Ethiopia, Government of — Moody’s places Ethiopia’s B2 ratings on review for downgrade

Ethiopia, Government of — Moody’s places Ethiopia’s B2 ratings on review for downgrade

(finance)–Rating Action: Moody’s places Ethiopia’s B2 ratings on review for downgradeGlobal Credit Research – 10 Mar 2021London, 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 RATINGSTHE REVIEW FOR DOWNGRADE WILL ASSESS CREDIT RATING IMPLICATIONS OF ENTERING G20 COMMON FRAMEWORKOn 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 CONSIDERATIONSEthiopia’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 LEVELThe 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 DOWNGRADEThe 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: b1Default history: At least one default event (on bonds and/or loans) has been recorded since 1983On 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 methodologyThe weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.REGULATORY DISCLOSURESFor 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.

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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.

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