Ethiopia hit by default concerns

Ethiopia’s long-term issuer and senior unsecured ratings have been lowered from B2 to Caa1 by Moody’s Investors Service, on debt default concerns.

Moody’s has not assigned an outlook to Ethiopia, as the country has been placed on review for further downgrade.

The country’s downgrade follows the government’s application for the Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI) (G20 CF).

Protracted deliberations regarding Ethiopia’s application for debt relief under the Common Framework have increased the risk of private sector creditors incurring losses, according to Moody’s.

There has been little progress since Ethiopia’s February announcement that it intended to seek debt treatment under the Common Framework.

Moody’s assesses that the decision whether or not to enforce comparable treatment of official and private sector lenders in the implementation of the Common Framework will be official lenders’ decision.

The requisite debt sustainability analysis is yet to be revealed. The official creditor committee has yet to be convened to determine the magnitude and apportionment of relief across the various creditor classes.

Passage of time since Ethiopia’s application to the Common Framework suggests a relatively complex decision by the creditor committee. This in turn indicates that an outcome that does not impose any losses on private sector creditors is less likely.

Meanwhile, heightened domestic political tensions risk interfering with official sector support and undermining foreign investment that is critical for the government’s financing in the near and medium term.

The review for downgrade will allow Moody’s to assess the progress of the official creditor committee deliberations regarding the extent of relief and apportionment across the various creditor classes.

Ethiopia’s review will also allow an assessment of prospective proceeds from the spectrum license auction, as well as progress on part-divestiture of Ethio Telecom, a telecommunications company.

This will provide a clearer indication of the government’s ability to secure financing, in the context of persistent government liquidity and external vulnerabilities.

Moody’s would maintain Ethiopia’s rating if it concluded that participation in multilateral or bilateral debt treatments under the Common Framework was very unlikely to entail default on private sector debt.

The rating agency would consider downgrading the rating if it concluded that private creditors will likely experience a loss as a result of the Common Framework implementation.

Meanwhile, Moody’s has also lowered Ethiopia’s long-term local currency (LC) ceiling from Ba3 to B2, while the foreign currency (FC) ceiling has been lowered from B2 to Caa1.

This comes after S&P Global Ratings dropped Ethiopia’s rating from B to B-, on default concerns earlier in 2021.

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