Fitch Ratings has assigned Ethiopia Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B'. The Outlooks on the Long-term IDRs are Stable. Fitch has also assigned a Short-term foreign currency IDR of 'B' and a Country Ceiling of 'B'.

KEY RATING DRIVERS

Ethiopia's IDRs reflect a balance between weak structural features indicating vulnerability to shocks and strong economic performance and improved public and external debt ratios since debt relief under HIPC in 2005-2007. More specifically, the ratings reflect the following key rating drivers:

-Despite impressive improvement over the past decade, Ethiopia's ratings are constrained by a weak level of development. The country ranks among the weakest Fitch-rated sovereigns on UN human development indicators, with a GDP per capita of USD500 in 2013, well below 'B' medians. Governance indicators as measured by the World Bank are broadly in line with 'B' medians.

-Economic performance is strong. With an average real GDP growth of 10.9% over the past five years, Ethiopia has outperformed regional peers due to significant public investments in infrastructure as well as growth in the large agricultural and services sectors. Despite a track record of high and volatile inflation, it declined significantly in 2013, reflecting lower food prices and the authorities' commitment to moderate central bank financing of the government.

-Fitch expects real GDP growth of 9% in 2014 and 8% in 2015. Ethiopia's growth over the medium-term can be sustained by large, untapped resources, including large hydro-electric potential. However, the private sector's weakness, reflecting the country's fairly recent transition to a market economy, and its inadequate access to domestic credit, could limit growth potential over the medium-term as public investment slows.

-Despite large capital expenditure, the general government (GG) budget deficit remained contained to an average 1.4% of GDP over the past five years, due to low levels of current spending, including a limited wage bill and modest interest payments. As a result, headline GG debt declined steadily in 2005-2012 following the 2005 HIPC/MDRI debt alleviation, and reached 25.8% of GDP in June 2013, well below the 'B' median and regional peers.

-Significant investments in infrastructure (including roads, electricity and railways) have been made possible by the heavy involvement of state-owned enterprises (SoEs), which finance a large part of investments on their own, mostly through heavy recourse to domestic bank credit. Fitch estimates that total SoE debt amounted to at least 25% of GDP at end-June 2013, doubling consolidated total public debt.

-Ethiopia's structural current account deficit - at 5.4% of GDP in 2013 - reflects low value-added exports and investment-related imports. It exerts pressure on international reserves, which at two months of current account receipts, are low compared with peers. However, with debt service also low, reserves relative to debt service are above the 'B' median. Net external indebtedness has risen steadily since 2007, though it remains moderate and in line with 'B'-rated peers. However, growing recourse to non-concessional financing, particularly by SoEs, could increase debt service.

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 lead to a positive rating action, individually or collectively, are:

-Stronger external indicators, including higher exports, as well as stronger FDI and international reserves

-A sustained decline in inflation reflecting an improved macro-policy environment

-Further improvement in structural factors, including stronger development and governance indicators

The main factors that could lead to a negative rating action, individually or collectively, are:

-Rising external vulnerability related to declining international reserves, widening current account deficit or rising external indebtedness

-Increased risk of contingent liabilities from SoEs and publicly-owned banks materialising on the government's balance sheet

KEY ASSUMPTIONS

The ratings are reliant on a number of assumptions, in particular, the following:

-Continuity in the development model of the country

-Continued strong support from the international community, implying continued aid inflows to the country to support its development

-Demand for Ethiopia's exports (including coffee, other agricultural products and gold) benefiting from the gradual recovery in the global economy, with world GDP growth forecast to increase to 2.9% in 2014 and 3.2% in 2015 from 2.3% in 2013

-No major change in the political regime in the coming years

The above statement was released by the rating agency