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
