Common Framework and Conflict Still Weigh on Ethiopia’s Rating

Fitch Ratings-Hong Kong-22 July 2021: The timeline and shape of Ethiopia’s debt treatment under the G20 Common Framework (CF) remains unclear, with Ethiopia’s one outstanding Eurobond still at risk of reprofiling as part of the broader agreement, says Fitch Ratings.

In January, Ethiopia indicated that it would seek debt treatment under the CF from the Paris Club and G20 bilateral official creditors, which requires comparable treatment across other official bilateral and private creditors. A restructuring of the USD1 billion (less than 1% of GDP) Eurobond, such as a maturity extension or coupon reduction, may represent a distressed debt exchange (DDE) under Fitch’s sovereign rating criteria. Our decision to downgrade Ethiopia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) in February to ‘CCC’, from ‘B’, reflected a significant risk of a DDE.

Ethiopia has stated that the Eurobond, which matures in December 2024 and carries annual coupon payments of USD66 million, will not be affected by the CF treatment, but the latest G20 communique (dated 9-10 July) stressed the importance of comparable private creditor treatment. The situation is complicated further by the possibility that some types of liability-management undertakings involving Ethiopia’s Eurobonds could be assessed by official creditors as comparable treatment without triggering our DDE criteria. These uncertainties are captured in Ethiopia’s current ‘CCC’ rating.

On July 6 the IMF published a statement urging the swift formation of the creditor committee for Ethiopia. Progress would help to avoid further delays to the country’s IMF programme. There was staff agreement on the programme’s first and second reviews in February, but we believe board approval – and the release of funds – is pending progress on CF treatment.

Prime Minister Abiy’s Prosperity Party won 410 out of 436 seats contested in elections held on 21 June. However, we believe this victory is unlikely to resolve Ethiopia’s ethnic and regional tensions, which extend beyond the Tigray conflict and will continue to weigh on political stability. Some opposition parties boycotted the vote, and logistical issues have delayed ballots for around a fifth of federal constituencies.

Meanwhile, Tigrayan forces recently recaptured their region’s capital, Mekelle. It remains unclear whether the government will be able to resolve the Tigrayan conflict, and we view the risk of further unrest in other regions as high.

We have previously highlighted how political developments might weigh further on Ethiopia’s sovereign credit metrics. Persistent political strife could, for example, depress FDI and tax collection and undermine attempts to reduce consumer price inflation, which averaged just over 20% yoy in 1H21. It could also aggravate relations with some bilateral partners and hold up donor flows, as illustrated by the suspension of some flows from the EU in December 2020.

Despite political turbulence and uncertainties over debt treatment, Ethiopia approved a budget for fiscal year 2021-2022 (starting in July) in a timely fashion, and has pressed ahead with elements of its economic reform agenda. The government sold a mobile licence in May for USD850 million to a consortium led by Safaricom, which should give a boost to foreign-exchange inflows. The government had planned to sell a second licence, but rejected a bid of USD600 million as too low. In mid-June the government also launched a tender process to sell a 40% stake in the state-owned Ethio Telecom. These steps to open up the telecoms sector are much delayed, but point to the potential for credit-positive economic reform if political challenges can be contained.

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