ADDIS ABABA – Fitch Ratings has upgraded Ethiopia’s Long-Term Local-Currency (LTLC) Issuer Default Rating from ‘CCC-’ to ‘CCC+’, citing a reduction in financial pressures and improved macro-economic stability.
This upgrade represents a positive development, although the country’s Long-Term Foreign-Currency rating remains at ‘RD’ (Restricted Default). According to Fitch, the upgrade reflects Ethiopia’s ongoing efforts to implement significant economic reforms, particularly those initiated by the National Bank of Ethiopia (NBE).
In July 2024, the NBE adopted a market-based exchange rate approach, resulting in a depreciation of the official rate by over 50%, which has helped align it more closely with the parallel market rate. This change has minimized distortions in the foreign exchange (FX) market, enhancing transparency and stabilizing Ethiopia’s economic outlook.
Additionally, the NBE has lifted restrictions on foreign exchange allocations for importers, increasing FX availability and promoting trade and investment. As part of its broader economic reforms, the NBE introduced a 15% interest-rate-based monetary policy and initiated regular open market operations to improve the transmission of monetary policy.
In July 2024, the International Monetary Fund (IMF) approved a new four-year Extended Credit Facility (ECF) Arrangement for Ethiopia, featuring an immediate disbursement of 1 billion USD from a total of 3.4 billion USD in funding. This, along with a 3.75 billion USD disbursement from the World Bank, is set to reduce Ethiopia’s reliance on domestic financing for its fiscal deficit, helping to alleviate financial repression and control inflation.
Fitch projects that net domestic borrowing will decline to 0.5% of GDP in 2025, down from 2.1% in 2023. The government’s fiscal deficits are expected to narrow to 2% of GDP in 2024, although a slight increase to 2.7% of GDP is anticipated in 2025 due to rising expenditures, including a 1.5% GDP fiscal package aimed at supporting vulnerable populations and increasing public sector wages.
Ethiopia’s strategy for managing debt includes converting 242 billion Birr in National Bank advances into long-term government securities and eliminating mandatory treasury bond purchases by commercial banks by 2025. This approach aims to minimize reliance on non-market-based local financing.
While Ethiopia remains in default on its foreign-currency debt obligations, having suspended payments on a 1 billion USD Eurobond in December 2023, there has been progress in restructuring 15.1 billion USD in external debt under the Common Framework, with an agreement anticipated by year-end. Official international reserves, currently estimated at just above 1 billion USD in FY 2024, are projected to rise to 2.9 billion USD in FY 2025 and 4.5 billion USD in FY 2026.
Fitch believes that these fiscal and monetary reforms will contribute to stabilizing Ethiopia’s economy, though it warns of increasing government borrowing costs, which are expected to reach positive real interest rates. This rise in costs may elevate rollover risks, making the next phases of economic management crucial.
Ethiopia’s advancements in debt restructuring, particularly with major creditors like China, reflect growing confidence in its capacity to manage local-currency obligations without exacerbating ongoing restructuring efforts. As the country negotiates with commercial creditors, the success of these strategies could further bolster its objectives for economic stability and growth in the years ahead, according to the rating agency.
BY MENGISTEAB TESHOME
THE ETHIOPIAN HERALD THURSDAY 31 OCTOBER 2024
