Ethiopia's Low Credit Rating and Debt Liquidity Risks

Moody’s Ratings on Thursday affirmed Ethiopia’s sovereign credit ratings, underscoring the country’s fragile finances as it works through a protracted debt restructuring while pursuing far-reaching economic reforms. In a statement issued in London, the ratings agency kept Ethiopia’s local-currency long-term issuer rating at Caa2 and its foreign-currency rating at Caa3, both deep in speculative territory. The outlook remains stable. Moody’s said the foreign-currency rating reflects its expectation that private creditors will incur losses as Ethiopia restructures its external debt under the G-20 Common Framework, a process that has dragged on for years. The agency said it is unlikely to change the rating until the restructuring, including talks with Eurobond holders, is completed. Ethiopia defaulted on its lone Eurobond in late 2023 and failed to redeem it at maturity in December 2024. While the government reached an agreement in principle with official creditors in March 2025 and a tentative deal with bondholders earlier this year, Moody’s noted that disagreements over the comparability of relief have forced renewed negotiations, prolonging uncertainty. The affirmation of the Caa2 local-currency rating reflects what Moody’s described as “acute liquidity risks,” even as the government moves away from central bank financing and financial repression. Reforms backed by the International Monetary Fund and the World Bank have shifted domestic borrowing toward market-based auctions and ended mandatory bond purchases by banks, steps aimed at curbing inflation and improving resource allocation. But those changes have left the government increasingly reliant on a shallow domestic debt market, Moody’s said, with issuance concentrated in short-term treasury bills and limited investor confidence. Once external debt servicing resumes, liquidity pressures could intensify. The stable outlook signals Moody’s expectation that credit conditions will remain broadly unchanged in the run-up to the conclusion of the debt restructuring. Improving market sentiment and easing external pressures have supported confidence, the agency said, though delays, political risks, and regional instability could still weigh on growth, investment, and public finances. Ethiopia’s economy has shown pockets of resilience. After the adoption of a market-driven exchange rate in mid-2024, foreign-exchange reserves more than tripled to $4.4 billion by July 2025, and exports, particularly gold, picked up. Foreign reserves reached 1.9 months of import cover in 2024/25, a significant rise from just three weeks (around 0.75 months) a year earlier. This underscores the positive impact of reforms such as foreign exchange market liberalization, export surges, and overall macroeconomic stabilization efforts. Still, inflation remains elevated at around 9.7%, foreign-exchange constraints persist, and governance and social risks continue to weigh heavily on the country’s credit profile. Moody’s said Ethiopia’s ratings are likely to remain very weak until the debt restructuring delivers meaningful relief. Progress in rebuilding reserves and boosting government revenues could eventually support an upgrade, while deeper-than-expected creditor losses or worsening domestic liquidity would put downward pressure on the ratings.