Fitch Affirms Ethiopia at 'B'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Ethiopia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B'. The Outlooks are Stable. The issue rating on Ethiopia's senior unsecured foreign currency bond has also been affirmed at 'B'. The Country Ceiling has been affirmed at 'B' and the Short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
Ethiopia's 'B' IDRs reflect the following key rating drivers:
Weak development and governance indicators illustrate weak debt tolerance, entrenching the rating in the 'B' rating category. Despite rapid development over the past decade, Ethiopia remains one of the poorest sovereigns rated by Fitch, with a purchasing power parity gross national income per capita of USD1,500, much lower than the peer median of USD7,700 at end-2015, and weaker indicators of human and financial development than 'B' medians.
Macroeconomic spillovers of the on-going severe drought (which has pushed more than 10% of the population into food insecurity) have remained contained compared with previous drought episodes. Fitch has revised down its growth forecast for FY16 (ending in July 2016) to 7.0% from 7.5%, to reflect the expected fall in agricultural production, primarily livestock and to a lesser extent, crops. However, traditional export commodities, including coffee, are less affected. In addition, the massive public investment effort endorsed by the state and the state-owned enterprises (SoEs), which has been a key growth driver in recent years, is continuing.
Structurally high and volatile inflation remains a rating weakness. Inflation picked up to double digits in recent months, driven by higher food prices, but declined to 7.5% yoy at March 2016, helped by tighter monetary policy. Growth in broad money and credit to the economy has decelerated since mid-2015, triggering a decline to '2' in Fitch's macro-prudential indicator and indicating a lower risk of systemic stress.
Fitch expects the current account deficit to remain in double digits in FY16 after widening to 12.8% of GDP in FY15. Ethiopia is a large beneficiary of lower oil prices, but its goods exports, primarily comprising raw agricultural commodities are also exposed to low international prices and drought-related imports of cereals have already picked up by 10% yoy over the first half of FY16. Fitch expects the majority of this deficit to be financed by external debt inflows, pushing net external debt to an estimated 180% of current account receipts by end-FY16, above the peer median of 74.2%.
External vulnerabilities are therefore increasing. Large current account deficits have maintained international reserves at approximately 2.3 months of current account payments at December 2015, a low level given that the exchange rate is overvalued by more than 30% in real terms. Ethiopia is therefore exposed to the risk of exchange rate adjustment. The central bank's ability to contain the depreciation of the currency to 5% a year against the US dollar will critically depend on FX generation through enhanced exports in coming years. The government is focusing on light manufacturing exports through the creation of industrial parks and improved trade logistics, as well as on electricity exports, but export diversification has remained weak so far.
The sharp decline in international oil prices has helped mitigate the impact of the drought on the budget deficit. The government has financed a large part of drought-related expenditures by tapping accumulated earnings in the Oil Stabilisation Fund, and benefits from international grants. Over the first half of FY16, budget deficit increased moderately, leading us to estimate that the full year budget deficit will be 3% of GDP, below the 'B' median of 4.1%. This will likely stabilise public debt to GDP at around 27% at end-FY16 (against a rating median of 54%), most of which will remain concessional.
Including SoEs debt, total consolidated public debt, at an estimated 56% of GDP at December 2015, is closer to rating medians as SoEs are heavily involved in public infrastructure financing. Although the government expects their debt to be repaid by commercial receipts, it still represents a contingent liability for the state, all the more so as it has guaranteed part of it (up to 8% of GDP in FY15).
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.
The main factors that could, individually or collectively, lead to negative rating action are:
- Rising external vulnerability, illustrated by declining international reserves, a further widening of the current account deficit or rising external indebtedness.
- A rapid increase in public sector indebtedness or increased risk of contingent liabilities from SoEs materialising on the state's balance sheet.
- An increase in macroeconomic imbalances, including a surge in inflation or a recession, related to the current drought.
The main factors that could, individually or collectively, lead to positive rating action, are:
- Stronger external indicators reflected in higher exports, stronger FDI and international reserves.
- Further improvement in the macro-policy environment, supporting moderate inflation and a transition to broader-based growth.
- Further structural improvements, including stronger development and World Bank governance indicators.
Fitch assumes that Brent crude will average USD35 and USD45 in 2016 and 2017, respectively.
Fitch assumes that official donors and creditors will continue supporting Ethiopia, covering a large part of drought-related expenditures and of budget financing needs over the foreseeable future.
Fitch assumes that the recent social unrest will not escalate in a way that would be detrimental to sovereign creditworthiness over the forecast horizon.