Moody’s, the prominent credit rating agency, has made a significant adjustment to Ethiopia’s foreign currency rating, lowering it by one notch from ‘Caa2’ to ‘Caa3.’ This decision reflects growing concerns about the country’s ability to meet its foreign currency-denominated private sector debt obligations, brought about by a combination of persistent challenges.
Foremost among these challenges is the depletion of foreign inflows, a consequence of the enduring impacts of the COVID-19 pandemic and an extended two-year conflict in the Tigray region. The conflict has pitted regional forces against Ethiopia’s federal army, supported by its allies.
Moody’s assessment is straightforward: Ethiopia’s external financial position has deteriorated considerably over the past two years, indicating the severity of the situation.
Nevertheless, it’s crucial to emphasize that the downgrade, while significant, is measured. Moody’s believes that private-sector creditors are likely to experience losses that are below the historical average experienced by sovereigns. This optimism is rooted in the Ethiopian government’s proactive steps to seek liquidity relief.
Moody’s stated, “The government is committed to improving the country’s external financial standing through various measures, including seeking debt relief within the G20 common framework.” This demonstrates the Ethiopian government’s resolve to stabilize its external financial situation, even amidst adversity.
Additionally, Moody’s has revised Ethiopia’s outlook from ‘negative’ to ‘stable,’ anticipating a swift debt relief process under the G20 Common Framework, with support from the International Monetary Fund. Ethiopia initiated its request for debt restructuring within the G20 Common Framework in early 2021, although progress was hindered by the civil conflict that began in November 2020.
Furthermore, China has recently granted Ethiopia permission to postpone payments on debts maturing in the 2023/2024 fiscal year under the G20 framework. This development provides Ethiopia with a welcome respite as it grapples with economic challenges.
In summary, Moody’s recent downgrade highlights Ethiopia’s precarious economic situation and the looming risk of default on its foreign currency-denominated debt. Nonetheless, the Ethiopian government’s concerted efforts, including debt relief initiatives and international support, offer a ray of hope for stabilizing the nation’s external finances and rejuvenating its economic prospects.
Photo source: Mark Lennihan, Associated Press
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By Montel Kamau
Serrari Financial Analyst
17th September, 2023
