Moody’s Keeps Ethiopia’s Low Credit Rating—What’s Next for the Economy?











Addis Ababa, March 14, 2025 – Moody’s Ratings has completed its periodic review of Ethiopia’s sovereign credit rating, maintaining its Caa3 foreign currency and Caa2 local currency issuer ratings. The assessment underscores Ethiopia’s ongoing financial struggles, particularly in managing its external debt burden, despite recent economic reforms and financial assistance from the International Monetary Fund (IMF) and the World Bank.

While Ethiopia has made notable progress in policy adjustments—such as shifting to a market-driven exchange rate—the country remains under economic stress, with continued negotiations on debt restructuring and significant fiscal vulnerabilities. The review does not signal an imminent change in Ethiopia’s credit rating, but it provides insights into the key factors shaping the nation’s financial future.

Debt Restructuring and Missed Eurobond Payment

Ethiopia has been engaged in a debt restructuring process under the G-20 Common Framework since February 2021, following increasing pressures on its external liquidity. However, despite ongoing negotiations, a final agreement with official sector creditors has not yet materialized.

One of the most concerning developments in Ethiopia’s financial landscape was its failure to make a $1 billion principal payment on its eurobond in December 2024. This default reinforces investor concerns about Ethiopia’s ability to meet its external obligations and further deteriorates market confidence.

Moody’s anticipates that losses for private-sector creditors remain highly probable, and until a restructuring deal is finalized, Ethiopia’s creditworthiness will remain weak. The protracted nature of the negotiations also raises concerns about how much debt relief Ethiopia can realistically secure and whether additional defaults could occur in the near future.

Currency Liberalization: A Double-Edged Sword

In an effort to stabilize its economy, Ethiopia implemented a market-driven exchange rate policy, a key reform required by international financial institutions such as the IMF. The move was aimed at addressing long-standing external imbalances and acute foreign exchange shortages.

Since the exchange rate liberalization, the Ethiopian birr has depreciated by 54% against the U.S. dollar, leading to significant economic shifts:

Increase in exports: The depreciation has made Ethiopian goods more competitive in international markets, contributing to a current account surplus in Q3 2024.

Higher import costs and inflation: While exports have grown, the cost of imports—particularly essential commodities like fuel, machinery, and pharmaceuticals—has surged, increasing inflationary pressures.

Strained purchasing power: The steep depreciation has made goods and services more expensive for Ethiopian households and businesses, intensifying economic hardship.

While the currency reform has helped correct trade imbalances, its impact on everyday consumers and businesses remains a concern, with inflation expected to remain high in the near term.

Macroeconomic Strengths and Structural Challenges

Moody’s has assigned Ethiopia a “ba2” economic strength rating, citing strong growth momentum as a key advantage. The country has consistently posted high GDP growth rates, largely driven by public investment in infrastructure and an expanding services sector.

However, Moody’s notes several structural weaknesses that continue to constrain economic stability:

Low per capita income: Despite strong overall growth, Ethiopia’s income levels remain among the lowest globally, limiting household purchasing power.

Heavy reliance on agriculture: Agriculture still accounts for a significant portion of GDP and employment, making the economy vulnerable to climate-related risks and global commodity price fluctuations.

State-led economic model: Ethiopia has historically relied on government-driven infrastructure projects to fuel growth, which has led to high levels of public debt and financial risks tied to state-owned enterprises (SOEs).

Governance and Fiscal Stability: A Mixed Outlook

Ethiopia’s institutional and governance strength is rated at “caa1”, reflecting persistent challenges in governance, regulatory effectiveness, and financial transparency. The country’s weak performance on global governance indicators, coupled with its history of default, has negatively impacted investor sentiment.

Fiscal strength is rated at “b1”, indicating moderate financial management capabilities. However, concerns remain about:

Weak revenue generation: The government has struggled to increase tax revenues, leading to fiscal deficits.

High contingent liabilities: Many state-owned enterprises have accumulated significant foreign currency-denominated debt, adding to Ethiopia’s financial risk.

Public debt sustainability: With high levels of external debt, Ethiopia’s ability to finance infrastructure and social programs without further borrowing remains uncertain.

Political and Environmental Risks

Moody’s assigns Ethiopia an ESG (Environmental, Social, and Governance) Credit Impact Score of 5, the weakest score possible, highlighting significant challenges:

Political and security risks: While domestic stability has improved following recent conflicts, political uncertainty continues to pose risks to investor confidence and economic stability.

Environmental vulnerabilities: Water management issues, desertification, and food security challenges remain major concerns. Climate risks could further strain government resources, particularly in rural areas heavily dependent on agriculture.

Weak governance frameworks: Corruption, bureaucratic inefficiencies, and limited regulatory oversight continue to weigh on Ethiopia’s overall credit profile.

Outlook: Stability Amid Uncertainty

Moody’s maintains a stable outlook on Ethiopia’s credit rating, citing balanced risks at current levels. The future trajectory of Ethiopia’s financial stability will depend on key factors:

✅ Successful Debt Restructuring: If Ethiopia reaches a favorable deal with its creditors, securing substantial debt relief, this could improve its credit outlook and ease liquidity pressures.

✅ Continued Economic Reforms: Further steps toward liberalizing key sectors, strengthening fiscal policies, and attracting foreign direct investment will be crucial for long-term stability.

🚩 Risk of Further Defaults: If Ethiopia’s debt restructuring negotiations remain unresolved for an extended period, or if creditor losses exceed current expectations, further downgrades could occur.

🚩 Domestic Liquidity Risks: Rising domestic interest rates or increased difficulty in securing local financing could exacerbate the country’s fiscal challenges.

🚩 Foreign Exchange Stability: While a market-driven exchange rate has helped correct external imbalances, excessive depreciation could lead to further inflation and economic hardship.

Conclusion: A Long Road Ahead

Ethiopia’s economic outlook remains fragile yet cautiously stable, with reforms bringing both opportunities and risks. The success of debt restructuring, coupled with fiscal and monetary policy adjustments, will be pivotal in restoring investor confidence and improving Ethiopia’s credit profile.

For now, Ethiopia remains a high-risk investment destination, but with strategic economic adjustments and improved financial governance, it could gradually work toward a more sustainable financial future.