Lack of clarity and delayed deliberation about the potential causes of the recent debt reworks on private creditors has led to a further downgrading of Ethiopia’s credit rating, a situation that could potentially drive up borrowing costs for the government.

On May 17, 2021, Moody's Investors Service, a renowned credit rating agency, downgraded the Government of Ethiopia's long-term issuer and senior unsecured ratings to Caa1 from B2, showing the country's higher susceptibility of defaulting on its debts.

Four months ago, Ethiopia had officially announced its application for the restructuring of its debt under the G-20 common framework. This was followed by the downgrading of Ethiopia’s credit rating by different credit agencies, including Fitch and Standard & Poor's (S&P), in the midst of concerns over private creditor risks arising from the country’s participation in the G-20 Debt Service Suspension Initiative.

Likewise, Moody’s, in its latest statement, slams authorities in Ethiopia for their delayed deliberations about their application to the G-20, explaining that this has increased the risk of private-sector creditors incurring losses, a situation which is likely to worsen because of political uncertainty and a fall in foreign direct investment. With credit agencies usually referring to African bondholders as private creditors, Ethiopia's Eurobond, introduced in 2014 and maturing in 2024, experienced a 1.3 cent fall, now being traded at 94.67 cents on the dollar.

US-based mutual funds including Emerging Markets Bond ETFs or American Beacon Global Evolution Frontier Markets Income Fund are the largest bondholders of Ethiopia’s Eurobond and are likely to be the biggest loser because of the debt restructuring, the impacts of which experts say is still unclear.

“Indeed, there are currently still no firm details of Ethiopia’s debt plans, including how Eurobond holders will be treated. We also see that Ethiopia’s re-profiling of debt service has an element of moderate risk of debt distress with higher risks for private creditors,” says Alisa Strobel, a senior economist for Sub-Saharan Africa at IHS Markit, another credit rating agency that has recently reduced Ethiopia’s rating. It has also adopted a negative outlook to the country’s long-term rating after taking into account that Ethiopia will see budgetary pressures resulting from efforts to contain the COVID-19 pandemic.

Ethiopia’s request for debt restructuring under G20 would suggest that the International Monetary Fund (IMF)’s Extended Credit Facility (ECF) programme review will involve close scrutiny of debt sustainability and it is likely that Ethiopia will adhere more quickly to IMF demands on policy reform as a result, according to her.

Ethiopia's external debt stood at 29.7 billion dollars as of December 31, 2020, of which a little over six billion dollars is owed to private creditors, while the country serviced almost one billion dollars of its debt in the first six months of the current fiscal year.