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Moody's changes Ethiopia’s investment outlook to negative

Moody's changes Ethiopia’s investment outlook to negative

  • Affirmed Ethiopia's rating of B1

Moody's Investors Service ("Moody's") has affirmed Ethiopia's B1 long-term issuer and senior unsecured ratings changing the outlook on the Government of Ethiopia to negative from stable on September 20, 2019.

According to Moody's Investors Service Statement the decision to change the outlook to negative reflects rising fiscal and external risks related to the decline in government revenue generation and rise in State-Owned Enterprise (SOE) external debt and associated service costs over recent years, while reserves coverage of imports remains very thin.

The government is pursuing wide-ranging structural reforms and privatization agenda aimed at transforming the economy from a state-centered and controlled economy to a market economy, arresting the deterioration in Ethiopia's fiscal metrics, and fortifying Ethiopia's foreign exchange generation capacity. However, progress on the reform agenda remains subject to significant implementation risk and will ultimately take time to reverse the deterioration in credit metrics witnessed in recent years. Moody's sees the downside risks to Ethiopia's fiscal and external positions during this extended period of change have increased. The statement explains.

The statement has put rationale for the ratings; for the negative outlook and the B1 rating affirmation as well. Regarding the negative outlook, the statement says “the decision to change the outlook to negative reflects rising risks on Ethiopia's fiscal and external positions.”

“Ethiopia's government revenue to GDP ratio (including grants) fell to 13.1% in fiscal 2018 from 16% in 2016 on the back of declining revenue from import tariffs and challenges in revenue administration, although a commensurate widening in the budget deficit has been avoided through cuts in expenditure.”

It further explains that Ethiopia's main exports, especially coffee and gold, are susceptible to commodity price shocks during a period of volatile external conditions. Moody's expects that external debt will rise to above 220% of export receipts in fiscal 2020, and continue to increase in the near to medium term.

Regarding the B1 rating affirmation, the statement says Ethiopia exhibits various credit strengths supporting the B1 rating.

“Moody's expects the economy to continue to grow at a robust rate, around 7-8% in the next few years. GDP expanded 7.7% last year on the back of high-profile infrastructure projects, such as highways and hydroelectric dams, generating employment and supporting future government revenue generation and foreign exchange generation capacity. Prospects of a continued solid inflow of Foreign Direct Investment coupled with the support of development partners, both bilateral and multilateral, also support the rating,” reads the statement.

The statement has also pointed out environmental social and governance considerations.

If progress in implementation of the government's reform plans indicates anything it is that sufficient benefits will likely be generated to tangibly reduce Ethiopia's external vulnerability and strengthen its fiscal position through improving export and government revenue generation capacity then rating up could be changed and if notwithstanding a continued reform agenda, government revenue looks likely to decline further and/or external debt continues to increase, pointing to weaker fiscal strength and risks to macroeconomic stability; then that could change the rating down.

Moody's Corporation is the holding company that owns both Moody's Investor Services, which rates fixed-income debt securities, and Moody's Analytics, which provides software and research for economic analysis and risk management. Moody's assigns ratings based on assessed risk and the borrower's ability to make interest payments and its ratings are closely watched by many investors.

It is to be remembered that, back in 2014, before Ethiopia’s first issuance of a sovereign bond valued at one billion dollars. The first cumulative investment rating for Ethiopia was conducted before the issuance of the bond conducted by the three investment rating giants: Mood’s, Fitch and Standards and Poor’s. Since then, the country has a rating of B1 (Moody’s) and B (Fitch), but featuring a rather stable investment rating, which is now downgraded to negative. Negative investment rating is said to be indicative of most likely declining prospects for the country while stable rating showing relative stability.

The first-ever sovereign bond issued by Ethiopia fetched a 6.25 percent interest rate at the time of issuing, a rating said to be reflective of the positive outlook of investors towards the bond. Ethiopia has since announced the earmarking of the one billion dollars sovereign bond to the construction of various industrial parks across the country including recently being completed Bahir Dar industrial park, on top of those which have already commenced work like Hawassa, Adama, Mekele, Kombolcha, Dire Dawa and Bole Lemi in the capital.