

Economic resiliency: b1

Default history: [not available]

On 14 October 2021, 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, 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, has materially weakened. The issuer's susceptibility to event risks has materially increased.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely given the negative outlook and before full clarity is obtained on the conclusion of the Common Framework creditor committee. A Common Framework conclusion pointing to no or very limited losses for private sector creditors would be credit positive.

Over time, evidence that political stability and peace are durably restored across the country would be credit positive, especially if such an environment pointed to a material improvement in government revenue and foreign exchange reserves.

Moody's would downgrade the ratings were the rating agency to conclude that losses to private sector investors would exceed those consistent with a Caa2 rating level.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

No Related Data.
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