Ethiopia’s “Favorable” Growth Outlook

Country’s Rating Supported

Ethiopia’s government bond rating, according to Moody’s Investor Service, is being supported by what the agency says is a “favorable” growth outlook. Carrying a low debt burden and low risk due to limited liquidity, Ethiopia’s current rating by Moody’s stands at B1 stable.

In its annual report on the country, Moody’s points to the constraints on Ethiopia’s rating, which include its relatively small economy and its vulnerability to extreme weather cycles. In addition, institutional strength in the country remains “weak”. A history of high inflation also plays into the mix, keeping the country at frontier market status. There are bright spots, however, given the country’s potential for large scale investments.

“Ethiopia’s growth outlook remains positive given the significant investment in the country’s power-generating capacity and infrastructure,” said Rita Babihuga, assistant vice president, analyst and co-author of the report. “Debt relief has also helped the government’s financial profile by keeping its debt burden and servicing costs low and by delivering a favorable debt structure.”

Ethiopia’s relatively “small and adequately capitalized” banking sector coupled with low government liquidity risk given stable and substantial inflows of grants and concessional lending, add to the credit-positive factors the country is now experiencing. However, should business conditions within the country start to improve, upward pressure on the rating could develop, thus leading to more foreign direct investment (FDI) and boosting economic
diversification.

Risks Linger, Potential For Price Shocks

The annual Credit Analysis published by Moody’s on August 5th depicts Ethiopia‘s credit profile in terms of economic strength, institutional strength, fiscal strength and susceptibility to event risk, which are the four main analytic factors considered in Moody’s Sovereign Bond Ratings Methodology.

Activities of state-owned enterprises involved in large infrastructure and power-generating projects imply potentially sizable contingent liabilities for the country’s public finances. In addition, Ethiopia’s geographic location in the Horn of Africa leaves it prone to instability and geopolitical risk.

Also running a large current account deficit and suffering from low foreign-exchange reserves, Ethiopia is a commodity exporter. This, the report states, leaves it vulnerable to price shocks for its main export commodities, coffee and gold.

Photo Credit: Bole area–Addis Ababa, Ethiopia, WantedInAfrica.com