Fitch Affirms Ethiopia at 'B' despite social unrest

Fitch Ratings affirmed Ethiopia's Long-Term Foreign and Local Currency IDR at B, despite facing economic challenges such as a rising current account deficit and accumulating external debt. The rating reflects the stable general government deficit in fiscal year 2016, with the budget deficit contained at the same level as previous years. Amelie Hall, Director at Fitch Ratings, highlighted the cautious approach by Ethiopian authorities in budget execution, which has helped keep public debt below 30% of GDP. However, the increasing debt burden of state-owned enterprises involved in large infrastructure projects like dams and railways has contributed to the rising aggregate debt in the country. One significant concern is the reliance on external debt to finance infrastructure projects, which are crucial for closing the infrastructure gap and promoting development in Ethiopia. The ability to repay foreign currency debt is heavily dependent on the country's capacity to generate foreign exchange, which has been a persistent challenge due to a chronic shortage of foreign currency. Amelie emphasized the importance of diversifying the export base and increasing foreign currency generation to address this issue. Another key challenge highlighted by Amelie is the depreciation of the Ethiopian currency by 5% annually. Despite the tight management of the exchange rate by authorities, the currency is estimated to be overvalued by 20% to 30% in real terms. This overvaluation poses a significant risk, especially considering the external financial constraints and the large current account deficit. The closure of the capital account and strict control over foreign currency allocation have helped maintain exchange rate stability in the short term, but long-term success will hinge on the effectiveness of the export promotion strategy to boost exports and foreign currency reserves. Looking ahead, Fitch Ratings has a stable outlook on Ethiopia's rating, balancing the upside and downside risks. An improvement in macroeconomic performance and the business environment could lead to a positive rating action. Conversely, negative factors such as worsening economic imbalances, expanding current account deficit, declining foreign exchange reserves, or increasing social unrest could trigger a negative rating action on Ethiopia's creditworthiness.