Fitch Ratings affirmed Ethiopia’s long-term foreign-currency issuer default rating at ‘RD’ (Restricted Default) on October 16, reflecting the country’s continued failure to meet external commercial debt obligations despite progress towards restructuring its $1bn Eurobond. The agency warned that renewed fighting in Tigray also threatens Ethiopia’s economic recovery.
Ethiopia applied for debt relief under the G20 Common Framework in 2021 and defaulted on its sole Eurobond after missing a $33mn coupon payment in December 2023. It is restructuring approximately $15bn in external obligations, including arrears as of end-June 2024.
The government reached a memorandum of understanding with its Official Creditor Committee in July 2025 and has since signed most of the bilateral agreements needed to implement that restructuring. Negotiations continue separately over a $200mn commercial loan.
Progress with private creditors proved more difficult. An initial agreement with Eurobond holders in January 2026 failed to secure official creditors’ acceptance because of concerns over the comparability of debt relief. Ethiopia negotiated revised terms in June, which received a favourable assessment from the Official Creditor Committee in August.
Under the revised agreement, holders of Ethiopia’s defaulted $1bn Eurobond would exchange their existing securities for a new $880mn bond, taking a 12% reduction in principal. The replacement bond would carry a 6.15% coupon, down from 6.625% on the original bond, and amortise in annual instalments to July 2029.
Bondholders would also receive warrants giving them the right, but not the obligation, to subscribe to a separate seven-year Ethiopian Eurobond during a specified period on agreed commercial terms. Exercising the warrants would require a new investment, separate from the $880mn replacement bond received in the restructuring. If Ethiopia chose not to proceed with the warrant-linked bond issuance, the warrants would instead be redeemed for cash at a price yet to be determined, capped at 9% of the notional amount redeemed. The 9% ceiling represents the maximum potential cash settlement, not a guaranteed payment or an additional repayment of the original Eurobond. Official creditors have warned that excessive benefits from the warrants could undermine comparability and require adjustments to their own debt treatment.
The August assessment cleared an important obstacle but did not complete the Eurobond restructuring. Fitch expects Ethiopia to launch a consent solicitation in the coming weeks, seeking approval from holders representing at least 75% of the bond’s outstanding principal. If the threshold is reached, the government could complete the exchange by the end of 2026.
The agreed Eurobond terms have been assessed as consistent with official creditors’ comparability-of-treatment requirement and with the IMF’s debt sustainability targets. However, the exchange remains subject to bondholder approval and has not been completed. Even if the $1bn defaulted bond is exchanged for the proposed $880mn replacement bond and associated warrants, Ethiopia must also resolve its remaining external commercial debt obligations before Fitch can reassess its restricted-default rating.
The country’s external liquidity position has meanwhile improved substantially, supported by higher gold and coffee export volumes and prices. The National Bank of Ethiopia’s gross international reserves reached an estimated $5.9bn in the fiscal year ended July 7, 2026, equivalent to 2.5 months of current external payments, compared with 2.1 months a year earlier and just 0.7 months in fiscal 2024.
Nevertheless, reserve coverage remains below the 3.7-month median for sovereigns in Fitch’s ‘B’, ‘C’ and ‘D’ rating categories. Continued export growth and foreign direct investment inflows are expected to offset the resumption of external debt servicing and stabilise reserve coverage through fiscal 2028.
General government debt is projected to decline from 33% of GDP in fiscal 2026 to 30% by fiscal 2028, well below the 62% peer median. Including state-owned enterprises and regional governments, total public-sector debt is estimated at 45% of GDP in fiscal 2026.
The relatively low debt-to-GDP ratio does not remove Ethiopia’s external repayment difficulties. The IMF and World Bank have classified Ethiopia’s debt as unsustainable before restructuring, citing debt-servicing obligations that exceed thresholds relative to export earnings and government revenue.
See IntelliNews: Ethiopia’s debt level “unsustainable” after Eurobond defaults, IMF, World Bank warn
The government deficit is estimated to have narrowed to 0.5% of GDP in fiscal 2026 from 1.6% a year earlier, supported by stronger revenue collection following foreign-exchange reforms. Fitch expects the deficit to widen to 2% of GDP in fiscal 2027 because of fuel subsidies and the potential fiscal impact of renewed conflict. It warned that the shortfall could be larger.
Large-scale fighting resumed in late September between federal forces and a Tigray People’s Liberation Front-led opposition alliance, undermining the fragile peace established in 2022. The fighting has disrupted essential services and humanitarian assistance and raised the risk of wider regional escalation involving Eritrea.
The regional repercussions have already extended beyond the battlefield. Eritrea severed diplomatic relations with Ethiopia on October 1 after Addis Ababa closed its embassy in Asmara and expelled 10 Eritrean diplomats, heightening concerns that renewed fighting could destabilise the wider Horn of Africa.
See IntelliNews: Eritrea cuts ties with Ethiopia as Tigray conflict threatens wider Horn of Africa instability
The renewed conflict, together with possible El Niño-related disruption to agricultural production, is expected to slow economic growth. Fitch forecasts real GDP expansion of 7% in fiscal 2027, compared with 9% in fiscal 2025, although growth would remain well above the 3.9% peer median.
Structural reforms, agricultural industrialisation and foreign investment are expected to support medium-term growth, although political instability and weak institutions remain constraints on Ethiopia’s credit profile.
Ethiopia’s defaulted senior unsecured foreign-currency debt carries a Fitch recovery rating of ‘RR2’, reflecting expectations of relatively favourable recoveries under the restructuring. The country’s ceiling remains at ‘B-’.
Fitch said it would assign a new forward-looking foreign-currency issuer rating once Ethiopia completed its external commercial debt restructuring and the agency judged that relations with a substantial majority of private creditors had normalised. The new rating would depend on Ethiopia’s prospective willingness and capacity to service its obligations, rather than follow automatically from completion of the Eurobond exchange.