Ethiopia’s favourable growth prospects and low debt burden support B1 rating says Moodys

Addis Ababa, Ethiopia (Capital Markets in Africa) :- Ethiopia’s (B1 Stable) government bond rating is supported by its strong growth prospects, prudent fiscal management and large and stable donor inflows, Moody’s Investors Service says in its latest credit analysis of the country today. However, Ethiopia’s relatively small economy, low per capita income and weak institutional strength all constrain the rating. The report is now available on Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“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,” said Rita Babihuga, Assistant Vice President — Analyst and co-author of the report. “Risks to this outlook stem from external shocks, such as an economic slowdown in major export partners, constraints to the financing of Ethiopia’s investment projects, or a protracted slump in commodity export prices.”

Ethiopia’s credit profile would be strengthened if business conditions improve, leading to more foreign direct investment and boosting economic diversification. Conversely, negative factors for the rating include any acceleration of external debt accumulation that does not support growth and difficulties in securing concessional external financing which would put downward pressure on the country’s already low international reserves.

Prudent government spending controls and efforts to mobilise domestic revenues have led to low and stable deficits. A five-year plan has focused on rebalancing the economy and improving agriculture, rural development and infrastructure. About 60% of government spending is directed towards public investment projects in sectors such as health, education, agriculture and transport.

Ethiopia’s federal government budget execution has been tight over the last decade and current spending is closely monitored to ensure that it grows below the pace of revenues. However, weak tax collection means Ethiopia’s revenue share is well below its regional peers, standing around just 14% of GDP, compared to a B-rated regional average of 23%. The government’s capacity for expanding the revenue base will rest on its ability to implement effective revenue-enhancing measures.

Debt servicing costs have risen slightly, from a low of 1.9% of government revenues in 2012 to 2.4% of government revenue in 2014. However, these costs are still low compared to peers. Debt relief has also helped the government’s financial profile by keeping its debt burden and servicing costs low. Ethiopia is the biggest recipient of aid in Africa.

The report says Ethiopia’s institutional strength is very low, although it has been improving in recent years. Susceptibility to event risk stems mainly from the country’s geographic location in the Horn of Africa, which is prone to instability and geopolitical risk.

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