London, 17 May 2021 -- Moody's Investors Service ("Moody's") has today downgraded the Government
of Ethiopia's long-term issuer and senior unsecured ratings to
Caa1 from B2 and maintained the review for further downgrade.
The downgrade to Caa1 reflects Moody's view that protracted deliberations
regarding Ethiopia's application for debt relief under the G-20
Common Framework have increased the risk of private sector creditors incurring
losses. The passage of time since Ethiopia's application
to the Common Framework suggests a relatively complex decision by the
Common Framework's creditor committee, which in turn indicates
that an outcome that does not impose any losses on private sector creditors
is less likely than at the time of Moody's previous rating action
in March. Moreover, heightened domestic political tensions
risk interfering with official sector support and undermining foreign
investment that is critical for the government's financing in the
near and medium term.
While the rating downgrade indicates that the risks have risen to a point
no longer consistent with the previous rating, the Caa1 long-term
issuer ratings acknowledge that there remain a number of potential outcomes
that do not involve private creditors incurring losses.
Maintaining the review for downgrade will allow Moody's to assess
the progress of the official creditor committee deliberations regarding
the extent of relief that Ethiopia requires, and the apportionment
of that relief to the various creditors, including private creditors.
The review period will also allow Moody's to assess Ethiopia's financing
situation following the IMF's executive board assessment of the
first and second reviews under the IMF programme and the outcome of the
spectrum license auction and asset sales.
The long-term local currency (LC) ceiling has been lowered to B2
from Ba3, while the foreign currency (FC) ceiling has been lowered
to Caa1 from B2. Country ceilings indicate the highest rating level
that would generally be assigned to the financially strongest issuers
domiciled in a country, including the strongest structured finance
transactions whose cash flows are generated predominantly from domestic
assets or residents. The LC country ceiling, two notches
above the sovereign rating, which is a relatively narrow gap,
reflects Moody's assessment of non-diversifiable risks 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.
The FC country ceiling is two notches below the LC country ceiling,
a relatively wide gap, reflecting Moody's assessment of elevated
transfer & convertibility risks, given a relatively closed capital
account and very constrained access to foreign exchange.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE OF RATINGS TO Caa1
There has been little progress since Ethiopia's 1 February announcement
that it intended to seek debt treatment under the Common Framework.
Prolonged deliberations about the precise application of the Common Framework
to Ethiopia point to increased risk for private sector creditors.
As already communicated in the last rating action, Moody's
assesses that the decision whether or not to enforce comparable treatment
of official and private sector lenders in the implementation of the Common
Framework for Ethiopia will be official lenders' decision.
The requisite debt sustainability analysis has yet to be revealed,
while the official creditor committee has yet to be convened to determine
the magnitude and apportionment of relief across the various creditor
classes. The passage of time since Ethiopia's application
to the Common Framework suggests a relatively complex decision by the
creditor committee, which in turn indicates that an outcome that
does not impose any losses on private sector creditors is less likely
than at the time of Moody's previous rating action in March.
While the authorities reached a staff-level agreement on the first
and second reviews of the Extended Credit Facility and Extended Fund Facility
in February, the reviews have yet to be presented to the IMF executive
board, which is critical for catalysing bilateral and multilateral
lenders' funding of the budget for fiscal 2021 and fiscal 2022.
Meanwhile, heightened domestic political tensions pose risks,
potentially interfering with official sector support and undermining foreign
investor interest in the country's economic liberalisation agenda,
both of which are also essential to the government's financing in
the near and medium term.
RATIONALE FOR MAINTAINING THE REVIEW FOR FURTHER DOWNGRADE
The continuing review for downgrade period will allow Moody's to
assess the progress of the official creditor committee deliberations regarding
the extent of relief and apportionment across the various creditor classes,
the IMF executive board assessment of the first and second reviews of
the IMF programme and any implications regarding the timing and composition
of bilateral and multilateral lenders' budget funding, and
the evolution of the political situation in the context of the ethnic
uprisings across Ethiopia. The review will also allow an assessment
of prospective proceeds from the spectrum license auction, as well
as progress on part-divestiture of Ethio Telecom, providing
a clearer indication of the government's ability to secure financing,
in the context of persistent government liquidity and external vulnerabilities.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Ethiopia's ESG Credit Impact Score is very highly negative (CIS-5),
reflecting high exposure to environmental and very high exposure to social
risks, and a highly negative governance profile. 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.
Ethiopia has a low governance profile score (G-4 issuer profile).
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.
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.
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: At least one default event (on bonds and/or loans)
has been recorded since 1983
On 13 May 2021, a rating committee was called to discuss the ratings
of Ethiopia, Government of. The main points raised during
the discussion were: progress regarding the issuer's application
under the G20 Common Framework for debt treatment beyond DSSI; the
issuer's liquidity risks and political risks, both of which
have materially increased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings would likely be confirmed at their current level should Moody's
conclude that participation in multilateral or bilateral debt treatments
under the auspices of the G-20 Common Framework was very unlikely
to entail default on private sector debt, according to Moody's
definition.
The ratings would likely be downgraded if Moody's concluded that
private creditors will likely experience a loss as a result of the Common
Framework implementation. Moreover, a further intensification
of liquidity and/or external pressure either as sources of financing do
not materialise and/or the current account deficit widens, and foreign
exchange reserves fall may also prompt repositioning at a lower rating
level. This could be a consequence of a further intensification
of domestic political tensions.
The increased risk associated with Ethiopia's application for debt treatment
under the Common Framework 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.
By virtue of the focus of the continuing review for downgrade, the
conclusion of the review is likely to be published on a date that deviates
from the previously scheduled date in the sovereign release calendar.
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_1263068.
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
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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
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
