Moody’s Expects Losses to Ethiopia’s Private Creditors as Government Pursues Debt Restructuring

Moody’s Rating, one of the three major global credit rating agencies, announced on Friday the completion of its periodic credit rating review of Ethiopia foreshadowing losses to private creditors as a result of the government's ongoing debt restructuring under the G-20 Common Framework (CF). The global credit rating agency cites the potential for a lengthy debt restructuring process as a source of greater losses to private creditors than currently reflected in its rating for Ethiopia. While the latest publication about Ethiopia does not entail a rating action or that one is likely soon, it comes after reassessments of ratings following a review conducted on the 11^th of March.

Ethiopia has been pursuing debt restructuring under the CF since February 2021 with a creditor committee comprising 12 countries, co-chaired by China and France being formed six months later. An agreement with the International Monetary Fund (IMF) economic program was among the conditions for successful restructuring. Despite the approval of an IMF program in July 2024 and progress on economic reforms, a debt restructuring agreement with official sector creditors remains elusive after advanced stages of negotiation, and Ethiopia missed a $1 billion Eurobond principal payment in December 2024.  An ad hoc committee of bondholders which holds around 40% of the bonds had rejected Ethiopia’s 18% proposed haircut (reduction) on the principal back in October. The Committee would later disagree with the IMF’s assessment of Ethiopia’s economy suggesting significant flaws and an artificially created solvency issue.

“The Government of Ethiopia's ratings, including its Caa3 foreign currency and Caa2 local currency issuer ratings, reflect our expectation of losses to private-sector creditors as a result of the government's ongoing debt restructuring under the G-20 Common Framework” reads the latest announcement by Moody’s. 

The rating agency indicated that an upgrade of the foreign currency rating is unlikely but possible if smaller losses for private-sector creditors are anticipated. Progress in rebuilding foreign exchange reserves and improving government revenue generation after the debt restructuring could exert upward pressure on both foreign and local currency ratings over time, according to the statement. Conversely, an increased likelihood of losses exceeding levels consistent with the Caa3 rating or a sharp deterioration in domestic liquidity would trigger downward pressure. 

Moody’s downgraded Ethiopia’s foreign currency rating to Caa3 back in September of 2023 citing a high likelihood of default on foreign currency-denominated private sector debt. While other ratings had also downgraded Ethiopia by a notch during the period, Fitch upgraded Ethiopia's Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to 'CCC+' from 'CCC-' five months ago. The Agency cited easing financing pressures, improved macroeconomic stability, and increased confidence that local-currency obligations will not be included in the ongoing debt restructuring.

Following agreements with the IMF in July, Ethiopia has shifted to a market-based exchange regime, increased domestic revenue mobilization targets, and rolled out a pullback on energy subsidies. A pair of reviews by the Fund over the intervening months have largely remained positive despite local criticism over inadequate support for the most vulnerable economic segments. Nonetheless, Ethiopia’s financial chieftains remain optimistic about the outcomes of the IMF’s four-year extended credit facility and debt restructuring negotiations. Last month, Ahmed Shide Ethiopia’s Finance minister announced that the East African nation has entered the "final stages" of negotiations with its creditors.