Bulls n Bears Entrepreneurship Zone :: Ethiopia: On the right track?

[Bulls n Bears]

 <mailto:info at bulls.co.zw> 

 

 

The world was shaken by images of Ethiopian famine back in 1984, yet since
then the country has achieved a remarkable turnaround to become one of
Africa’s economic success stories in the volatile Horn of Africa.

Since 2005, it has achieved double-digit annual GDP growth according to
some estimates, while the 8% preferred by the International Monetary Fund
(IMF) and some Western analysts is still more than respectable.

The speed of change is illustrated by the exponential rise in Ethiopia’s
GDP. In 2000 it was US$8.2bn, growing to just over $43bn by 2012 before
nearly doubling to $80bn by 2017, according to the IMF. By 2023, it is
forecast to reach $129bn.

Foreign investment piled in as Ethiopia emerged as one of the world’s
fastest-growing economies, while social and economic indices improved faster
than anywhere else in Africa (albeit from a low base). But despite all this,
at the end of 2015 protests broke out within the country’s Oromia region,
home to Ethiopia’s largest ethnic group, the Oromo.

As protests continued into 2016 and beyond – in February this year the
country declared a second state of emergency coupled with the prime minister
resigning – the country saw its hard-won reputation as an East African
stalwart of stability and business opportunity badly shaken.

Ethiopia has always been a country of contradictions, its current rapid
pace of change heightening the divergence: In parts of the country people
live almost medievally, while parts of the capital, Addis Ababa, are as
expensive as New York, with the affluent part of the urban population able
to afford luxury Western goods and comfortable lifestyles. One of Ethiopia’s
great challenges is squaring such extremes.

Nevertheless, there remains among those doing business in Ethiopia a sense
of cautious confidence about the country’s future and opportunities – one
reason foreign direct investment (FDI) remained robust during the troubles:
In 2016, flows to Ethiopia rose by 46% to $3.2bn. Optimism has been further
raised by the fact that the state of emergency was lifted in June at the
same time that the country announced the end of a long-standing feud with
Eritrea over land and a move to open up state-owned monopolies to investors.

“Ethiopia has a great need for foreign direct investment, the government
wants it to come from a wide range of countries, so there are opportunities
for everyone,” says Clive Newell, a 35-year veteran of the UK’s foreign
office, and now an Africa and Middle East expert at G3, a London business
intelligence and investigations firm.

The main advantages, Newell notes, are a growing and youthful large
population, strong and sustained economic growth forecast to continue,
accelerating urban development, an emerging middle class, a well-established
and expanding agricultural sector, and untapped mineral wealth.


Steadying the rudder


On 2 April, Abiy Ahmed was sworn in as Ethiopia’s new prime minister. The
42-year-old technocrat – crucially an Oromo – is widely seen as a reformer
who is already taking steps to restore calm.

While the periodic unrest and the state of emergency had somewhat affected
business confidence, the new prime minister has helped to stabilise the
situation, Newell says, adding: “It’s business as usual in most of the
country.”

Indeed, even at the height of the protests, life went on as normal in the
capital, Addis Ababa. Ethiopia’s time zone (GMT+3) is conducive for
international business, and its strategic position between the Middle East,
Europe and the US means it “can be called the centre of the globe,” says
Wudu Yedemie, country manager, DHL Express Ethiopia, who notes how within a
10-hour-flight circumference of Addis Ababa, one can reach six billion of
the world’s population.

The continuing stability of Ethiopia’s macroeconomic and investment
policies during the unrest meant the country still managed to be named a
“star performer” in an FDI Attractiveness survey by the World Bank in its
2017/2018 Global Investment Competitiveness Report.


Embracing the developmental state model


Conscious of the need to boost production and productivity to sustain the
country’s giant population, the government has embraced state-led
development policies focusing on services and agriculture, and drawing on
state-generated revenue from strongly performing public companies like
Ethiopian Airlines and Ethio Telecom to finance large infrastructure
projects.

Ethiopia wants to become a light manufacturing hub to rival those found in
the Far East, hence its ambitious program of building multiple
investor-friendly industrial parks offering special opportunities to attract
foreign capital and expertise.

The country’s current population of around 100 million – making it Africa’s
second most populous country after Nigeria – is set to exceed 127 million by
2037. As a result it has a huge labour force that is young, relatively
well-educated and affordable. Labour costs are less than half the level in
China and Vietnam, according to the McKinsey Global Institute.

“There is huge promotion on the focused sectors like garment manufacturing,
horticulture or other manufacturing in the industrial zones, which are well
incentivized to promote these activities [with the likes of] 10-year
exemptions from tax and VAT,” says Amadou Diallo, CEO, DHL Global Forwarding
Middle East and Africa.

For example, Ethiopia aims to boost foreign exchange earnings from flowers
and other plants to more than $1bn a year from $280m now, according to the
Ethiopian Horticulture Producer Exporters Association.

Other growth areas include sugar industry development, the brewery
industry, the hospitality industry, the cement industry and construction.

While the country’s state-led development model has drawn comparisons with
China’s, key differences exist. China has allowed private enterprise to
prosper, while the Ethiopian government had until recently restricted access
to several key sectors such as telecoms, banking and retail.

However, on 5 June the government announced it was loosening its grip on a
number of sectors, including telecoms, airlines and energy. While it will
retain majority stakes in what were previously state-run monopolies like
Ethiopian Airlines and Ethio Telecom, they will now be open to private
domestic and foreign investment – a major policy shift.


Land of origins and bounty


The country has the second-highest number of river resources in Africa and
has begun tapping its enormous hydropower potential, aware that a reliable
and ample source of energy is required to drive industry forward, while its
absence will hinder progress. The latest 6.5 gigawatt Grand Ethiopian
Renaissance Dam (GERD) could prove a game changer for local energy
consumption and enable excess electricity to be sold to neighbouring
countries. The dam would also provide water for vast new irrigation schemes
to spur the country’s already well-established and expanding agricultural
sector. The dam’s man-made lake could even generate fishery and tourist
attractions, such as boating and pleasure cruises.

Wind, geothermal, solar power and biomass also offer renewable energy
opportunities. Large-scale natural gas production infrastructure is under
construction and should generate $1bn per year in revenue, with exports due
to start in September 2018. And at the beginning of July 2018, 450 barrels
of petroleum crude were extracted from three wells, proving the nation has a
commercially viable reserve.

Meanwhile, the government has deftly managed good trade relations,
utilising the US’s African Growth and Opportunity Act (AGOA) that enhances
market access to the US for qualifying sub-Saharan African countries.

Its exports also have duty-free and quota-free access to the EU, Japan,
Canada, China, Turkey, Australia and New Zealand, while India grants it
preferential access


Full steam ahead


“Ethiopia is the region’s locomotive,” says Dawit ­Gebre-ab, director of
strategic planning at the Djibouti Ports and Free Zones Authority, which
manages Djibouti’s network of ports and logistics infrastructure. “With its
expansion in manufacturing, Ethiopia could become the China of Africa. It
possesses all the ingredients.” The huge population also means public and
private healthcare spending is increasing rapidly.

“The government has set itself ambitious targets to improve the health of
the population,” Newell says. “Both public and private healthcare need new
clinics, hospitals, equipment, ambulances, coldchain facilities and much
else besides, [also] better availability of imported and locally produced
pharmaceuticals.”

Economic liberalisation in telecoms looks likely to give the sector a huge
boost and give the government more revenues. It’s estimated, for example,
that the current $900m the government reaps from its Ethio Telecom monopoly
could be closer to $10bn if more competition were allowed.

“Since these sectors have been closed for so long, every sector will offer
an opportunity for the [business] experts to play a role in Ethiopia soon as
they open up for international business,” Diallo says.

When it comes to technology, many Ethiopians are currently too poor to snap
up tech goods. But that hasn’t stopped the country developing mobile phones
and smartphones for export to other parts of Africa, such as Nigeria.
Furthermore, the country’s rapidly expanding middle class means a growing
portion of the population has disposable income for higher-tech, more
expensive goods, and Ethiopia is poised to become a middle-income country by
2025, according to the World Bank.

In 2016 Ethiopia overtook Kenya as the largest economy in East Africa, and
remains the US’s main Horn of Africa ally, having played a key role in
regional military operations. Such economic, political and military clout
means Ethiopia is well placed to drive economic development for the
increasingly integrated East Africa region, which currently has 71
construction projects valued at $32.6bn, according to Deloitte, and four of
the 10 biggest projects are in Ethiopia.

“Ethiopia’s projection of soft power, including trade relations with its
neighbours, the development of cross-border economic infrastructure and
sharing of services, is helping to bind these nations more closely together
and demonstrating in tangible ways the benefits of integration,” says Matt
Bryden, executive chairman of Sahan Research, a Nairobi-based think tank.


Keen to connect


The country is also seeking to overcome both its landlocked state and its
isolationist past with a series of five-year Growth and Transformation Plans
to improve infrastructure and facilitate international trade. Infrastructure
spending as a percentage of its GDP – 39% in 2017, according to an analysis
by financial consulting group Deloitte – is the highest in Africa, with
transport, energy and real estate the top three sectors driving the
expenditure spree.

“The government is heavily investing in infrastructures for road, aviation
and rail and factoring in convenience through building industrial parks with
one-stop shop services, such as customs, and more,” says Yedemie. “It’s also
building dry ports to reduce the effect of being a land-locked country, and
investing in IT parks to enhance supporting technology infrastructure.”

He notes Ethiopian Airlines is a particular logistical strength, with
strong local, regional and international passenger and cargo flight
networks. The government is upgrading the national road network, he says.
This will enable farmers to transport produce to bigger markets, support the
area’s growing sugar industry, enable the development of coal mines in the
region, and improve connections to neighboring countries such as Sudan,
Kenya and Djibouti.

In 2018 a new $4bn electric railway from Addis Ababa to Djibouti opened,
cutting freight transport times from two days to 10 hours.

But while Ethiopia’s transport infrastructure is undoubtedly improving,
like most elements in Ethiopia it is coming from a low base. “The
infrastructure at all critical points in our logistics world is not up to
the mark and a lot needs to be done to bring it up to speed,” Diallo says.

“Furthermore, the procedural component also lags behind other African
countries, including below-par customs processes and formalities,
international shipment handling, timeliness at customs and ports, logistics
competence, and tracking and tracing of all shipments entering and moving
around the country,” he adds.

This explains why, in 2016, the World Bank’s Logistics Performance Index
assessment ranked Ethiopia at 126, placing it well behind South Africa and
Kenya, and also behind the likes of Tanzania, Rwanda and Ghana. But a low
starting point invariably offers potential.

“The challenges are there,” says Diallo. “We do, however, see significant
opportunities in Ethiopia going forward, provided the country manages to
address its challenges in terms of trade facilitation and processes.”

There are other economic issues to overcome. The country is struggling
under high public debt and rising inflation, and has long been plagued by a
shortage of foreign currency – a consistent lament from foreign companies
working in the country – while Ethiopia’s ease-of-doing-business ratings
remain among the world’s worst.

The World Bank estimates the country needs to invest $5.1bn in
infrastructure each year for 10 years to overcome existing constraints on
development. Ethiopia is also heavily in debt to – and dependent on – China
for providing enormous funding, expertise and cooperation for many of
Ethiopia’s recent infrastructural developments.


Crucial juncture for future growth


Ethiopia therefore finds itself at a crossroads. Despite the current
optimism and relative calm, further violence is possible and, if sustained,
could result in shareholder pressure to mark time on investments, or even
disinvestment campaigns by human rights activists. But if the ruling party
continues to open up the economic and political system, some say Ethiopia’s
progress toward stability and prosperity could quicken.

For now, the consensus among observers is that investors will continue to
be drawn by the country’s advantages: the size of the domestic market, the
sustained record of high economic growth, the government’s welcoming of
foreign investment and striving to provide the requisite infrastructure, an
increasingly skilled workforce and Ethiopia’s growing regional role.

There is even talk of Ethiopia eventually emerging as an African powerhouse
alongside South Africa and Nigeria – if it can retain stability both
politically and economically.

“It’s a promising situation as the country opens to the world, and now is
the right time to be there,” Diallo says.

This article was originally published by DHL.—Howwemadeitinafrica 



 

Invest Wisely!

Bulls n Bears 

 

Telephone:    <tel:%2B263%204%202927658> +263 4 2927658

Cellphone:      <tel:%2B263%2077%20344%201674> +263 77 344 1674

Alt. Email:    <mailto:info at bulls.co.zw> info at bulls.co.zw  

Website:
<http://www.google.com/url?q=http%3A%2F%2Fwww.bulls.co.zw&sa=D&sntz=1&usg=AF
QjCNH8LYgdY55h-XKseuM8Kpr-JKdfhQ> www.bulls.co.zw 

Blog:
<http://www.google.com/url?q=http%3A%2F%2Fwww.bulls.co.zw%2Fblog&sa=D&sntz=1
&usg=AFQjCNFoIy6F9IXAiYnSoPSgWDYsr8Sqtw> www.bulls.co.zw/blog

Twitter:                  @bullsbears2010

LinkedIn:               Bulls n Bears Zimbabwe

Facebook:
<http://www.google.com/url?q=http%3A%2F%2Fwww.facebook.com%2FBullsBearsZimba
bwe&sa=D&sntz=1&usg=AFQjCNGhb_A5rp4biV1dGHbgiAhUxQqBXA>
www.facebook.com/BullsBearsZimbabwe

Skype:         Bulls.Bears 



 

 

-------------- next part --------------
A non-text attachment was scrubbed...
Name: winmail.dat
Type: application/ms-tnef
Size: 459774 bytes
Desc: not available
URL: <http://listmail.bulls.co.zw/pipermail/bulls/attachments/20181024/0730eee5/attachment-0001.bin>