Moody’s confirms Ethiopia’s rating, outlook negative :The legacy of Abiy Ahmed

London, 07 August 2020 — Moody’s Investors Service (“Moody’s”) has today confirmed the B2 issuer and senior unsecured rating of the Government of Ethiopia, with the outlook changed to negative. This concludes the review for downgrade initiated on 7 May 2020.

The review for downgrade reflected Moody’s assessment that the country’s participation in the G20 Debt Service Suspension Initiative (DSSI) raised the risk that private sector creditors would incur losses. In the last few weeks, Moody’s has considered the evidence of implementation of DSSI for a range of rated sovereigns, and statements by G20 officials. While Moody’s continues to believe that the ongoing implementation of DSSI poses risks to private creditors, the decision to conclude the review and confirm the rating reflects Moody’s assessment that, at this stage, for Ethiopia, those risks are adequately reflected in the current B2 rating.

It remains unclear what influence is being applied to Ethiopia and to other participating sovereigns to treat private creditors in a comparable manner to official sector creditors. However, a number of elements suggest that the probability of broad-ranging private sector involvement has diminished. These include the apparent absence of progress in discussions about how private sector involvement (‘PSI’) would be effected in DSSI in general; indications by the G20 that PSI would require the support of the borrowing government; the government of Ethiopia’s continued assertion that PSI is not contemplated; and evidence of some debt payments being made to private sector creditors under a DSSI regime.

The risks that remain relate to the possibility that in particular cases DSSI is implemented with private sector creditors also being drawn in to provide debt service relief and incurring losses in doing so. Should the probability of losses to private sector creditors increase as implementation of DSSI for Ethiopia becomes clearer, Moody’s would reflect any related changes in risks to private creditors in further rating announcements.

The negative outlook reflects Moody’s view that Ethiopia’s fiscal and external vulnerabilities that had increased before the coronavirus shock will be exacerbated by the shock, and potentially reach a degree of severity consistent with a lower rating. Delivering on the government’s structural reform agenda and reversing the persistent deterioration in revenues to low levels will be challenging in the subdued economic environment that Moody’s expects to continue into fiscal 2021. Moreover, Ethiopia remains reliant on recurrent financing from official lenders to meet its large funding gap and preserve macroeconomic stability. Uncertainty about the sovereign’s capacity to secure external funding to fully cover the country’s needs could sharply increase the pressure on its liquidity and balance of payments.

The long-term local currency bonds and bank deposits ceilings remain unchanged at Ba3. The long-term foreign currency bonds ceiling remains unchanged at B2, and the bank deposits ceiling has remained unchanged at B3.
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