Exacerbated by the hard currency crunch and substantial gaps in external financing, Ethiopia risks defaulting on its debt services, predicts Fitch Ratings’ latest report on Ethiopia.
Published on November 2, 2023, the credit rating agency downgraded Ethiopia from CCC- to the CC rank, with the junk level declining to the default stage.
“Decline in external liquidity and significant external financing gaps have increased the likelihood of a default event,” predicts the report
Ethiopia has been carrying a debt burden that constitutes over half of its GDP, estimated at USD 111 billion. Out of that, external debt accounts over USD28 billion, of which 70 percent is owed by the central government. Domestic debt reached USD34.8 billion as of June 2023. Domestic debt rose by 25 percent from June 2022, while external debt remains static as government halts commercial borrowing.
Unable to meet the debt service commitments, the country has been pushing for debt treatment from the G20 Common Framework (CF) debt relief initiative since early 2021. Fitch’s rating implying the “probable risk of default” comes amidst the debt restructuring efforts.
Abdulmenan Mohammed (PhD), a seasoned financial analyst based in London, closely follows Ethiopia’s economy and financial landscape. He says the recent downgrade by Fitch Ratings shows how seriously Ethiopia is struggling to repay the external debts.
Ethiopia has recently been in constant decline in the eyes of ‘The Big Three’ credit rating agencies, including by Moody’s Investors Service (Moody’s) and Standard & Poor’s (S&P), all of which are US-based and operating multinational.
Judging by the reports and own observation, Abdulmenan believes “[Ethiopia] is vulnerable to default due to depleting foreign currency reserves, persistent balance of payment deficits, delay in debt restructuring and external funding, as well as rising domestic costs of financing.”
During IMF and WB annual joint press briefing few weeks back in Marrakesh, Morocco; IMF’s director of the African Department, Abebe Aemro Selassie, explained Ethiopia’s request for debt treatment through the G20 Common Framework still awaits IMF’s staff-level agreement.
The long-awaited G20 Common Framework debt restructuring efforts seem to be fruitless, as there have been no updates while the country’s dire financial situation deepens. “In the absence of debt restructuring and an external source of long-term funding, it appears that Ethiopia will have a difficult time ahead, which may trigger default on debts,” Abdulmenan gave his opinion to The Reporter.
Recalling China’s recent offer to suspend Ethiopia’s debt service obligations by one year, Fitch’s report says it expects this bilateral negotiation to be “insufficient to address the large financial gaps and improve debt sustainability.”
Coming up with the second Homegrown Economic Reform Agenda (HGER 2.0), the Ethiopian government is currently looking for fresh finances from international financial institutions, mainly a new IMF program.
Last July, Teklewold Atnafu, Senior Monetary Advisor to the Prime Minister, disclosed to The Reporter that the government asked IMF and the World Bank for USD 12 billion injection to finance the implementation of HGER 2.0.
“Prolonged delays in securing financing from the IMF and other multilaterals will lead to a further deterioration in external liquidity,” Fitch’s report states. “In the absence of a debt treatment that would reduce Ethiopia’s external debt servicing burden and facilitate external financing, the country’s already strained external liquidity will continue to worsen.”
According to Patrick Heinisch, an economist keenly observing the economic situation of East African countries, details including the revenue base decline from 12.5 to 8.4 percent of the GDP that the report unveiled are “worrisome.”
Ethiopia’s foreign currency reserve, reportedly amounting to USD one billion, covers less than one month of import bill. Furthermore, Ethiopia has to shell out USD1 billion for the repayment of Eurobond that matures by end of 2024.
“In order to improve the outlook, Addis Ababa has to achieve an agreement with the IMF on the new program and must speed up the Common Framework debt restructuring process,” Patrick told The Reporter.