October 28, 2024 – Fitch Ratings has raised Ethiopia’s Long-Term Local-Currency (LTLC) Issuer Default Rating to ‘CCC+’ from ‘CCC-‘, citing easing financial pressures and enhanced macroeconomic stability. This marks a positive shift, as the country’s Long-Term Foreign-Currency rating remains at ‘RD’ (Restricted Default).

Key Drivers of the Upgrade

Fitch’s decision reflects Ethiopia’s continued efforts to implement economic reforms, primarily through changes led by the National Bank of Ethiopia (NBE). In July 2024, the NBE adopted a market-based approach to the exchange rate, causing the official rate to depreciate by over 50% and aligning it more closely with the parallel market rate. This shift has reduced distortions in the foreign exchange (FX) market, allowing for greater transparency and stabilizing Ethiopia’s economic outlook.

Additionally, the NBE removed restrictions on foreign exchange allocations for importers, which has increased FX availability, encouraging trade and investment. As part of broader economic reforms, the NBE introduced a 15% interest-rate-based monetary policy, along with regular open market operations, to improve monetary policy transmission.

Fiscal Reforms and International Support

The International Monetary Fund (IMF) approved a new four-year Extended Credit Facility (ECF) Arrangement for Ethiopia in July 2024, with an immediate disbursement of $1 billion from a total $3.4 billion funding. This, combined with a $3.75 billion disbursement from the World Bank, is expected to alleviate Ethiopia’s reliance on domestic financing for its fiscal deficit, reducing financial repression and containing inflation.

Fitch projects that net domestic borrowing will decrease to 0.5% of GDP in FY25, down from 2.1% in FY23. Government fiscal deficits are also expected to narrow, reaching 2% of GDP in FY24, although forecasts suggest a slight increase to 2.7% of GDP in FY25 due to increased spending, including a 1.5% GDP fiscal package to support vulnerable populations and public sector wage increases.

Addressing Debt and Financing Needs

Ethiopia’s focus on managing debt includes converting National Bank advances of ETB242 billion into long-term government securities and eliminating mandatory treasury bond purchases by commercial banks by FY25. This approach aims to reduce reliance on non-market-based local financing.

Ethiopia remains in default on foreign-currency debt obligations, having suspended payments on a $1 billion Eurobond in December 2023. However, progress has been made under the Common Framework to restructure $15.1 billion in external debt, with an agreement expected by year-end. Official international reserves, estimated at just above $1 billion in FY24, are projected to increase to $2.9 billion in FY25 and $4.5 billion in FY26.

Economic Outlook

Fitch anticipates that these fiscal and monetary policy reforms will stabilize Ethiopia’s economy, although it warns of rising government borrowing costs, projected to reach positive real interest rates. The increased costs are expected to raise rollover risks, making the next phases of economic management critical.

Ethiopia’s progress toward debt restructuring, especially with major creditors like China, reflects confidence in its ability to handle local-currency obligations without adding to the ongoing restructuring. As Ethiopia negotiates with commercial creditors, the success of these measures could further support its goal of economic stability and growth in the coming years.

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