Addis Abeba — Fitch Ratings, a renowned credit rating agency, has announced a downgrade in Ethiopia's long-term foreign currency issuer default rating (IDR). The country's IDR has been revised from 'CCC-' to 'CC', indicating a heightened level of vulnerability in meeting its financial obligations without defaulting.
Fitch has downgraded Ethiopia's rating as a result of a significant decline in liquidity and substantial financing shortfalls, which have heightened the risk of a potential default.
This is the second time Ethiopia's credit rating has been downgraded since September 2023. Two months ago, Moody, another credit rating agency, downgraded Ethiopia's foreign currency rating from 'Caa2' to 'Caa3'. This downgrade was attributed to a high probability of default on foreign currency-denominated private sector debt.
Fitch has stated that Ethiopia's 'cc' rating signifies a potential default risk associated with its involvement in the G20 Common Framework (CF) debt relief initiative, whose progress has been limited thus far. Although the official creditor committee convened in September 2021, there has been no publicly acknowledged agreement reached regarding Ethiopia's debt treatment.
Delays have been attributed to various factors, including the Tigray conflict and the absence of a debt sustainability analysis. The peace agreement reached in November 2022 paved the way for negotiations with the International Monetary Fund (IMF) regarding a financing program. However, despite a year passing since the peace deal, no concrete agreement has been reached. The credit agency warns that this prolonged delay in securing financing from the IMF and other multilaterals will exacerbate Ethiopia's liquidity situation even further.
A month ago, the IMF made an encouraging announcement regarding the ongoing discussions on potential support for the economic program of the Ethiopian authorities. In a statement released by the organization, it was highlighted that the IMF's team, which visited Ethiopia from 25 September to 03 October, 2023, acknowledged the significant steps taken by Ethiopia to combat inflation and bring stability to its economy.
Fitch has highlighted that the absence of a debt relief plan, which could alleviate the pressure of external debt and enable financing, will further deteriorate Ethiopia's already strained liquidity. According to Fitch's estimations, Ethiopia's external debt payments are projected to reach $1 billion in 2024 and $2 billion in 2025, including a $1 billion eurobond due in December 2024.
As a result of escalating external debt payments and diminished external funding, the credit rating agency highlights that Ethiopia's foreign currency reserves have declined to $1 billion. This amount is insufficient, representing less than the equivalent of one month's worth of external payments.
Ethiopia has been experiencing persistent deficits in its current account, and these external imbalances have been exacerbated over the past three years due to various factors, including conflict and disruptions in external loans. Fitch's projections indicate that the current account deficit of Ethiopia is expected to rise to 2.9% of GDP ($4.6 billion) in 2023, compared to 3.8% the previous year.
In order to alleviate the burden, Fitch recommends a significant adjustment of the official exchange rate, as there is currently a significant disparity between the official and parallel market exchange rates.
Despite a modest 5% depreciation of Ethiopia's official exchange rate against the US dollar in 2023, the premium of the parallel market exchange rate exceeds 80%. This significant disparity, according to Fitch, has resulted in illicit financial flows and informal trading.
Fitch highlights the rise in domestic financing costs as a notable concern. With reduced external funding, the government has increasingly turned to domestic financing from the banking sector. According to a report by Addis Standard in August 2023, domestic debt in Ethiopia has experienced a substantial increase of 14% since June 2022, reaching a staggering 1.7 trillion birr by the end of March 2023.
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Projections indicate that domestic interest payments are expected to reach 10.5% of the annual government revenue in 2024. This increase can be attributed to higher costs associated with issuing domestic debt.
In recent years, the government has implemented various measures to generate funds within the local market. In November 2022, the National Bank of Ethiopia (NBE) issued a directive that mandates commercial banks to acquire a five-year Treasury bond with a 9% interest rate. This bond is required to make up 20% of their monthly loans and advances.
At present, the NBE holds a substantial amount of government bonds, totaling 434 billion birr, which accounts for 38.5% of the total domestic debt. A significant portion of the domestic debt also consists of direct advances from the central bank, estimated to reach 120 billion birr by the end of 2023.
