Fitch Affirms Ethiopia at ‘B’; Outlook Stable

(The following statement was released by the rating agency)
PARIS/LONDON, April 10 (Fitch) Fitch Ratings has affirmed
Ethiopia’s Long-term
foreign and local currency Issuer Default Ratings (IDRs) at ‘B’.
The issue
ratings on senior unsecured foreign currency bonds are also
affirmed at ‘B’. The
Outlooks on the Long-term IDRs are Stable. The Country Ceiling
and the
Short-term foreign currency IDR are also affirmed at ‘B’.
KEY RATING DRIVERS
Ethiopia’s ‘B’ IDRs reflects a balance between the economy’s
high exposure to
weather and commodity price shocks, as illustrated by
particularly weak
development and governance indicators, and strong economic
growth associated
with improved public and external debt ratios since debt relief
under HIPC in
2005-2007. More specifically, they reflect the following key
rating drivers:
-Development and World Bank governance indicators remain weak
despite impressive
achievements of the authorities’ development strategy in the
last decade,
illustrating low debt tolerance and entrenching the IDRs in the
‘B’ rating
category. Income per head remains among the lowest of
Fitch-rated sovereigns.
-Macroeconomic performance is broadly in line with peers. After
outperforming
peers with an average 10.2% over the past five years, real GDP
growth is likely
to reach 9%-10% in FY15 (ending in early July 2015), as
authorities maintain a
large public investment effort. Structurally high and volatile
inflation has
moderated to single-digits over the past 18 months (February
2015: 7.4%), due to
moderate domestic and international food prices and reduced
recourse to central
bank financing.
-General government’s fiscal stance has remained cautious. Given
adequate budget
execution over the first seven months of the fiscal year, Fitch
estimates that
the authorities’ FY15 target of a deficit of 2.9% of GDP is
achievable. Public
debt will likely moderately increase to 27.1% of GDP (FY14: 26%)
following a
USD1bn bond issue in December 2014 but will remain below peers.
Although the
share of foreign-currency debt is significant (56% at December
2014), Fitch
believes that risks to public debt sustainability in the short-
to medium-term
remain moderate, due to its largely concessional nature, low
interest rates and
long maturity.
-Despite favourable general government metrics, Fitch deems
public finances
neutral to the ratings as a significant part of fiscal risks are
transferred to
state-owned enterprises (SoEs), which have historically borne a
large share of
public investment cost. Their consolidated debt has materially
increased in
recent years to 22% of GDP at end-June 2014 from 12.1% in 2010.
As they already
absorb the lion’s share of limited domestic credit (29% of GDP
at end-June
2014), they have increasingly turned to external, sometimes
non-concessional,
sources in recent years. The authorities expect this debt to be
repaid from
commercial receipts, but Fitch views this as a rising contingent
liability for
the government for which data availability remains limited.
-The banking sector is sound with NPLs of around 3% of gross
loans; however,
risks could emerge from its large and concentrated exposure to
SoEs and from
rapid expansion in domestic credit (30% yoy in December 2014).
This is reflected
in a score of ‘3’ on Fitch’s macro-prudential indicator of
potential systemic
stress.
-Weak FX generation is a constraint on the ratings given the
rising
foreign-currency indebtedness of the government and SoEs (which
cumulatively
reached 22% of GDP at end-June 2014). International reserves, at
1.8 months of
current account payments at end-June 2014, are structurally
stretched, although
they have since started to improve on the back of the bond issue
and lower
international oil prices.
However, with an expected current account deficit of 7.6% of GDP
in FY15, and
limited signs of export diversification and FDI pick-up so far,
Fitch expects
international reserves will remain vulnerable and external debt
to continue
rising in coming years. Nevertheless, this may be mitigated by
an improvement in
the export base and composition over the medium term following
the completion of
the Gile Gibe III and the Renaissance dams and as the government
focuses on
export promotion.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch’s assessment that upside and
downside risks to
the ratings are currently well-balanced.
The main factors that could, individually or collectively, lead
to a positive
rating action, are:
-Stronger external indicators reflected in higher exports,
stronger FDI and
international reserves
-Further structural improvements, including stronger development
and World Bank
governance indicators
-Further improvement in the macro-policy environment, supporting
moderate
inflation and a transition to broader-based growth
The main factors that could, individually or collectively, lead
to a negative
rating action are:
-Rising external vulnerability, illustrated by declining
international reserves,
further widening of the current account deficit or rising
external indebtedness
-Increased risk of contingent liabilities from SoEs and
publicly-owned banks
materialising on the state’s balance sheet
KEY ASSUMPTIONS
Fitch assumes that the ruling coalition EPRDF will remain in
power after the
general elections due in May 2015 and therefore no major changes
to the
political regime and development model of the country in the
coming years.
Fitch assumes that world GDP will grow by 2.7% in 2015 and 3% in
2016,
supporting Ethiopia’s exports of goods and services.
Fitch assumes that Brent crude will average USD65 and USD75 per
barrel in 2015
and 2016 respectively, compared with an average USD101 in 2014,
improving the
current account deficit and international reserves in both
years.
Contact:
Primary Analyst
Amelie Roux
Director
+33 144 299 282
Fitch France S.A.S.
60 rue de Monceau – 75008 Paris
Secondary Analyst
Federico Barriga Salazar
Associate Director
+44 20 3530 1242
Committee Chairperson
Douglas Renwick
Senior Director
+44 20 3530 1045
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530
1103, Email:
peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable criteria, ‘Sovereign Rating Criteria’ dated 12 August
2014 and
‘Country Ceilings’ dated 28 August 2014, are available at
www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Criteria
here
Country Ceilings
here
Additional Disclosure
Solicitation Status
here
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DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS
LINK:
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DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE
ON THE AGENCY’S
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CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S
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AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE
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SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.
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ON THE FITCH
WEBSITE.

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