Moody's on Friday downgraded Ethiopia's foreign currency rating by a notch to 'Caa3' from 'Caa2', citing a high likelihood of default on foreign currency-denominated private sector debt.
The agency added that the East African country's foreign inflows had dried up against the backdrop of the COVID pandemic and about two-years of conflict in the Tigray region between regional forces and Ethiopia's federal army with its allies.
"Ethiopia's external profile has deteriorated to very weak levels over the last two years," the credit ratings agency said in a statement on Friday.
Moody's said the downgrade, however, is limited to one notch to reflect its expectations that losses for private-sector creditors are expected to be lower than historical average losses of sovereigns, helped by the government seeking liquidity relief.
"The government plans to improve the country's external position with several initiatives, including debt relief under the G20 common framework," the agency said in a statement on Friday.
Moody's also changed Ethiopia's outlook to stable from negative on expectations that the debt relief exercise under the G20 Common Framework would proceed relatively quickly and under a funding program with the International Monetary Fund.
Africa's second-most populous country had requested a debt restructuring under the G20 Common Framework process in early 2021, but progress was delayed by the civil war that broke out in November 2020.
China had recently allowed Ethiopia to suspend payments on debts maturing in 2023/2024 fiscal year under a framework set up by the G20.
(Reporting by Saikeerthi in Bengaluru; Editing by Shailesh Kuber)