Wednesday, December 3, 2014

Rating Action: Moody's assigns provisional (P)B1 rating to Ethiopia's forthcoming US dollar-denominated bond offering

Global Credit Research - 02 Dec 2014

London, 02 December 2014 -- Moody's Investors Service (Moody's) has today assigned a provisional long-term (P)B1 rating to the Government of Ethiopia's forthcoming bond issue. The senior unsecured bond will rank pari passu with all of Ethiopia's current and future senior unsecured debt. The rating is aligned with Ethiopia's long-term issuer rating of B1.
This rating action concerns a new rating solicited by the issuer for a forthcoming issue that was not in the market at the time that the sovereign release calendar was published, and is therefore being released on a date not listed in that publication.
The provisional (P)B1 rating is based on the preliminary prospectus dated 25 November 2014. Moody's will assign a definitive rating upon receipt of the final documentation.
RATING RATIONALE
The provisional rating on the forthcoming senior unsecured bond issue is aligned with the Government of Ethiopia's long-term B1 issuer rating. This reflects Ethiopia's favourable long-term economic prospects, with the near-term fiscal outlook dominated by public sector investment funded increasingly through non-concessional lending. However, Ethiopia's rating remains constrained by (1) its susceptibility to geopolitical event risk; (2) the large agricultural sector; and (3) price volatility of major export commodities, specifically coffee and gold.
While Ethiopia's per capita GDP income is rising quickly and growth prospects remain favourable thanks to government investments toward the development of infrastructure, its economy remains small, with low per capita income and substantial reliance on the volatile agricultural sector. The latter represents almost half of gross value added and is susceptible to poor harvest outcomes due to extended periods of drought.

The weakness of Ethiopia's institutions remains a challenge, with a mixed monetary policy track-record as the country struggles to contain volatile and elevated inflation rates, averaging 16.7% per annum over the past decade. On a positive note, the government's five-year plans show policy continuity and the administration shows a track-record of fulfilling or even outperforming the plans' targets.
The government has been able to keep budget deficits low, averaging just 2.5% of GDP in the past ten years, and Ethiopia benefits from substantial donor support, with grants making up about 10% of total central government revenue and from debt-relief initiatives. This resulted in a low public debt level of 22% of GDP in 2013 (46.7% of GDP in 2013 including State-Owned Enterprises), with a favourable structure. Debt-servicing costs remain relatively moderate due to concessional funding, though this could change as large infrastructure projects will be increasingly funded by private sources.
The country's geographic location in the Horn of Africa, neighbouring countries such as Somalia, Sudan and South Sudan, coupled with an unresolved border conflict with Eritrea, expose it to geopolitical event risk. Low levels of foreign-exchange reserves, limited levels of FDI inflows and susceptibility to price shocks to the country's main export commodities add to Moody's assessment of moderate event risk.
Ethiopia has low government liquidity risk due to the large share of concessional borrowing and a relatively small and well-capitalized banking system. However, Moody's notes the high concentration in the banking sector and dominance of state-owned banks, with the three public banks accounting for 73% of total assets and the dominant Commercial Bank of Ethiopia alone accounting for 63% of total assets in 2013. In addition to concentration risk, government policies distort credit allocation by commercial banks, which has a negative effect on financial sector developments.
ISSUER RATING OUTLOOK
The stable outlook on Ethiopia's issuer rating balances Moody's assessment of Ethiopia's prospects for continuing economic growth in the medium term supported by investments in the country's infrastructure against ongoing institutional constraints and event risks.
WHAT COULD CHANGE THE ISSUER RATING -- UP/DOWN
Upward pressure on the B1 issuer ratings could develop as a result of (1) improving business conditions that would attract more FDI inflows and boost the private sector; (2) a successful shift from a public-sector-led investment model to a private-sector-driven one.
Downward pressure would be exerted on the rating in the event of (1) a substantial withdrawal of donor support; (2) an acceleration in external debt build-up without compensatory increase in potential growth and hard currency earning capacity; or (3) a significant escalation of political and social tensions that would in turn hinder the country's medium-term growth prospects.
GDP per capita (PPP basis, US$): 1,427 (2013 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 9.7% (2013 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.7% (2013 Actual)
Gen. Gov. Financial Balance/GDP: -2% (2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.5% (2013 Actual) (also known as External Balance)
External debt/GDP: 24.3% of GDP (2013 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 01 December 2014, a rating committee was called to discuss assigning a provisional rating to the forthcoming US-denominated bond offering of Ethiopia, Government of. The main points raised during the discussion were: The committee discussed the nature of the obligation and concluded that the forthcoming issuance would rank pari passu with other senior unsecured debt issued by the Government of Ethiopia.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Elisa Parisi-Capone
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
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SUBSCRIBERS: 44 20 7772 5454

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