Moody’s retains Ethiopia’s B1 rating – notes weak Institutional Strength

The leading creating ratings agency, Moody’s Investors Service (abr. as Moody’s) retained Ethiopia’s B1 Credit rating.

In its country credit analysis report released last Friday, Moody’s announced that “Ethiopia’s favorable growth prospects and low debt burden support B1 rating”.

Ethiopia attained a B1 rating from Moody’s on May 2014 ahead of its oversubscribed maiden Eurobond issuance. Two other leading agencies gave similar credit rating to Ethiopia at about the same time.

Last Friday’s report is a periodic update of Moody’s analysis on the credit worthiness and credit risk level of Ethiopia to investors and creditors.

“While Ethiopia’s economy is relatively small, with an estimated nominal GDP of around $50 billion in 2014, it has grown rapidly over the last decade averaging 10.8% in real terms. …In comparative terms, the economy is about the same size as that of Jordan (B1) and Kenya (B1), and growth has outpaced the B1 median as well as regional and Asian peers”, states the report.

Moody’s report, obtained by HornAffairs, shows that Ethiopia’s credit rating (B1) was supported in the credit analysis that evaluated her credit profile in terms of four rating factors: Namely; Economic Strength, Institutional Strength, Fiscal Strength and Susceptibility to Event Risk.

The four factors are assessed on a scale that ranges from very high to very low.

Ethiopia scored Moderate (-) in Economic Strength, Very Low (+) in Institutional Strength and Moderate (+) in both Fiscal Strength and Susceptibility to Event Risk rating factors.

Moody’s report scored Ethiopia’s Economic Strength as Moderate (-), while her regional peers Ghana (B3-), Uganda (B1) and Senegal (B1+) score Low (+). This score is an evaluation of the economic structure, primarily reflected in economic growth, the scale of the economy and wealth, as well as in structural factors that point to a country’s long-term economic robustness and shock-absorption capacity.

The Moderate (-) score of Ethiopia was based on the resilience of her economy in registering strong growth despite depressed export prices and continuation of the high public investment rate, which is the world’s third-highest.

Looking forward, states the report, “We expect public-sector investment to continue to drive economic expansion in the near-term, with growth averaging around 10% in real terms over the next two years”. Economic slowdown in major export partners like China, constraints to the financing of Ethiopia’s major investment projects, or a protracted slump in the country’s main commodity export prices are some of potential shocks identified.

Ethiopia’s Institutional Strength on the other hand scored Very Low (+), a rank similar to regional peers the Republic of the Congo (Ba3) and Uganda score Very Low (+) while Angola, Nigeria (Ba3) and the D.R. Congo score Very Low (-).

The assessment of institutional strength, according to the report, is underpinned by three categories of the World Bank’s governance indicators: Government Effectiveness, Rule of Law, and Control of Corruption in which Ethiopia scores roughly in line with the B-median, for Government Effectiveness and Rule of Law and exceeds the B-rated median in one category, Control of Corruption.

On the third rating factor, Fiscal Strength, Ethiopia’s scores as Moderate (+), similar to Vietnam (B1) and Uganda. The score reflects “its small fiscal deficits and low debt levels, while constrained by very low revenue ratios compared to its peers, and potential sizable contingent liabilities in the public enterprise sector”.

According to the report, “low and stable deficits characterize Ethiopia’s fiscal position…achieved through prudent spending control in the face of fluctuating grant financing, and increased efforts to mobilize domestic revenues as nominal expenditure has grown”.

The analysis noted the federal government’s tight budget execution over the last decade, low debt burden as compared to its peers, standing at around 26% of GDP in 2014 with the median for B-rated countries at 42% of GDP and also Ethiopia’s budgetary allocation for the poor (pro-poor development spending), which averaged 13% of GDP over the last decade and is the highest in Africa.

The report score Ethiopia’s Susceptibility to Event Risk as Moderate (+), which reflected a Moderate score of political risk, low government liquidity and Banking system risks and Low (+) score for Ethiopia’s external vulnerability risk.

Improving institutional quality and weak tax collection, deepening private sector participation in the economy and attracting more foreign direct investment are some of the recommendations of the report.

The full report can be purchased from Moody’s here

********************