Ethiopia's sovereign credit rating received a negative outlook by Moody's Investors Service, a credit rating firm, due to the country's existing fiscal and external peril, compounded by the Novel Coronavirus (COVID-19).

The Agency further stated that the pandemic shock will manifest in high-income inequality and exacerbated levels of poverty that have the potential to stoke social discontent.

The current negative outlook conferred on Ethiopia translates into low confidence in the country's credit profile. Poverty coupled with weak governance, particularly among state-owned enterprises (SOEs), has contributed to the low outlook. The dependency of the country on rainfall for its agriculture and energy have also been cited as reasons for the negative outlook, as periodical droughts can potentially put the sector in jeopardy.

Agricultural output like coffee, the main export commodity of the sector, as well as gold, are vulnerable to commodity price shocks during a period of volatile external conditions like the pandemic. These set-ups in the country have translated to a slowdown in GDP projections of up to two percent in this fiscal year as well as the next one.

This is despite the government's huge bet on domestic revenue collection, covering 64pc of the current fiscal year's budget, of which 19.6pc is expected to be covered by foreign loans and assistance. Moody's estimates Ethiopia's external financing requirements will amount to 6.6pc of GDP in this fiscal year. Ethiopia's capacity to secure external funding is uncertain, as Moody's reports, and failure to cover the country's needs in this way could sharply increase the pressure on its liquidity and balance of payments.

The country's fiscal vulnerabilities are compounded by a large and financially weak SOE sector, aggravated further by the economic shock, according to Moody's.

The government, however, is taking steps to reform SOEs drowning in debt, which is compounding its fiscal vulnerabilities. It has initiated the formation of an Asset & Liability Management Company, which will manage investment activities, assets and liabilities of the enterprises and absorb a little over half a trillion Birr in residual debt, which the enterprises cannot currently attend to.

The government has also introduced an all-encompassing programme of new policy prescriptions by Prime Minister Abiy Ahmed's (PhD) administration, dubbed the Homegrown Economic Reform Agenda, which aims to work toward macroeconomic, structural and sectoral reforms. The masterplan for the economic reform of the country did not score points for the credit profile as the rating agency doubts the delivery of the agenda.

This same institution has been painting the country's economy with flying colours for the last few years, and this is a sudden shift from their track record of a narrow and myopic report, according to a macroeconomist who wanted to remain anonymous.

"Economists for the last five years have been trying to debunk the colours they were putting up by actually showing the structural and policy problems," he said. "Extenuating the issue now may be good, but the fundamental problem in the country lies in the political situation, which needs to be immediately addressed."