Research Update:

Ethiopia Assigned 'B/B' Foreign And

Local Currency Sovereign Ratings;
Outlook Stable; 129th Rated Sovereign
Primary Credit Analyst:
Gardner T Rusike, Johannesburg +27 (11) 214 1992; gardner.rusike@standardandpoors.com
Secondary Contact:
Ravi Bhatia, London (44) 20-7176-7113; ravi.bhatia@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Ethiopia Assigned 'B/B' Foreign And Local
Currency Sovereign Ratings; Outlook Stable; 129th
Rated Sovereign
Overview
Ethiopia continues to achieve high economic growth, exceeding the average
in Sub-Saharan African countries.
Its current account deficits are modest relative to peers', supported by
a services surplus and large remittances.
We are assigning our 'B' long-term foreign and local currency ratings,
and 'B' short-term rating, to Ethiopia.
The stable outlook reflects our view that over the next year the strong
pace of economic growth will be maintained and current account deficits
will not rise significantly.
Rating Action
On May 9, 2014, Standard & Poor's Ratings Services assigned its 'B/B' foreign
and local currency long- and short-term sovereign credit ratings to the
Federal Democratic Republic of Ethiopia. The outlook is stable. The transfer
and convertibility (T&C) assessment is 'B'. Ethiopia is the 129th sovereign
rated by Standard & Poor's.
Rationale
The ratings are constrained by Ethiopia's low GDP per capita, our estimate of
large public-sector contingent liabilities, and a lack of monetary policy
flexibility. The ratings are supported by strong government effectiveness,
which has halved poverty rates over the past decade or so, moderate fiscal
debt after debt relief, and moderate external deficits. Ethiopia's brisk
economic growth--far exceeding that of peers--also underpins the ratings.
Ethiopia has achieved political stability since it adopted its new
constitution in 1995, under the leadership of the Ethiopian People's
Revolutionary Democratic Front (EPRDF) coalition. The EPRDF coalition holds
99% of the seats in the national assembly after the last 2010 election. In
broad terms, we expect the status quo to be maintained in the upcoming 2015
elections. Ethiopia has reported high economic growth in recent years,
reducing poverty and achieving more homogeneous wealth levels than peers'. The
World Bank's ease of doing business indicator ranks Ethiopia at 125 out of 189
countries in 2014, while peers Kenya and Uganda rank at 129 and 132. Nearby
Rwanda, however, is ranked at 32. Ethiopia faces geopolitical risks from its
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unstable neighbors Somalia, Eritrea, Sudan, and South Sudan, who are involved
in domestic conflicts. However, Ethiopia has been at the forefront of finding
peaceful solutions for its neighbors through the Intergovernmental Authority
on Development (IGAD) in member states around the horn of Africa and east
Africa.
Ethiopia's economic growth has consistently well outpaced the average for
peers in Sub-Saharan Africa, averaging at least 9% real GDP growth over the
past decade, partly due to significant government spending in public sector
infrastructure. We estimate that real GDP per capita growth will average 6.5%
over 2014-2017. The government has primarily invested in transport
infrastructure (roads and rail) and energy (power generation through hydro).
Agriculture has also been a key growth driver.
We estimate GDP per capita at a low $630 in 2014. However, strong economic
growth has translated into significant poverty reduction and fairly
homogeneous wealth levels. According to International Monetary Fund (IMF)
data, poverty declined to about 30% in 2011 from 60% in 1995.
We expect current account deficits to average 6% of GDP over 2014-2017, driven
by rising imports of capital goods and fuel. The current account trends are
vulnerable to external demand and international prices for coffee and
horticultural products. Ethiopia has a services account surplus, predominantly
due to Ethiopian Airlines' revenues, and large current account transfers
mostly made up of remittances that we estimate at about 10% of GDP. Over
2014-2017, we project that gross external financing needs should average 118%
of current account receipts and reserves. During the same period, we estimate
that narrow net external debt will average 87% of current account receipts. We
think external indebtedness will rise as state-owned companies borrow under
non-concessional terms to meet the financing needs of government programs.
Ethiopia's current fiscal position is similar to rated peers'. Although
headline fiscal deficits would suggest average fiscal deficits of 2.5% of GDP
over 2014-2017, our measure of change in general government debt averages 4.5%
of GDP per year over the same period. This takes into account borrowing
incurred by the government that may not necessarily be reflected in the
headline fiscal deficits, such as off-budget items. Fiscal policy is heavily
geared toward pro-poor social spending and large public investment spending
programs. We anticipate that reported fiscal deficits will be maintained below
3% of GDP as revenues will likely be constrained at a low of about 15% of GDP.
Government debt stock is still lower than peers'. Ethiopia benefitted from
Heavily Indebted Poor Countries/Multilateral Debt Relief Initiatives over
2004-2006 as well as high nominal GDP growth rates that helped keep the
debt-to-GDP ratio low. We estimate that net general government debt will rise
to 26% by 2017, from 21% of GDP in 2013. We expect contingent liabilities to
be intermediate because Ethiopia has a fairly large public sector and
state-owned financial institutions. In recent years, public entities have
raised non-concessional funding, some of it with government guarantees that we
estimate represent roughly 3.5% of GDP.
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Research Update: Ethiopia Assigned 'B/B' Foreign And Local Currency Sovereign Ratings; Outlook Stable; 129th
Rated Sovereign
We regard Ethiopia as maintaining a managed floating exchange rate regime,
with significant interventions. As is common for a country at this stage of
development, monetary policy credibility and central bank independence is
still developing from a low base. Historically, Ethiopia has experienced high
inflation owing to a combination of external shocks and loose monetary policy.
The central bank has in some years financed the government's fiscal deficits
through direct advances to the central government. In addition, Ethiopia
maintains foreign exchange restrictions which may affect external debt service
payments.
Outlook
The stable outlook on Ethiopia reflects our view that over the next year the
current pace of economic growth will be maintained and current account
deficits will not rise significantly, supported by positive services accounts
and large inflows of remittances.
We might raise the ratings if we saw more transparency on the financial
accounts of Ethiopia's public sector contingent liabilities and their links
with the central government. We might also consider a positive rating action
if we observed that monetary policy credibility was improving, either through
better transmission mechanisms or relaxed foreign exchange restrictions on the
current account.
We could lower the ratings if economic growth slowed, the fiscal position
deteriorated--for instance due to a much faster rise in government
expenditures than we expect--or external liabilities increased significantly
owing to much higher external borrowing or as a result of deteriorating terms
of trade.
Key Statistics
Table 1
Ethiopia - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal
GDP (US$
bil)
27 32 29 31 43 49 54 61 69 77 87
GDP per
capita
(US$)
331 386 347 360 478 536 576 632 699 754 835
Real GDP
growth
(%)
10.8 8.8 9.9 7.3 8.5 9.0 9.0 9.1 9.2 9.2 9.3
Real GDP
per capita
growth
(%)
7.8 5.9 7.1 4.5 5.7 6.2 6.2 6.3 6.4 6.4 6.5
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Research Update: Ethiopia Assigned 'B/B' Foreign And Local Currency Sovereign Ratings; Outlook Stable; 129th
Rated Sovereign
Table 1
Ethiopia - Selected Indicators (cont.)
Change in
general
government
debt/GDP
(%)
4.2 4.0 5.1 6.8 4.2 4.9 4.5 4.6 4.3 4.5 4.6
General
government
balance/GDP
(%)
(2.9) (0.9) (1.3) (1.6) (1.2) (1.9) (2.5) (2.6) (2.3) (2.5) (2.6)
General
government
debt/GDP
(%)
32.0 27.6 29.3 28.7 23.9 24.6 25.5 26.5 27.1 27.8 28.5
Net
general
government
debt/GDP
(%)
25.6 22.1 23.9 22.7 18.7 19.1 20.8 22.5 23.6 24.8 26.0
General
government
interest
expenditure/revenues
(%)
2.9 2.4 2.4 2.2 1.9 2.1 2.4 2.5 2.7 2.8 3.0
Oth dc
claims on
resident
non-govt.
sector/GDP
(%)
16.4 14.6 15.5 15.1 14.7 15.7 16.8 17.5 18.1 18.7 19.3
CPI
growth
(%)
17.2 44.4 8.5 8.1 33.2 22.8 8.1 8.0 8.0 7.0 7.0
Gross
external
financing
needs/CARs
+use. res
(%)
105.9 111.6 102.4 92.1 106.3 110.6 118.1 117.4 117.7 119.2 119.7
Current
account
balance/GDP
(%)
(5.6) (5.1) (4.1) (0.7) (6.6) (5.1) (6.8) (6.2) (6.0) (6.3) (6.1)
Current
account
balance/CARs
(%)
(22.1) (21.4) (13.8) (2.1) (25.2) (22.0) (29.9) (28.3) (28.3) (30.4) (30.5)
Narrow
net
external
debt/CARs
(%)
31.4 23.4 24.9 22.1 41.6 54.3 64.6 74.1 82.9 93.2 97.8
Net
external
liabilities/CARs
(%)
42.8 34.8 33.7 30.0 49.4 62.2 76.8 89.6 101.6 115.6 120.8
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Research Update: Ethiopia Assigned 'B/B' Foreign And Local Currency Sovereign Ratings; Outlook Stable; 129th
Rated Sovereign
Table 1
Ethiopia - Selected Indicators (cont.)
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year
plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as
the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid
assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net
external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
Related Research
Default Study: Sovereign Defaults And Rating Transition Data, 2013 Update,
April 18, 2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
New Rating
Federal Democratic Republic of Ethiopia
Sovereign Credit Rating B/Stable/B
Transfer & Convertibility Assessment B
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Research Update: Ethiopia Assigned 'B/B' Foreign And Local Currency Sovereign Ratings; Outlook Stable; 129th
Rated Sovereign
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Research Update: Ethiopia Assigned 'B/B' Foreign And Local Currency Sovereign Ratings; Outlook Stable; 129th
Rated Sovereign
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