London, 10 March 2021 -- Moody's Investors Service ("Moody's") has today placed the Government
of Ethiopia's B2 long-term issuer and senior unsecured ratings
on review for downgrade.
The decision to place Ethiopia's ratings on review for downgrade reflects
Moody's conclusion that the government's commitment,
as part of its entry into the G20 Common Framework, to sign a Memorandum
of Understanding (MoU) that requires it to engage with private creditors
raises the risk those creditors will incur losses. It is increasingly
clear that, in contrast to the approach taken last year under the
Debt Service Suspension Initiative (DSSI), official sector lenders
are intent on upholding the principle of comparable treatment of official
and private sector lenders. While that principle may not be enforced
in all cases, the decision on whether to do so will ultimately rest
with official sector lenders. The review period will allow Moody's
to assess whether, in this case, the risks of private sector
involvement in providing debt relief have risen to a point no longer commensurate
with the current rating level.
The long-term local currency (LC) and foreign currency (FC) ceilings
remain unchanged at Ba3 and B2, respectively. 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, 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, albeit improving,
institutional framework. The FC country ceiling is a two-notch
gap to the LC country ceiling, reflecting Moody's assessment
of elevated transfer & convertibility (T&C) risks, given
a relatively closed capital account and very constrained access to foreign
exchange.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
THE REVIEW FOR DOWNGRADE WILL ASSESS CREDIT RATING IMPLICATIONS OF ENTERING
G20 COMMON FRAMEWORK
On 1 February, Ethiopia's government issued a statement confirming
its intention to seek debt relief under the G20 'Common Framework'.
In that announcement, the government stated its aim of reducing
the country's debt vulnerabilities and lowering the risk of debt
distress by the end of the three-year IMF programme entered into
in December 2019. The G20 Common Framework term sheet stipulates
any debtor country signing a MoU with participating creditors under the
Common Framework "will be required to seek from private
creditors a treatment at least as favourable as the one agreed in the
MoU". While initial indications were that, as in 2020
under the original DSSI, the government might in practice not be
required to do so, it is now clear that official sector lenders
are intent on upholding the principle of comparable treatment of official
and private sector lenders.
It is therefore clear that the risk has risen that private sector creditors
will incur losses, although it remains unclear how far that risk
has risen. Ethiopia will be required to engage with private creditors,
but the decision on whether to enforce comparability of treatment will
ultimately rest with official sector lenders. The Paris Club has
indicated that exceptions could in principle be made. However,
they will only be allowed under limited circumstances, specifically
"when the debt only represents a small proportion of the country's debt
burden and when restructuring would unduly interfere with the smooth running
of trade". The former is certainly true in Ethiopia's
case, which was an important factor behind Moody's decision
not to move the rating down at this time. However, it is
not clear how far that will influence the outcome of what official sector
creditors are likely to see as an example case.
Moody's understands that an IMF Debt Sustainability Analysis to
be published in coming weeks will determine the amount of relief necessary
to achieve the stated intention of reducing Ethiopia's debt vulnerability
from high risk of debt distress to moderate risk of debt distress by the
end of the programme period. The G20 creditor committee rather
than the Ethiopian government will then determine the apportionment of
the requisite relief across various creditor classes. Only when
those negotiations have concluded will the amount of relief required from
private creditors, if any, become clearer. The review
period will allow Moody's to assess whether Ethiopia's Common Framework
application will be implemented without private sector participation an
outcome which may lead to the rating being confirmed at its current level
— or, if not, whether any losses expected to arise from
the Common Framework debt treatment would be consistent with a lower rating.
The outcome of the review period will also reflect Moody's evolving
view of the sustainability of Ethiopia's fiscal and external position,
particularly near-term financing risks. Moody's expects
that the economy will rebound during 2021 after being adversely affected
by the coronavirus shock. Though the IMF has recently indicated
through a staff-level agreement that performance under the IMF
programme has been strong, downside risks remain; reflecting
the low revenue to GDP ratio of around 12% and still thin foreign
reserves at less than 3 months import cover. While receipts from
asset sales through the partial privatization of Ethio Telecom and the
auctioning of spectrum licenses offer the prospect of an uptick in foreign
exchange reserves that would ease the pressure on the exchange rate,
it remains uncertain when these proceeds will be received. Meanwhile,
domestic political risks remain elevated as tensions in northern and westerly
regions of the country simmer, with potential implications for donor
community funding.
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 increasingly 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 bout 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).
Ethiopia's governance and institutional strength is weak as reflected
in low, albeit improving Worldwide Governance Indicators (WGI).
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.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
The rating could be confirmed at its current level should Moody's
conclude that Ethiopia's application for debt relief under the Common
Framework was unlikely to entail default on private sector debt.
FACTORS THAT COULD LEAD TO A DOWNGRADE
The rating would likely be downgraded should Moody's conclude that
Ethiopia's application for debt relief under the Common Framework
was likely to entail default on private sector debt. In that event,
the rating would be moved to a level consistent with expected losses to
investors. Losses in excess of 5% would be consistent with
a rating of Caa1 or lower.
Separately, an intensification of external pressure, with
materially wider current account deficits than Moody's currently
expects and/or an inability to secure sufficient external financing leading
to a further marked erosion of foreign exchange reserves would also likely
prompt repositioning at a lower rating level.
The heightened 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 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.
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): 16.1%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -2.8%
(2020 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.0% (2020 Estimate)
(also known as External Balance)
External debt/GDP: 27.1% (2020 Estimate)
Economic resiliency: b1
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983
On 8 March 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 application for debt treatment
under the G20 Common Framework for debt treatment beyond DSSI.
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_1243406.
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
