‘Fitch Ratings has downgraded Ethiopia’s Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) from ‘CCC-‘ to ‘CC, citing a material decline in external liquidity and significant external financing gaps that have heightened the risk of a default event. The agency, however, affirmed the Long-Term Local-Currency IDR (LTLC) at ‘CCC-‘.

Key Rating Drivers:

1. Downgrade of LTFC IDR: The downgrade is attributed to Ethiopia’s participation in the G20 Common Framework (CF) debt relief initiative, which could potentially lead to a default event due to the principle of comparable treatment for official and private creditors.
2. Strained External Liquidity: Ethiopia’s external liquidity is predicted to worsen without a debt treatment that alleviates its external debt servicing burden. The country’s external principal and interest payments are estimated at USD1.0 billion in FY24 and USD2.0 billion in FY25.
3. Structural External Imbalances: Ethiopia’s structural current account deficits and external imbalances have been exacerbated by multiple shocks and disrupted external loans.
4. Little Progress on Common Framework: While a peace agreement in November 2022 opened up possibilities for IMF negotiations on a financing programme, there has been limited progress due to the ongoing Tigray conflict and lack of a debt sustainability analysis.
5. Rising Domestic Financing Cost: The Ethiopian government is increasingly relying on domestic financing, with interest service expected to increase to 10.5% of general government revenue in FY24.
6. Tight Fiscal Position: Fitch estimates that the fiscal deficit narrowed to 2.6% of GDP in FY23 from 3.4% in FY22. The revenue base is also reported to have declined.
7. Vulnerable Debt Profiles: While public sector debt/GDP is lower than the ‘B’/’C’/’D’ median, over 50% of the government debt is held by external creditors, making it vulnerable to exchange rate depreciation.
8. Inflationary Pressures: Inflation in Ethiopia remains high, averaging 32.5% in FY23 and 28.4% in 1QFY24, influenced by supply-side shocks, currency weakness, and expansionary fiscal and monetary policies.

ESG – Governance and Creditor Rights: Ethiopia has an ESG Relevance Score of ‘5’ for Political Stability and Rights and for Rule of Law, and Institutional and Regulatory Quality and Control of Corruption. The low World Bank Governance Indicators ranking at 21.6 reflects political instability, weak institutional capacity, and corruption. The country also scores ‘5’ for Creditor Rights, highlighting the increasing likelihood of default.