Ethiopia 'B/B' Ratings Affirmed; Rating Outlook Decision Under Appeal

  • Despite rising global uncertainty connected to COVID-19, we still expect Ethiopia to post solid GDP growth, albeit lower than in 2019.
  • Ethiopia's weak external position and public finances remain significant rating constraints.
  • We are affirming our 'B/B' ratings on Ethiopia.
  • The outlook is under appeal.

Rating Action

On March 27, 2020, S&P Global Ratings affirmed its 'B/B' foreign and local currency sovereign credit ratings on Ethiopia. The outlook is under appeal.

Outlook

Ethiopia requested an appeal of S&P Global Ratings' decision on the outlook.
S&P Global Ratings determined that the conditions for making such an appeal had been met, in accordance with its policies and procedures. As a consequence, we will deviate from our calendar of 2020 EMEA sovereign, regional, and local government rating publication dates to resolve the appeal. We plan to resolve it within two weeks.

Rationale

The ratings on Ethiopia continue to be supported by the economy's strong medium-term growth prospects and the central government's moderate debt burden, alongside our understanding that state-owned entity (SOE) debt will be subordinated to sovereign, that is, central government obligations. The ratings are constrained by low GDP per capita; a weak external position; and limited monetary policy effectiveness, characterized by the crawling currency arrangement, shallow capital markets, and high inflation. Despite the gradual improvement in the external accounts, Ethiopia's external financing needs will remain high and its foreign exchange reserves inadequate.
While central government debt is still moderate, the high debt levels at its loss-making SOEs poses contingent risks to public debt sustainability. We also consider that a sizable component of Ethiopia's GDP growth is directly connected to SOEs' strong appetite for borrowing to fund capital projects, some of which may prove to be unproductive.

Key Statistics

Table 1

Ethiopia Selected Indicators
Mil. ETB2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. ETB)1,0891,3321,5681,8332,2022,6963,2183,7874,4785,175
Nominal GDP (bil. $)576674818395103106111117
GDP per capita (000s $)0.70.70.80.90.91.01.01.01.11.1
Real GDP growth10.310.48.010.17.79.04.55.06.67.0
Real GDP per capita growth7.57.85.57.55.36.72.12.54.14.5
Real investment growth24.426.39.112.55.010.15.55.07.06.8
Investment/GDP39.633.430.442.138.733.931.629.928.527.5
Savings/GDP29.419.819.432.330.926.925.723.823.022.2
Exports/GDP11.39.17.87.68.47.97.06.77.27.2
Real exports growth2.9(11.2)(9.3)8.312.76.4(4.0)(3.0)11.04.0
Unemployment rateN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
External indicators (%)
Current account balance/GDP(10.2)(13.5)(10.9)(9.8)(7.9)(7.0)(5.9)(6.1)(5.5)(5.3)
Current account balance/CARs(54.2)(81.3)(64.2)(67.5)(49.3)(47.0)(45.3)(47.7)(41.7)(41.0)
CARs/GDP18.716.617.014.615.914.813.112.813.113.0
Trade balance/GDP(18.4)(20.4)(18.8)(15.9)(14.9)(13.1)(11.3)(11.3)(10.9)(10.7)
Net FDI/GDP2.63.34.45.24.53.22.93.12.92.9
Net portfolio equity inflow/GDP0.00.00.00.00.00.00.00.00.00.0
Gross external financing needs/CARs plus usable reserves149.3174.1164.0172.2160.8156.8158.2163.6153.1150.2
Narrow net external debt/CARs114.0159.5168.1190.6189.3194.9218.6225.3214.9209.4
Narrow net external debt/CAPs74.088.0102.4113.8126.7132.6150.5152.5151.7148.6
Net external liabilities/CARs196.1256.3280.8344.0353.1370.7424.5455.5449.7458.4
Net external liabilities/CAPs127.2141.4171.0205.3236.4252.2292.2308.3317.4325.2
Short-term external debt by remaining maturity/CARs29.935.744.356.952.246.955.056.653.352.4
Usable reserves/CAPs (months)1.81.62.02.22.01.92.22.02.32.4
Usable reserves (mil. $)2,7023,4043,5883,3513,3383,5863,3573,9884,3494,690
Fiscal indicators (general government; %)
Balance/GDP(2.5)(2.3)(1.9)(3.3)(3.0)(2.5)(2.5)(2.3)(1.9)(2)
Change in net debt/GDP4.84.24.95.97.13.45.14.84.34.1
Primary balance/GDP(2.2)(1.9)(1.4)(2.8)(2.5)(2.0)(2.0)(1.8)(1.4)(1.5)
Revenue/GDP14.515.015.514.713.112.810.710.19.79.5
Expenditures/GDP17.017.317.418.016.115.313.212.411.611.5
Interest/revenues2.42.73.03.14.03.94.85.25.45.5
Debt/GDP25.025.726.829.431.930.530.730.930.430.4
Debt/revenues172.3171.7172.2200.1244.4238.5287.0305.5313.2320.4
Net debt/GDP20.621.022.825.428.326.527.328.028.028.3
Liquid assets/GDP4.44.74.03.93.64.03.42.92.42.1
Monetary indicators (%)
CPI growth8.17.79.77.414.612.616.413.111.99.0
GDP deflator growth10.910.89.06.111.612.314.212.110.98.0
Exchange rate, year-end (ETB/$)19.6320.6722.0523.2527.5329.0333.3838.3942.2346.45
Banks' claims on resident non-gov't sector growth29.833.921.424.522.226.016.415.315.317.1
Banks' claims on resident non-gov't sector/GDP28.030.731.633.734.235.234.433.732.833.2
Foreign currency share of claims by banks on residentsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Foreign currency share of residents' bank depositsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Real effective exchange rate growth0.411.91.17.9(5.9)21.1N/AN/AN/AN/A
Sources: National Bank of Ethiopia, World Bank(Economic Indicators), National Bank of Ethiopia, Bloomberg (Monetary Indicators), National Bank of Ethiopia, Ministry of Finance of Ethiopia (Fiscal indicators); National Bank of Ehiopia, Bank for International Settlement (External Indicators)
Adjustments: None.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. ETB--Ethiopian birr. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Ethiopia Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment5Decision-making remains centralized under the ruling coalition party, and future policy responses are difficult to predict. There is a risk of challenges to political institutions, because of demands for more economic and political participation by parts of the population. While the new government is broadening political representation to some extent, difficult ethnic relations persist.
Economic assessment5Based on GDP per capita (US$) as per Selected Indicators in Table 1. Weighted-average real GDP per capita trend growth over a 10-year period is at more than 5%, which is well above sovereigns in the same GDP category.
External assessment6Based on narrow net external debt and gross external financing needs/(current account receipts [CARs]+useable reserves) as per Selected Indicators in Table 1. The Ethiopian Birr is not an actively traded currency. There is a risk of marked deterioration in the access to external financing, due to a potential shift of foreign direct investment flows. The net external liability position is worse than the narrow net external debt position by over 100% of CAR, as per Selected Indicators in Table 1. The sovereign's external data lack consistency, with no international investment position (IIP) statistics available.
Fiscal assessment: flexibility and performance6Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. The sovereign faces shortfalls in basic services and infrastructure, as reflected, for instance, by its low ranking on the United Nations Development Programme's human development index.
Fiscal assessment: debt burden3Based on net general government debt (% of GDP) as per Selected Indicators in Table 1. Over 50% of gross government debt is denominated in foreign currency. Contingent liabilities are moderate with material exposure to state-owned enterprises in power, rail, sugar, and other sectors, and we assess the likelihood of extraordinary government support as significant.
Monetary assessment5The exchange rate regime is a crawling peg. The National Bank of Ethiopia is more likely to pursue a gradual, but more rapid, devaluation path to reduce overvaluation of the birr. We view the central bank's independence to be limited due to perceived political interference, as demonstrated by the monetization of fiscal deficits. Consumer price index as per Selected Indicators in Table 1.
Indicative ratingbAs per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility0
Final rating
Foreign currencyB
Notches of uplift0Default risks do not apply differently to foreign- and local-currency debt.
Local currencyB
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