Fitch Ratings downgrades Ethiopia due to increased default risk
Fitch Ratings has further downgraded Ethiopia, pushing the country deeper into junk status due to concerns about the potential for a default. The agency downgraded Ethiopia from 'CCC-' to 'CC,' citing increasing worries about the country's external liquidity decline and substantial external financing gaps, which have heightened the risk of a default in the Horn of Africa nation.
In the absence of a viable debt solution that would alleviate Ethiopia's external debt servicing burden and facilitate external financing, Fitch predicts that the country's already strained external liquidity will continue to deteriorate.
Fitch estimates that Ethiopia will face sovereign external principal and interest payments of $1.0 billion in the fiscal year ending on July 7, 2024 (FY24) and $2.0 billion in FY25, with a $1 billion Eurobond maturing in December 2024. The non-sovereign public sector also faces about $1 billion in debt service obligations annually.
Key Takeaways
A peace agreement signed on November 2 of the previous year marked the end of the civil war in Ethiopia, and it set the stage for negotiations with the International Monetary Fund (IMF) regarding a financing program. However, as of October 2023, the IMF mission reported progress in discussions on reforms but had not yet reached a staff-level agreement. Ethiopia has also been engaged in negotiations with bilateral creditors, including China, for potential debt relief. But the specific details of these negotiations have not been made publicly available. Fitch points out that bilateral liquidity relief, even if obtained, would be insufficient to address the significant financing gaps and enhance debt sustainability in the medium term, particularly in the absence of renewed financing from international financial institutions. The agency further warns that prolonged delays in securing financing from the IMF and other multilateral organizations could lead to a further deterioration in Ethiopia's external liquidity.
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