Ethiopia’s credit profile balances high growth and low debt costs against range of challenges

ADDIS ABABA (Capital Markets in Africa) – Ethiopia’s B1 rating and stable outlook reflects its strengths, including high growth levels and low debt-servicing costs, set against challenges such as high inflation, low per capita income, low foreign exchange reserves and a weak institutional framework, Moody’s Investors Service says in an annual report today.

The report, “Government of Ethiopia – B1 Stable, Annual Credit Analysis”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“Ethiopia’s economy has grown rapidly over the last decade and we expect GDP growth of around 8% over the next few years, which will bolster its fiscal position,” said Aurelien Mali, Vice President — Senior Credit Officer and co-author of the report. “While the authorities’ efforts to diversify the economy support creditworthiness, Ethiopia also faces a number of credit challenges, including vulnerability to political risk and weather cycles and price volatility for coffee and gold.”

Moody’s assessment of Ethiopia’s fiscal strength as “Moderate” reflects the country’s low debt burden, favourable debt structure and affordable interest payments. Other factors include its low government revenue ratios, sizable potential contingent liabilities from the state owned enterprises, and a high proportion of foreign-currency debt within the government’s borrowing portfolio.

The government has recorded low and stable deficits averaging -1.9% of GDP between 2008 and 2016. This has been achieved through prudent spending controls in the face of fluctuating grant financing, as well as efforts to mobilise domestic revenues alongside an increase in nominal expenditure. Moody’s expects the central government deficit to remain at around 2.5% of GDP in the coming years.

Ethiopia’s central government debt is low compared to its peers at around 27.6% of GDP in 2016. Although debt remains low, it has increased slowly to fund large capital projects and Moody’s expects this trend to continue as Ethiopia works on large-scale infrastructure projects under its Growth and Transformation Plan.

Ethiopia faces high political risks stemming from its geographical location and the domestic political environment. The country is surrounded by a number of conflict zones and tensions with Eritrea remain high following a war in 1998-2000. The conflict in South Sudan has led to large numbers of South Sudanese refugees fleeing to Ethiopia.

While upward pressure on Ethiopia’s sovereign rating is unlikely in the short-term, export diversification, the completion of infrastructure programmes and a lessening of domestic and geopolitical tension in the region would all be positive.

On the other hand, downward pressure would stem from an acceleration in external debt levels and difficulties in securing concessional external financing, which would put downward pressure on international reserves.

Major delays or interruptions in key infrastructure projects that hinder medium-term growth prospects and foreign exchange generation capacity would also weigh on the rating.