Ethiopia is facing a record-high sovereign-risk premium following its recent downgrade deeper into junk status by Moody’s Investors Service. Investors are demanding an unprecedented extra yield to hold Ethiopia’s dollar-denominated debt, with spreads widening to a staggering 4,089 basis points above Treasuries. This marks a significant contrast to the narrowing spread observed earlier in the year.
Last Friday, Moody’s downgraded Ethiopia’s foreign issuer rating from Caa2 to Caa3, while the local issuer rating remained at Caa2. The outlook, however, shifted from negative to stable. Ethiopia is facing the imminent challenge of servicing approximately $154 million in bond and loan payments within the next year, based on data compiled by Bloomberg.
Sam Singh-Jami, African strategist at Rand Merchant Bank, explained, “The primary reason behind the downgrade of Ethiopia’s foreign-currency rating is the growing likelihood of default on privately-held foreign-currency debt due to strained external liquidity. The government has sought relief under the G20 Common Framework for debt treatment.” This move reflects the government’s efforts to secure assistance in managing its financial obligations.
Moody’s recent downgrade was influenced by their expectation that losses for private-sector creditors could range from 20% to 35%, a figure lower than the historical average of sovereign defaults, which is approximately 50%. The government’s focus remains primarily on securing liquidity relief as it grapples with its financial challenges.
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19th September, 2023
Delino Gayweh
Serrari Financial Analyst
