African markets

Moody’s downgrades Ethiopia to Caa2; negative outlook

Moody’s Investors Service (“Moody’s”) today downgraded the Ethiopian government’s senior long-term, unsecured issuer rating to Caa2 from Caa1 under review for downgrade. The outlook is negative. This concludes the decommissioning review initiated on May 17, 2021.

The downgrade to Caa2 reflects increased default risks. In the absence of significant developments and prospects for near-term settlement of Ethiopia’s request for debt treatment under the Common Framework, and, in part as a consequence, without access to official or debt-based external financing the market, external liquidity risks have increased significantly, indicating that a possible default. The continued escalation of social tensions and conflicts in Ethiopia has weakened the quality of the country’s institutions and governance and further undermined the state’s ability to obtain external financing, essential to shore up its very weak foreign exchange reserves.

The negative outlook reflects heightened uncertainty regarding political risks and the resolution of the Common Framework, as well as the risk of significant losses for investors in the event of Ethiopia defaulting beyond what would be consistent with a Caa2 rating.

Ethiopia’s local currency (LC) country cap has been lowered from B2 to Caa1. The country’s foreign currency (FC) cap has also been lowered to Caa2 from Caa1. Moody’s assessment is that non-diversifiable risks are appropriately captured in an LC cap one notch above the sovereign rating, given the state’s considerable footprint in the economy, with very limited private sector, a very large public 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 difference between the FC and LC ceiling reflects Moody’s assessment of material transfer and convertibility (T&C) risks, given a relatively closed capital account, limited access to foreign currencies and external imbalances that could lead the government to impose T&C restrictions.

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