Fitch Affirms Ethiopia at ‘B’; Outlook Stable

by Zelalem

(The following statement was released by the rating agency)
PARIS/LONDON, November 07 (Fitch) Fitch Ratings has affirmed
Ethiopia’s
Long-term foreign and local currency Issuer Default Ratings
(IDRs) at ‘B’. The
Outlooks on the Long-term IDRs are Stable. The Country Ceiling
and the
Short-term foreign currency IDR are both affirmed at ‘B’.
KEY RATING DRIVERS
Ethiopia’s ‘B’ IDRs reflect the following key rating drivers:-
-Ethiopia is vulnerable to shocks even compared with ‘B’ rated
peers despite
strong improvements in its World Bank governance indicators and
development
indicators over the past decade. This is balanced by strong
economic performance
and improved public and external debt ratios since debt relief
under HIPC in
2005-2007.
-Macroeconomic performance is broadly in line with rated peers.
The public
sector-led development strategy implemented over the past
decade, focusing on
heavy investments in infrastructure, has sustained strong real
GDP growth, which
reached an estimated 10.3% in the fiscal year to 7 July 2014
(FY14), above most
regional peers, although it may be overestimated according to
previous reports
by the IMF. Inflation, which has historically been high and
volatile, has slowed
to single digits since October 2013, due to a combination of
moderate
international food prices and reduced central bank financing of
the budget
deficit. However, Fitch believes inflation remains vulnerable to
food price
variations.
-Public finances compare favourably with ‘B’ rated peers, but
are exposed to
rising contingent liabilities. General government debt has
broadly been stable
over the past four years, at 26% of GDP in FY14, well below
peers (47.1%). Debt
structure is also favourable. As the government relies heavily
on concessional
lending from multilateral creditors, maturities are long while
interest
payments, at 2.1% of budget revenues, are extremely low. The
foreign-currency
share of public debt, at 60.5% at end-FY14, is in line with
peers. This moderate
level of debt has been made possible by the containment of
general government
deficit below 4% of GDP over the past decade (2.6% in FY14), due
to spending
restraint, and outsourcing of part of its investments to
state-owned
enterprises (SoEs).
As a result SoEs’ debt has risen significantly in recent years,
and accounted
for an estimated 22% of GDP in FY14 (FY10: 12.1%). Even though
the authorities
expect this debt to be repaid from SoEs’ commercial receipts,
Fitch believes
this is a rising contingent liability for the government.
Additionally, this
rise in debt has been financed by recourse to domestic credit,
concentrating
bank exposure to SoEs, and increasingly from external sources,
sometimes with
less favourable financing conditions, which could increase
external debt and
interest service over the coming years.
-Authorities’ strategy of transitioning towards export-led
growth has had
limited results so far: the current account deficit widened to
8.6% of GDP in
FY14 from 5.9% in FY13, as declining commodity prices have
penalised exports of
coffee and gold, which together with oil seeds, still accounted
for 56% of goods
exports in FY14, while imports of capital goods have continued
to grow. As a
result net external debt, at 100% of current account receipts,
is on the rise
and coverage of current account payments by international
reserves has remained
weak, at only 1.8 months at end-FY14. Prospects for export
diversification are
positive, however, over the medium term, helped by a slightly
improving
environment for foreign direct investments (FDI) and potential
electricity
exports.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch’s assessment that upside and
downside risks to
the rating 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 levels 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
The ratings are reliant on a number of assumptions:
-Fitch assumes that there will be no major change in the
political regime and
development model of the country in the coming years.
-Fitch assumes that world GDP will grow by 3% in 2015 and 3.1%
in 2016, from
2.6% in 2014, therefore sustaining demand for Ethiopian exports
of goods and
services.
-Fitch assumes that the international community’s support for
Ethiopia will
continue in the coming years.
Contact:
Primary Analyst
Amelie Roux
Director
+33 144 299 282
Fitch France S.A.S.
60 rue de Monceau – 75008 Paris
Secondary Analyst
Richard Fox
Senior Director
+44 20 3530 1444
Committee Chairperson
Tony Stringer
Managing Director
+44 20 3530 1219
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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