Moody's Investors Service ("Moody's") has today downgraded the long-term issuer and senior unsecured ratings of the Government of Ethiopia to Caa2 from Caa1 under review for downgrade. The outlook is negative. This concludes the review for downgrade initiated on 17 May 2021.
The downgrade to Caa2 reflects increased default risks. In the absence of significant developments in and prospects of a near-term resolution of Ethiopia's application for Common Framework debt treatment, and, partly as a result, without access to official or market-based external funding, external liquidity risks have increased significantly pointing to a possible default. Continued heightened social tensions and conflict in Ethiopia have weakened the quality of the country's institutions and governance and further impair the sovereign's ability to secure external funding, which is essential to shore up its very thin foreign exchange reserves.
The negative outlook reflects heightened uncertainty regarding political risks and the Common Framework's resolution, and the risk of material losses to investors in the event of a default by Ethiopia beyond what would be consistent with a Caa2 rating.
Ethiopia's local currency (LC) country ceiling was lowered to Caa1 from B2. The foreign currency (FC) country ceiling was also lowered to Caa2 from Caa1. Moody's assessment is that non-diversifiable risks are appropriately captured in a LC ceiling one notch above the sovereign rating, taking into account the extensive footprint of government in the economy, with very limited private sector activity, a very large state-owned enterprise sector, and government ownership of the majority of the banking system, as well as a weak institutional framework and high political and external vulnerability risks. The one-notch gap between the FC and LC ceiling reflects Moody's assessment of material Transfer & Convertibility (T&C) risks, given a relatively closed capital account, constrained access to foreign exchange and external imbalances which could lead the government to impose T&C restrictions.