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Fitch downgrades Ethiopia’s rating over default fears

Fitch Ratings has downgraded Ethiopia's Long-Term Foreign-Currency Issuer Default Rating (IDR) from 'B' to 'CCC', signaling there is a real possibility of default on debt owed to private creditors. The new rating portrays the worsening of the country’s ability to meet its debt obligations.

This comes almost a week after Ethiopia’s Ministry of Finance announced it is looking to make use of the G20 "Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)" (G20 CF), which Fitch says is still an untested mechanism that explicitly raises the risk of a default event.

“DSSI is designed to facilitate timely and orderly debt treatment for eligible countries with broad credit participating,” said the Ministry of Finance, which wanted to utilize all mechanisms at its disposal including the common framework to reduce debt vulnerabilities and lower the risk of debt stress.  

According to Fitch, the decision of the Ethiopia’s government requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors.

“This could mean that Ethiopia's one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch's sovereign rating criteria,” the Rating Agency said.

Of over USD 54 billion total debt of Ethiopia, half is external, while the remaining is taken from domestic sources. 

About USD 3.3 billion of the external loan was owed to private creditors until last year. This is including the country’s outstanding Eurobond due in December 2024 and another USD2.3 billion government-guaranteed debt owed to foreign commercial banks and suppliers.

Ethiopia's external finances are a rating weakness and this is the main factor behind the intention of using the G20 CF. Persistent current account deficits (CAD), low FX reserves and rising external debt repayments present risks to external debt sustainability, the Statement by Fitch said.

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