Fitch Ratings has affirmed Ethiopia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC', reflecting the risk of a default event, low levels of foreign reserves, increasing gross external financing needs, and delays to expected sources of external financing.

The default event may result from the government's participation in the G20 Common Framework (CF) debt relief initiative, which after a delayed start in September 2021, has stalled partly "due to disagreements among Ethiopia's bilateral creditors, as well as the country's ongoing civil conflict."

The conflict in the African country began in late 2020, with the federal military and its allies battling forces loyal to the Tigray People's Liberation Front (TPLF), the political party that controls Tigray. The fighting, which has killed thousands and displaced millions, also hammered its economy.

"The conflict serves to highlight ongoing domestic and regional political risks that will remain a key risk to the country, and one that poses a threat to FDI and other external financing flows," said Fitch.

The CF treatment, with its principle of comparable treatment for both official and private creditors, directly affects only bilateral (official) debt, which accounts for approximately 30 percent of the 29.5 billion in external debt owed by the central government and state-owned enterprises. While 12 lender countries participate in the creditor committee, the bulk of official bilateral debt is from China. Chinese lenders also constitute a significant portion of what Ethiopia classifies as private commercial debt.

The country has seen significant external financing gaps in recent years, Fitch said. "Risks to the external position will remain, as a widening current account deficit will increase Ethiopia's gross external financing requirements over the next two years."

It forecasts the current account deficit to widen to 4.4 percent of GDP in the fiscal year ending June 2022 (FY22), from 3 percent of GDP in FY21, and then to narrow slightly to 4.2 percent in FY23.

(Writing by Brinda Darasha; editing by Daniel Luiz)

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