Fitch affirms Ethiopia at 'B'

Fitch Ratings has recently affirmed Ethiopia's Long-Term Foreign and Local-Currency Issuer Default Ratings at 'B' with a Stable Outlook. This affirmation extends to the issue ratings on Ethiopia's senior unsecured foreign-currency bonds as well, maintaining them at 'B'. However, the stable outlook is accompanied by challenges that weigh down on the economic prospects of the country. Jan Fradrick, Head of Middle East and Africa Sovereigns at Fitch Ratings, shed light on these challenges during a recent interview on CNBC Africa. The key aspects discussed revolved around the burden of state-owned enterprise (SOE) debt, adherence to IMF recommendations, and the persisting current account deficit. Ethiopia's fiscal position appears to be relatively strong with government debt standing at 27% of GDP. The concern, though, lies in the rapid accumulation of debt by state-owned enterprises, which has surged by 12% of GDP in the past five years, reaching a significant 31% mark. While these SOEs fund crucial infrastructure projects, sustaining such high levels of spending raises doubts about their long-term financial feasibility. In response to this, the government is reportedly refraining from initiating new projects to curb further debt escalation. Moreover, the IMF's advice to halt non-concessional loans has been taken seriously by Ethiopian authorities, despite not being under an IMF program. Acknowledging the impact on future funding from international bodies, Ethiopia is likely to align with IMF guidelines to safeguard its access to financial support. Another pressing concern highlighted by Fitch is the current account deficit, which stands at 8.4% while the median for Fitch-rated countries is 5.7%. Despite being touted as a potential manufacturing hub in East Africa, Ethiopia's current exports still heavily rely on traditional sectors like agriculture and mining, with manufacturing contributing a mere 5%. The government's efforts to bolster the manufacturing industry, evidenced by investments in industrial parks, are yet to yield substantial results. A significant driver of the widening current account deficit is the high level of investments in the country, necessitating further debt accumulation to bridge the gap. Foreign Direct Investment (FDI) inflows, averaging 3% over the past five years, while commendable, fall short of offsetting the current account deficit on their own. Therefore, debt financing is expected to play a crucial role in managing the deficit moving forward. In conclusion, while Fitch Ratings' affirmation of Ethiopia at 'B' with a Stable Outlook underscores some positive aspects of the economy, challenges such as mounting SOE debt, adherence to IMF recommendations, and the persistent current account deficit loom large. The government's strategic responses to these challenges will shape the country's economic trajectory in the coming years.