(Reuters) – S&P Global Ratings on Friday downgraded Ethiopia’s long-term foreign and local currency sovereign credit ratings to ‘B-’ from ‘B’ on potential debt restructuring, announcing the move days after Fitch Ratings downgraded the country.
“Exacerbated by the effects of the COVID-19 pandemic, Ethiopia’s structurally weak external balance sheet has deteriorated further, in our view”, S&P Global Ratings said.
On Tuesday, Ethiopia’s sovereign dollar bonds dropped nearly 2 cents as Fitch chopped Ethiopia’s credit score by two notches after Addis Ababa signaled it could be the first with an international government bond to use a new G20 ‘Common Framework’ plan.
The scheme, which is open to over 70 of the world’s poorest countries, encourages their governments to defer or negotiate down their external debt as part of a wider debt relief program.
S&P said it estimated Ethiopia’s public debt repayment needs at about $5.5 billion over 2021-2024, including a $1 billion Eurobond due in 2024.
The ratings agency added that the economic effects of the COVID-19 pandemic have slowed Ethiopia’s economic activity in the services and industry sectors, including retail trade, hospitality, transportation, and construction.
S&P described the Tigray conflict in November 2020 that followed increased tensions between the federal and local authorities as “the most significant (conflict) since Prime Minister Abby Ahmed took office in 2018.”
“Another outbreak of armed conflict could spur wider ethnic tensions, weakening Ethiopia’s political and institutional framework and threatening the government’s transformative reform agenda”, it added.
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.
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.
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.
Ethiopia plans to seek a restructuring of its sovereign debt under a new G20 common framework and is looking at all the available options, the country’s finance ministry told Reuters on Friday.
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.