11 February 2021 The African Peer Review Mechanism (APRM), a specialized entity of the African Union (AU), had a mandate to supports African countries in the area of credit rating agencies. As part of this mandate, the APRM undertakes routine reviews of rating outcomes assigned by international credit ratings agencies on African countries. The APRM has noted the downgrade of the Republic of Ethiopia’s long-term foreign currency sovereign credit rating by Fitch on the 09th of February 2021, 2-notches from B to CCC. Moody’s and S&P Global rating still has the country’s long-term credit rating on B2 and B, respectively. The newly assigned rating for Ethiopia means the country is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for it to meet its financial commitments on the obligation. The APRM raises the following observations;
- The key driver of Ethiopia’s rating downgrade is the announcement by the government that it will be utilizing the G20’s Common Framework for Debt Treatments under the Debt Service Suspension Initiative (DSSI).
- The assessment that this G20 debt support mechanism is still an untested mechanism and explicitly raises the risk of a default event is speculative and unobjective. From the precedence of the DSSI program, it has been clear that the G20’s debt relief programs will not be imposed on private creditors whose choice to reject the debt relief request will remain open.
- Ethiopia only has one outstanding Eurobond and has wide number options to service both the Eurobond and other commercial debt; its risk of falling into debt distress is significantly minimal. The bulk of the country’s public external debt is official multilateral and bilateral debt that the country may most likely restructure rather than default.
Based on these factors, the APRM views the downgrade of the Government of Ethiopia’s long-term foreign currency sovereign credit rating by Fitch to CCC as an incorrect reflection of the country’s creditworthiness. The rating downgrade, in fact, counters the efforts by the G20 to assist the Government of Ethiopia and other developing countries to address the impact of the Covid-19 pandemic as it immediately leads to increase in the cost of servicing existing debt. The APRM will therefore provide technical and operational support to Ethiopia’s credit rating liaison team to engage Fitch on its newly assigned credit rating with aim of attaining a rating upgrade in future review.
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