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· Ethiopia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings.
· The downgrade is coming at a time when Ethiopia had decided to issue new telecom licenses and a stake sales in Ethio Telecom
· The Ministry of Finance disclosed that Ethiopia has signed a Memorandum of Understanding with the Paris Club, which is under the auspices of the G20 “DSSI”, and negotiated debt service suspension agreements with its non-Paris Club bilateral creditors
Ethiopia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings. The downgrade is coming at a time when Ethiopia has decided to issue new telecom licenses and a stake sale in Ethio Telecom. Analysts maintain this would affect the foreign direct inflows because of the risk perception. Fitch is one of the first three rating agencies that rate Ethiopia.
The reason given by Fitch for downgrade was that the East African country was looking to make use of the G20 “CF DSSI” (G20 CF), a comfort being extended by G-20 countries at the request of World Bank and IMF to give comforts to poorer countries to cope up with resource crunch during the pandemic days. Ethiopia has applied for availing this facility. This, the rating agency says, is an untested mechanism, which can raise the risk of a default if the country contracted the loan does not have the means to repay.
Against the backdrop of the pandemic in poorer countries, the World Bank and the International Monetary Fund urged G20 countries to establish the DSSI that is helping countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people. Since May 1, 2020, the initiative has delivered about US$ 5 billion in relief to more than 40 eligible countries. The suspension period, originally set to end on December 31, 2020, has been extended through June 2021. In its statement, the Ministry of Finance disclosed that Ethiopia has signed a Memorandum of Understanding with the Paris Club, which is under the auspices of the G20 “DSSI”, and negotiated debt service suspension agreements with its non-Paris Club bilateral creditors.
Fitch said that Ethiopia’s external finances are weak as evident from the intention of using the G20 CF. The country is also facing persistent current account deficits (CAD), low foreign exchange reserves and rising external debt repayments indicating vulnerability of external debt front. Ethiopia’s external financing requirements, the rating agency says, is at more than US$ 5 billion on average in the next two fiscals. However, the country may face difficulties in raising resources to that extent. Therefore, the risk of default cannot be ruled out.
