(The following statement was released by the rating agency) PARIS/LONDON, November 07 (Fitch) Fitch Ratings has affirmed Ethiopia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling and the Short-term foreign currency IDR are both affirmed at 'B'. KEY RATING DRIVERS Ethiopia's 'B' IDRs reflect the following key rating drivers:- -Ethiopia is vulnerable to shocks even compared with 'B' rated peers despite strong improvements in its World Bank governance indicators and development indicators over the past decade. This is balanced by strong economic performance and improved public and external debt ratios since debt relief under HIPC in 2005-2007. -Macroeconomic performance is broadly in line with rated peers. The public sector-led development strategy implemented over the past decade, focusing on heavy investments in infrastructure, has sustained strong real GDP growth, which reached an estimated 10.3% in the fiscal year to 7 July 2014 (FY14), above most regional peers, although it may be overestimated according to previous reports by the IMF. Inflation, which has historically been high and volatile, has slowed to single digits since October 2013, due to a combination of moderate international food prices and reduced central bank financing of the budget deficit. However, Fitch believes inflation remains vulnerable to food price variations. -Public finances compare favourably with 'B' rated peers, but are exposed to rising contingent liabilities. General government debt has broadly been stable over the past four years, at 26% of GDP in FY14, well below peers (47.1%). Debt structure is also favourable.
As the government relies heavily on concessional lending from multilateral creditors, maturities are long while interest payments, at 2.1% of budget revenues, are extremely low. The foreign-currency share of public debt, at 60.5% at end-FY14, is in line with peers. This moderate level of debt has been made possible by the containment of general government deficit below 4% of GDP over the past decade (2.6% in FY14), due to spending restraint, and outsourcing of part of its investments to state-owned enterprises (SoEs). As a result SoEs' debt has risen significantly in recent years, and accounted for an estimated 22% of GDP in FY14 (FY10: 12.1%). Even though the authorities expect this debt to be repaid from SoEs' commercial receipts, Fitch believes this is a rising contingent liability for the government. Additionally, this rise in debt has been financed by recourse to domestic credit, concentrating bank exposure to SoEs, and increasingly from external sources, sometimes with less favourable financing conditions, which could increase external debt and interest service over the coming years. -Authorities' strategy of transitioning towards export-led growth has had limited results so far: the current account deficit widened to 8.6% of GDP in FY14 from 5.9% in FY13, as declining commodity prices have penalised exports of coffee and gold, which together with oil seeds, still accounted for 56% of goods exports in FY14, while imports of capital goods have continued to grow. As a result net external debt, at 100% of current account receipts, is on the rise and coverage of current account payments by international reserves has remained weak, at only 1.8 months at end-FY14. Prospects for export diversification are positive, however, over the medium term, helped by a slightly improving environment for foreign direct investments (FDI) and potential electricity exports. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main factors that could, individually or collectively, lead to a positive rating action, are: -Stronger external indicators reflected in higher exports, stronger FDI and international reserves -Further structural improvements, including stronger development and World Bank governance indicators -Further improvement in the macro-policy environment, supporting moderate inflation levels and a transition to broader-based growth The main factors that could, individually or collectively, lead to a negative rating action are: -Rising external vulnerability, illustrated by declining international reserves, further widening of the current account deficit or rising external indebtedness -Increased risk of contingent liabilities from SoEs and publicly-owned banks materialising on the state's balance sheet KEY ASSUMPTIONS The ratings are reliant on a number of assumptions: -Fitch assumes that there will be no major change in the political regime and development model of the country in the coming years. -Fitch assumes that world GDP will grow by 3% in 2015 and 3.1% in 2016, from 2.6% in 2014, therefore sustaining demand for Ethiopian exports of goods and services. -Fitch assumes that the international community's support for Ethiopia will continue in the coming years. Contact: Primary Analyst Amelie Roux Director +33 144 299 282 Fitch France S.A.S. 60 rue de Monceau - 75008 Paris Secondary Analyst Richard Fox Senior Director +44 20 3530 1444 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here
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