Ethiopia in debt restructuring, downgrade after printing money, despite low deficit

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ECONOMYNEXT – Ethiopia had been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings after it applied for ‘Paris Club’ debt relief having printing money through central bank advances, despite relatively low government debt and a budget deficit of only 2.8 percent of gross domestic product.

The “Common Framework for Debt Treatments (G20 CF) goes beyond a May 2020 announced Debt Service Suspension Initiative for sovereign debt and “explicitly raises the risk’ of extending capital payments or interest for private debt under its conditions, Fitch said.

Ethiopia’s government has maintained “considerable budgetary discipline” with what Fitch said was a “moderate” increase in the budget deficit to 2.8 percent of GDP.

Government debt to GDP was 31.5 percent while total state enterprise debt to GDP was 25.6 percent. There could be pressure on state finances due to Coronavirus, Fitch said.

Central Bank Credit

An International Monetary Fund program has been attempting to wean Ethiopia’s central bank away from money printing, and starting Treasury bill auctions, after the currency fell and inflation rose.

“Government financing has continued its transition towards market-based T-bill auctions and away from the long-standing system of direct advances from the National Bank of Ethiopia (NBE, the central bank),” Fitch said.

This is a core part of the IMF programme, which seeks to promote monetary policy reforms to help gradually tackle inflation that has remained extremely high at close to 20 percent.”

In Sri Lanka despite having a well-functioning Treasury bill market, bids are now rejected and large volumes of cash are injected to trigger forex losses amid high deficit.

In 2015 and 2018 the central bank triggered currency crises, mostly with aggressive open market operations and ‘operations twist’ style activity, critics have said.

Despite low debt and low deficits, money printing has pushed the Ethiopian Birr from 29.11 to the US dollar in November 2019 to 39.3 to the US dollar by February 2021.

Analysts have also warned that IMF programs usually encourage a ‘flexible exchange rate’, a highly inconsistent money regime with money exchange rate and money policy which are at loggerheads with each other.

It involves neither a fully floating rate (no interventions, no sterilization) nor a consistent peg (unsterilized interventions), leading to rapid depreciation as the monetary authority switches rapidly back and forth rapidly from a peg to a float and back within the same trading session.

The extent of how debt will be affected will be decided by an IMF debt sustainability analysis of Ethiopia which is currently being done, Fitch said.

Ethiopia Debt

The bulk of Ethiopia’s public external debt is official multilateral and bilateral debt.

Government and government-guaranteed external debt was 25 billion US dollars in fiscal year to June 2020.

Of this, 3.3 billion dollar was owed to private creditors. There was a billion dollar Eurobond (1 percent of GDP) due in December 2024, with minimal annual debt service of 66 million dollar until the maturity.

There were 2.3 billion dollars of government-guaranteed debt owed to foreign commercial banks and suppliers.

State enterprise debt owed to private creditors came from Ethio Telecom and Ethiopian Airlines was 3.3 billion dollars.

“While this is not guaranteed by the government, it represents a potential contingent liability,” Fitch said.

Ethiopian Airlines is one of the most profitable airlines in the world.

Ethiopia’s external financing requirements were more than 5 billion on average from financial years to 2021 to 2022 including federal government and state enterprise amortization.

Foreign reserves are expected to remain around 3.0 billion dollars or two months of current external payments.

Debt Re-profiling

The extent of debt treatment required will be based upon the outcome of an International Monetary Fund Debt Sustainability Analysis for Ethiopia, which is currently being updated, Fitch said.

“The G20 CF, agreed in November 2020 by the G20 and Paris Club, goes beyond the DSSI that took effect in May 2020, in that it requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors,” the rating agency said.

“This could mean that Ethiopia’s one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch’s sovereign rating criteria.

“There remains uncertainty over how the G20 CF will be implemented in practice, including the requirement for private sector participation and comparable treatment.

“Fitch’s sovereign ratings apply to borrowing from the private sector, so official bilateral debt relief does not constitute a default, although it can point to increasing credit stress.”

“Within the context of Paris Club agreements, comparable treatment requirements are not always enforced and the scope of debt included can vary.

“The Paris Club states that the requirement for comparable treatment by other creditors can be waived in some circumstances, including when the debt represents only a small proportion of the country’s debt burden.

The focus will instead be on some combination of lowering coupons and lengthening grace periods and maturities.

However, any material change of terms for private creditors, including the lowering of coupons or the extension of maturities, would be consistent with the definition of default in Fitch’s criteria.

There was also a conflict in Tigray region.

Conflict in Tigray: Implications for Ethiopia’s International Standing

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Charged Affairs | Since Ethiopian Prime Minister Abiy Ahmed assumed office in April 2018, experts have optimistically predicted the country’s emergence as a regional power. Factors such as a large population, rapid economic growth, and a reform-minded head of government seemed to support this proposition, until recent instability in federal relations threatened an upset to Ethiopia’s position as an emerging power.

After the federal government’s recent incursion into the Tigray region of Ethiopia and subsequent fighting, reports suggest that several thousand citizens are dead and upwards of 40,000 are displaced. The conflict has drawn attention from the African Union and various other international actors. The crisis in Tigray is not an isolated event, but a manifestation of the security threats and political instability plaguing Prime Minister Ahmed Abiy in his campaign for national unity. Should Addis Ababa fail to resolve Ethiopia’s underlying grievances, Ethiopia risks losing both its position as a regional power and its cache as an international partner.

Violence in Tigray commenced in early November 2020 when Abiy ordered federal troops into the region. While the invasion was ostensibly a reaction to looting by the Tigray People’s Liberation Front (TPLF), most observers agree that the military action was intended as punishment after regional leaders held elections last September in defiance of a federal ban. Abiy declared victory on November 28th after federal troops took control of Tigray’s capital, Mekelle. However, fighting in the region remains heavy. International observers have also raised concerns of war crimes after Ethiopian armed forces threatened to target civilians.

At the heart of this contest between Abiy and the TPLF is a debate around Ethiopian governance and the extent to which Addis Ababa should exercise centralized control. The Tigray conflict has highlighted Ethiopia’s unique system of ethnic federalism, which gives semi-autonomous power to the country’s states, each of which was created along ethnic lines. Since this system was first implemented in 1995, certain ethnic groups – notably the Tigray – have enjoyed a degree of political control disproportionate to their demographic representation.

Abiy’s 2018 election marked a challenge to Ethiopia’s status quo. As the country’s first Oromo prime minister, an ethnic group which is demographically dominant but historically marginalized, Abiy has prioritized the blurring of ethnic lines. His program of “Ethiopianization” envisions a unified national identity that would take precedence over ethnic divisions. But after enjoying 15 years of special advantages achieved through their political clout, powerful ethnic groups fear losing their superior position to homogeneity. The resulting discontent has destabilized Ethiopian governance, as regional leaders fight to maintain their power and autonomy while Abiy tries to solidify central control.

The degree of violence seen in Tigray and the seeming intransigence on both sides of the federalism debate has led some analysts to warn of a broader civil war in Ethiopia. These fears are likely overblown. Two months of intense conflict in Tigray have strained TPLF resistance, and no other state in Ethiopia has the economic or military assets to successfully launch a revolt at this scale. However, it is clear that tensions between Addis Ababa and powerful regional contingents are not going away.

Although it received the most press coverage, what happened in Tigray is not an isolated event. Amhara’s attempted regional coup and the Sidama region’s vote for autonomy from the Southern Nationalities, Nations, and People’s Region, both in 2019, represented earlier challenges to Abiy’s anti-federalist agenda. Nationwide, escalating violence from ethnic paramilitary groups has also threatened Ethiopianization. In the face of continuing resistance, Abiy must be prepared to use force to retain control over the country. Tigray demonstrated his military willingness towards this end, and recent purges of opponents from top positions have shorn up his political might. Abiy should also realize that ruling under martial law may seriously jeopardize Ethiopia’s position as a regional leader and international power.

Ethiopia has some natural advantages that set it up as a regional power, including its size and resource wealth. But the country’s leadership has also sought out an expanded role in recent years: Addis Ababa hosts the African Union headquarters; the country’s National Defense Force coordinates and oversees multilateral peace and security operations in the region; and Ethiopian heads of government have mediated conflicts among neighboring states. Today, as Kenyan-Somali ties disintegrate and the U.S. withdrawal from Somalia generates ill-will in the region, strong leadership over the Horn of Africa is more important than ever.

The Tigray situation is already having harmful effects on regional relations. Federal troops came into direct conflict with Ethiopia’s western neighbor after patrol operations “ambushed” Sudanese forces. The burdens that come with mass refugee flows also threaten regional ties, as Tigrayan civilians surge over the border into Sudan and Eritrea. Perhaps the most serious consequence for Ethiopia’s position in East Africa, however, are the indirect effects of Abiy’s battle for centralized control. The guarded militarism inherent in this fight against state autonomy does not lend itself to legitimate leadership, raising the potential for increased distance from neighbors and regional institutions.

Of even greater concern to world leaders is the risk that an Ethiopian implosion could disrupt international security operations in the Horn of Africa. Prime Minister Abiy and his predecessors have operated in close partnership to American and European powers in counterterrorism and anti-piracy initiatives. With terrorist capabilities surging in the region and piracy ramping up off the coast of Somalia, international actors depend on capable, stable partners like Ethiopia. Unless Abiy finds a peaceful and sustainable solution to conflict over federalist governance, Ethiopia will lose its position as that go-to ally

Ethiopia dollar bonds drop after Fitch downgrade

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NASDAQ | Ethiopia’s sovereign dollar bonds dropped nearly 2 cents after Fitch downgraded the country to CCC, citing the government’s plan to make use of the new G20 common framework to overhaul its debt burden.

The country’s outstanding 2024 bond XS1151974877=TE dropped to as low as 92.06 cents in the dollar, according to Tradeweb data, trading close to record lows hit in late January when Ethiopia surprised markets with its announcement to seek debt relief.

“(This is) the first negative spillover from last week’s decision to go for the G20 Common Framework, a process that no eurobond issuer has been though yet, and one that could take some time, especially as private sector creditors have to be included,” said Simon Quijano-Evans, chief economist at Gemcorp Capital.

Fitch said earlier that the downgrade reflects the government’s announcement that it is looking to make use of the G20 framework, “which although still an untested mechanism, explicitly raises the risk of a default event.”

Ethiopia: Government approves ‘first step’ towards Tigray emergency assistance

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UN agencies have received approval from the Ethiopian Government for 25 international staff to provide humanitarian assistance inside the country’s conflict-torn Tigray region, the UN Spokesperson said on Monday.

“This clearance is a first step towards ensuring that aid workers in Tigray can deliver and ramp up the response given the rapidly rising needs in the region”, Stéphane Dujarric told journalists at the daily press briefing.

He recalled a number of positive engagements between the Government and senior UN officials, including with Filippo Grandi, High Commissioner for Refugees (UNHCR), Gilles Michaud chief of UN Safety and Security and most recently, David Beasley, Executive Director of the World Food Programme (WFP).

“Mr. Beasley has just wrapped up a trip to Ethiopia and he says that WFP has accepted the Government’s request to help authorities and aid partners transport aid into and within Tigray”, informed Mr. Dujarric.

Moreover, WFP has also agreed to provide emergency food aid for up to one million people in Tigray.

The conflict between the Government and regional forces of the Tigray People’s Liberation Front (TPLF) began in early November, when the Prime Minister ordered a military offensive after rebels attacked a federal army base. Government forces reported that the region had been secured at the end of November, but TPLF resistance has continued amid accusations of extrajudicial killings and rights abuses.

Escalating humanitarian needs

Meanwhile, around 60 more humanitarian workers from the UN and non-governmental organizations are awaiting approval in the capital Addis Ababa for deployment to Tigray.

They also look forward to rapid authorizations for any further requests put forward.

“While we welcome these clearances, we remain deeply concerned about the significant escalation in humanitarian needs in Tigray, where people have endured more than three months of conflict with extremely limited assistance”, said the UN spokesperson.

He also expressed unease over continued reports of grave violations against civilians.

“We reiterate our call for the full resumption of free and unconditional access for humanitarian supplies and personnel to the Tigray region”, Mr. Dujarric said, adding that it should include “blanket clearances” for organizations operating in the area, “so that we can immediately reach all the people in need with all the assistance they urgently require”.

Ethiopia debt restructuring plan faces hurdles of transparency

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The African Report | Ethiopia’s plan to seek debt restructuring under a G20 common framework agreed in November triggered a sell-off in African debt at the end of January on fears of a contagion effect.

The framework enables debtor countries to seek an IMF programme to strengthen their economies and renegotiate their debts with public and private creditors. But such a debt restructuring for Ethiopia would face barriers due a lack of transparency, analysts say.

Any attempt to reconcile balance of payments and published public external debt figures with underlying debt-creating flows shows information gaps and supports “a narrative of opaque lending”, argues Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town.

Along with Djibouti and Zambia, Ethiopia’s dealings with China “raise the probability of higher-than-estimated debt contracted by extra-budgetary units (EBUs) as well as potentially large contingent liabilities,” she writes in a research note.

  • China does not publish official or non-official bilateral debt agreements with central governments or state-owned enterprises, she notes.
  • The channel through which private-sector participation in the framework can be forced is not clear, Erasmus says.

“The agreement of the principles of the G20 Common Framework is positive but negotiations in actual restructurings are likely to be challenging,” says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. Lack of clarity on what is owed to China is one obstacle. While he hasn’t seen any firm evidence of Chinese loans to Ethiopia being understated, there is “less transparency” on Chinese lending, he says.

Chinese loans aren’t the only problem.

  • The fact that India and Turkey, which are non-Paris club G20 lenders, are the largest bilateral creditors after China, may complicate an Ethiopian restructuring, Bohlund says.
  • A further stumbling block is reluctance from debtor nations to participate in fear of adverse credit rating actions. African countries intending to tap international debt markets this year, such as Tunisia, Ghana and Kenya, may be reluctant to join the initiative, Erasmus says.

Unrealistic growth outlook

For Africa, recent sharp declines in external borrowing costs for many countries amid global optimism on emerging markets provides a “silver lining” to the cloud of debt woes, according to Jacques Nel, head of Africa macro at NKC. “Markets are now open to lending to many sub-Saharan African sovereigns, which could provide the necessary fiscal breathing room in 2021.”

  • But official Ethiopian projections for annual economic growth of 8.4% are dismissed by Erasmus. NKC predicts growth of 2.2% given the “dire fiscal position and balance of payments risks.”
  • “The near-term outlook is clouded by political tensions ahead of the June election, reputational risks related to armed conflict in Tigray, an upsurge in desert locust infestation and forex shortages,” Erasmus writes.
  • That means the long-awaited liberalisation of Ethiopia’s high-potential sectors such as telecommunications and banking is now urgent. This would be the “crucial first step in addressing structural vulnerability and lowering government debt dependence,” Erasmus argues.

Dual-track danger

Zambia, heavily indebted to China, in November became the first African country to default on its debt during the COVID-19 pandemic. Even the G20’s less expansive debt service suspension initiative (DSSI), which allows repayments to be deferred but does not provide for writing off debt, is hard to implement in the absence of transparency, says Harry G. Broadman, managing director at Berkeley Research Group LLC in Washington.

  • “The mode and channels through which Chinese lending is made to poor countries present thorny challenges for the effective functioning of the DSSI,” he says.
  • Chinese state-owned entities do not face strong incentives to follow market standards of transparency. And on the borrower side, there can be disincentives or bans on fully disclosing the terms and magnitude of debts to Beijing, he adds.

A DSSI may have only a limited impact if a debtor government is unable to come clean, Broadman says. “Perversely, what may emerge, in effect, is a dual track paradigm for debt relief, one pertaining to bona fide official flows under the auspices of the DSSI, and the other focused on Chinese debt,” he says. “This would hardly be a framework for sound macroeconomic management in recipient countries.”

Bottom Line

As was the case with Zambia, opaque debts to Chinese creditors are likely to continue to hamper attempts to provide African debt relief.

EU Accuses Eritrean Forces of Fueling Conflict in Ethiopia

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Bloomberg | EU envoy scheduled to meet Ethiopian premier on Tuesday. UN says international staff given approval to travel to Tigray

The European Union accused Eritrean troops of fueling the months-long conflict in Ethiopia’s Tigray region and echoed a U.S. call for their withdrawal.

The presence of Eritrean forces is “exacerbating ethnic violence” in Tigray, the EU said in a statement Monday. Eritrea rejects the accusation and said the EU statement was “appalling,” according to comments posted by Information Minister Yemane Gebremeskel on Twitter on Tuesday.

“The EU statement laments the ‘exacerbation of ethnic violence’ while conveniently forgetting the toxic policy of institutionalized ethnicity and polarization that the now defunct Tigray People’s Liberation Front clique pursued for decades,” Yemane said.

The U.S. said last month there were “credible reports” of Eritrean involvement in the violence in Tigray, which began on Nov. 4 when Ethiopian federal troops declared war on forces loyal to the dissident TPLF. The governments of both Ethiopia and Eritrea have previously denied Eritrean troops are involved in the fighting.

Ethiopian Prime Minister Abiy Ahmed’s spokeswoman, Billene Seyoum, didn’t respond to a requests for comment sent by text message.

Finnish Foreign Minister Pekka Haavisto, who has been nominated as a special envoy to the region by EU member states, is scheduled to meet Abiy on Tuesday in the Ethiopian capital, Addis Ababa, to discuss the crisis.

In December, the EU suspended almost 90 million euros ($109 million) of budgetary aid to Ethiopia because of the conflict, which the United Nations estimates has killed thousands of people, displaced about 2.2 million others and destroyed 80% of the region’s health centers.

Debt Restructuring

The war threatens to strain government finances already stretched by the Covid-19 pandemic. Last month, the Finance Ministry said it would seek to restructure its external debt under a Group of 20 program to address “pandemic-related financial constraints.” The nation’s $1 billion of 2024 Eurobonds plunged the most on record after the announcement.

Haavisto on Feb. 7 traveled to Sudan, where he held talks with government officials aimed at cooling tensions with Ethiopia after several deadly clashes between the two nations in al-Fashqa, an area of fertile farming land that straddles their border. Officials in Ethiopia’s ethnic Amhara region have pressed the government to seize land that Sudan claims ownership of based on colonial treaties dating back to 1902.

UN agencies on Monday received approval from the government for 25 of its international staff to move into Tigray to help deliver humanitarian aid to the region, Secretary-General Antonio Guterres’ spokesman, Stephane Dujarric, said in a statement.

“We remain deeply concerned about the significant escalation in humanitarian needs in Tigray where people have endured more than three months of conflict with extremely limited assistance,” Dujarric said. “We are also very concerned by reports of grave violations against civilians that we continue to receive.”

Though Ethiopia announced victory in the Tigray war on Nov. 28, the region’s former leader, Debretsion Gebremichael, has vowed to continue fighting.

EU urges Eritrea to stop meddling in Ethiopia war

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EU Observer | The EU has urged Eritrea to withdraw troops from Ethiopia and for access to diplomats, aid workers, and journalists to war-torn regions. “The EU joins the United States’ call for the withdrawal of Eritrean troops from Ethiopia, which are fuelling the conflict in Tigray, reportedly committing atrocities, and exacerbating ethnic violence,” it said Monday. The Eritrean forces are fighting alongside Ethiopian government troops against local rulers in Ethiopia’s Tigray region.

Fitch Downgrades Ethiopia to ‘CCC’ – Rating Action Commentary

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Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC’ or below.

KEY RATING DRIVERS

The downgrade reflects the government’s announcement that it is looking to make use of the G20 “Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)” (G20 CF), which although still an untested mechanism, explicitly raises the risk of a default event.

The G20 CF, agreed in November 2020 by the G20 and Paris Club, goes beyond the DSSI that took effect in May 2020, in that it requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors. This could mean that Ethiopia’s one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch’s sovereign rating criteria. There remains uncertainty over how the G20 CF will be implemented in practice, including the requirement for private sector participation and comparable treatment. Fitch’s sovereign ratings apply to borrowing from the private sector, so official bilateral debt relief does not constitute a default, although it can point to increasing credit stress.

Within the context of Paris Club agreements, comparable treatment requirements are not always enforced and the scope of debt included can vary. The Paris Club states that the requirement for comparable treatment by other creditors can be waived in some circumstances, including when the debt represents only a small proportion of the country’s debt burden.

The focus of Ethiopia’s engagement with the G20 CF will be on official bilateral debt, as reprofiling of this will have the biggest impact on overall debt sustainability. Nonetheless, the terms of the framework clearly create risk that private sector creditors will also be negatively affected. The G20 statement on the G20 CF indicates that debt treatments will not typically involve debt write-offs or cancellation unless deemed necessary. The focus will instead be on some combination of lowering coupons and lengthening grace periods and maturities. The extent of debt treatment required will be based upon the outcome of the IMF’s Debt Sustainability Analysis for Ethiopia, which is currently being updated. However, any material change of terms for private creditors, including the lowering of coupons or the extension of maturities, would be consistent with the definition of default in Fitch’s criteria.

The bulk of Ethiopia’s public external debt is official multilateral and bilateral debt. Government and government-guaranteed external debt was USD25 billion in fiscal year 2020 (FY20, which ended in June 2020). Of this, USD3.3 billion was owed to private creditors. This includes Ethiopia’s outstanding USD1 billion Eurobond (1% of GDP) due in December 2024, with minimal annual debt service of USD66 million until the maturity; and USD2.3 billion government-guaranteed debt owed to foreign commercial banks and suppliers. Other SOE debt to private creditors which relates to Ethio Telecom and Ethiopian Airlines is a further USD3.3 billion. While this is not guaranteed by the government, it represents a potential contingent liability.

Ethiopia’s external finances are a rating weakness and this is the main factor behind the intention of using the G20 CF. Persistent current account deficits (CAD), low FX reserves and rising external debt repayments present risks to external debt sustainability. Ethiopia’s external financing requirements, at more than USD5 billion on average in FY21-FY22 including federal government and SOE amortisation, are high relative to FX reserves, which we forecast to remain at around USD3 billion. Reserves cover only around two months of current external payments.

The CAD narrowed to 4.1% of GDP in FY20 as imports declined, maintaining the trend since FY15 when the CAD was 12.5% of GDP. We forecast the CAD to hover around 4% of GDP, although this does not incorporate potential import costs associated with vaccines to combat the coronavirus pandemic. Smaller CADs have not eased pressure on FX reserves because net FDI has been lacklustre (averaging 2.7% of GDP in FY19-FY20) and net external borrowing has moderated with negative net borrowing by SOEs. The central bank has allowed sharper exchange rate depreciation, but the currency nonetheless remains overvalued, with a weaker rate in the parallel market. Proposed sales of mobile licenses and a stake in Ethio Telecom, the state-owned telecoms company, are an upside risk to FDI inflows and reserves in FY21-FY22.

The IMF assessed Ethiopia at high risk of external debt distress in its latest assessment in 2020, with Ethiopia breaching thresholds on external debt service/exports and the present value of external debt/exports. An improvement from high to moderate risk is a central aim of the three-year arrangement with the IMF agreed in late 2019 under the Extended Credit Facility and the Extended Fund Facility. Given the difficulty of substantially boosting exports in the near term, the main route to achieve this is via reducing debt service costs. Within the IMF programme, the authorities planned by the first review to undertake additional reprofiling of bilateral loans but this has not yet happened. The pandemic has placed further emphasis on debt reprofiling.

Ethiopia and the IMF reached staff-level agreement on the first review of the programme in August 2020, but this awaits board approval. The Fund’s press release recognised that performance had mostly been good, but also emphasised the need for financial support from Ethiopia’s international partners including through debt reprofiling.

Ethiopia’s ‘CCC’ IDRs also reflect the following key rating drivers:

Strong economic growth potential and an improving policy framework support the rating, while double-digit inflation, low development and governance indicators and elevated political risks weigh on the rating.

The coronavirus pandemic continues to present significant risks to Ethiopia, but the negative economic impacts since the onset have been somewhat contained so far. Given that the fiscal year ends in June, we do expect more of a hit to growth in FY21 than FY20, but forecast a return to growth rates in the 6%-7% range over the medium term. The government has maintained considerable budgetary discipline, with moderate increases in the general government budget deficit, to 2.8% of GDP, and government debt/GDP (31.5%), while total SOE debt/GDP (25.6%) has fallen. However, the pandemic presents risks of upward pressure on spending. Government financing has continued its transition towards market-based T-bill auctions and away from the long-standing system of direct advances from the National Bank of Ethiopia (NBE, the central bank). This is a core part of the IMF programme, which seeks to promote monetary policy reforms to help gradually tackle inflation that has remained extremely high at close to 20%.

The military conflict in the Tigray region from November 2020 has underlined ongoing political risks in Ethiopia as well as for Ethiopia’s international relations. Considerable domestic political uncertainty, related to the delayed 2020 parliamentary election (now planned for June) and ongoing ethnic and regional tensions within the country, remains a risk to Ethiopia’s credit metrics, in Fitch’s view. Greater political unrest could, for example, act as a drag on FDI and tax collection and exert further upward pressure on inflation. It could also lead to worsening relations with some bilateral partners and hold up donor flows, as illustrated by the suspension of some flows from the EU in December.

ESG – Governance: Ethiopia has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Ethiopia has a low WBGI ranking in the 25th percentile, reflecting in particular political instability, as well as low scores for voice and accountability and regulatory quality.

RATING SENSITIVITIES

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

– Structural Features: Stronger evidence that Ethiopia’s engagement in the G20 CF will lead to comparable treatment for private sector creditors consistent with a default event under Fitch’s criteria.

– External Finances: Increased external vulnerability that heightens the risk of default irrespective of the G20 CF, such as the emergence of external financing gaps and downward pressure on already low foreign-exchange reserves.

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

– Structural Features: Clarity that the G20 CF will not lead to a default event.

– External Finances: Stronger external finances with acceleration in exports, for example, leading to smaller CADs and higher foreign-currency reserves.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

In accordance with the rating criteria for ratings in the ‘CCC’ range and below, Fitch’s sovereign rating committee has not used the SRM and QO to explain the ratings, which are instead guided by the rating definitions.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].

KEY ASSUMPTIONS

We assume that Ethiopia pursues involvement in the G20 CF.

We expect global economic trends and commodity prices to develop as outlined in Fitch’s Global Economic Outlook.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Ethiopia has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

Ethiopia has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.

Ethiopia has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.

Ethiopia has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver, as for all sovereigns.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

APPLICABLE CRITERIA
Country Ceilings Criteria (pub. 01 Jul 2020)
Sovereign Rating Criteria (pub. 26 Oct 2020) (including rating assumption sensitivity)

APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Country Ceiling Model, v1.7.1 (1)
Debt Dynamics Model, v1.2.1 (1)
Macro-Prudential Indicator Model, v1.5.0 (1)
Sovereign Rating Model, v3.12.1 (1)

ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy

ENDORSEMENT STATUS
Ethiopia EU Endorsed, UK Endorsed

DISCLAIMER

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1 dead as soldiers fire on protest in Tigray capital: doctor

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One person was shot dead Tuesday when soldiers opened fire on an anti-government protest in the capital of Ethiopia’s conflict-hit northern Tigray region, a medical official said.

The protest in the city of Mekele was timed to coincide with a visit by religious leaders from the national capital Addis Ababa, part of an effort by the federal government to show that life is returning to normal in Tigray three months after fighting began.

Groups of young men used stones and burning tyres to block roads in central Mekele, and soldiers used live rounds in at least one location, several witnesses told AFP.

“One dead body already arrived” with gunshot wounds, said a doctor at Ayder Referral Hospital, adding that the victim was “a young man.”

There could be more casualties, said the doctor, who spoke on condition of anonymity for fear of reprisals.

“The head of our transport division was injured. He was beaten by soldiers along with his son and he’s getting treatment in the hospital,” the doctor said.

“He told the physicians that there are lots of injured in the street but nobody is bringing them to the hospital.”

In early November, Prime Minister Abiy Ahmed announced military operations against Tigray’s former ruling party, the Tigray People’s Liberation Front (TPLF), saying they responded to TPLF-orchestrated attacks on federal army camps.

Federal forces entered Mekele in late November, and Abiy declared at the time that fighting was “completed”.

But portions of Tigray remain insecure, hindering the distribution of humanitarian assistance, and aid workers are warning of possible widespread starvation.

Mekele residents have also complained that life is far from peaceful in the city, accusing soldiers of using lethal force to enforce a curfew.

President Sahle-Work Zewde visited Mekele over the weekend, telling residents that Abiy’s government was “working to fully restore peace and return the overall activity to normalcy.”

The religious leaders were expected to stay in Tigray for three days and meet with regional government officials and security forces.

Multiple Tigray residents told AFP that many businesses were closed Tuesday, a move intended to show anger with the federal government.

“The government is trying to show the international community that everything is going well in Tigray and peace is already completely stabilised,” said one resident, who also requested anonymity for safety reasons.

“It was like the protest was to prevent this false information,” he said.

Officials from the caretaker administration in Tigray did not respond to requests for comment.

Ethiopia gives UN green light to deploy 25 staff to Tigray

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UNITED NATIONS (AP) — U.N. agencies received approval from Ethiopia’s government Monday to send 25 more staff members to embattled Tigray, a region where the United Nations says hunger is growing and much of the area has been inaccessible to humanitarian workers.

U.N. spokesman Stephane Dujarric called the clearance “a first step towards ensuring that aid workers in Tigray can deliver and ramp up the response given the rapidly rising needs in the region.”

A U.N. humanitarian report released Thursday said life for civilians in Tigray has become “extremely alarming” since fighting began in early November pitting Ethiopian and allied forces against those of the Tigray region, which dominated the country’s government for almost three decades before Prime Minister Abiy Ahmed took office in 2018. Each side now views the other as illegitimate.

The government has said well over 1 million people in Tigray have been reached with assistance but some aid workers have reported having to negotiate access with a range of armed actors, even from neighboring Eritrea, and starvation has become a major concern.

As fighting enters its fourth month, international pressure has increased on Ethiopia, Africa’s second most populous country and the anchor of the Horn of Africa, to allow aid workers, journalists and human rights experts into Tigray. Currently, communications are patchy and little is known about the situation for most of its 6 million people.

Dujarric pointed to recent “positive engagements” between the government and senior U.N. officials, including World Food Program Executive Director David Beasley, who just wrapped up a trip to Ethiopia.

Beasley reported that WFP has accepted the government’s request “to help authorities and aid partners transport aid into and within Tigray” and also agreed “to provide emergency food aid for up to one million people in Tigray,” Dujarric said.

The U.N. spokesman said humanitarian workers “are looking forward to receiving approval” for 60 staff members from the U.N. and aid agencies who are in Ethiopia’s capital, Addis Ababa, ready to go to Tigray, as well as rapid approval of future requests.

According to last week’s report from the Famine Early Warning Systems Network, which is funded and managed by the United States, “aid workers on the ground indicate a rising in acute malnutrition across the region.” It said that “only 1 percent of the nearly 920 nutrition treatment facilities in Tigray are reachable.”

“Many households are expected to have already depleted their food stocks, or are expected to deplete their food stocks in the next two months,” the report said. It warned that more parts of central and eastern Tigray likely will enter Emergency Phase 4, a step below famine, in the coming weeks. Health care in the region is also “alarmingly limited,” the report said.

In a separate statement, the U.N special adviser on the prevention of genocide, Alice Wairimu Nderitu, said she has received reports of serious human rights violations in Tigray, including “extrajudicial killings, sexual violence, looting of property, mass executions and impeded humanitarian access.”