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Nov 22, 2018 | 10:00 GMT

7 mins read

Ethiopia Offers Investors a Tantalizing, If Tainted, Promise

Chinese Premier Li Keqiang and then-Ethiopian Prime Minister Hailemariam Desalegn attend a signing ceremony at the Great Hall of the People in Beijing on May 12, 2017.
(THOMAS PETER - POOL/Getty Images)
Highlights
  • Addis Ababa will proceed carefully toward the partial privatization of large state-owned enterprises like Ethio Telecom, Ethiopian Airlines and others in 2019.
  • Ultimately, the transparency of the process will give investors key insight into the government's intentions regarding privatization.
  • Ethiopia's rising economic potential will drive further investment interest from non-Western countries like China and Vietnam.
  • Investors' appetites to take on additional risk will depend greatly on whether Ethiopia's recently completed infrastructure projects are perceived as successful.
  • Although the partial privatization of state-owned enterprises may spark an uptick in investment, Addis Ababa will need to undertake deeper structural economic reform to improve growth and foster greater internal stability.

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Annual Forecast. These assessments are designed to provide more context and in-depth analysis on key developments in the coming year.

After a stunning 2018, Ethiopia is poised to make more waves in 2019. The country's ambitious prime minister, Abiy Ahmed, has neutralized threats to his rule at home and brokered a peace deal abroad. What's more, his promise of economic liberalization has generated significant interest from international investors and multinationals dreaming of entering a massive market that was largely closed to the rest of the world. But how Addis Ababa manages this process over the next year will have an outsized impact on its growth prospects in the years ahead.

The Big Picture

2019 will be a crucial year for regional heavyweight Ethiopia. After signaling its intention to liberalize its economy, Addis Ababa will try to make good on its promise, by privatizing part of its large, state-owned enterprises. If such efforts succeed, Ethiopia's 100 million-strong market could enter a new era of investment and growth, helping to stabilize the country and allow it to flex its muscles further beyond its borders.

Auctioning off the Cash Cows

The Ethiopian government has long wielded control over the economy due to its preference for a developmental state model rather than one of unfettered capitalism dominated by foreign competition. Over time, however, Ethiopia has warmed to the idea of allowing slightly freer markets, yet the government still presides over a bloated public sector and retains a monopoly on several key sectors, including telecommunications, air transport and the railways. The financial sector, for its part, consists only of local banks, as foreign lenders are prohibited from entering the market.

Today, Ethiopia boasts one of the world's fastest-growing economies, while it has made great strides in lifting its poorest out of poverty and improving health care, education and other services. Nevertheless, its economic growing pains are challenging the status quo, meaning the country continues to grapple with massive unemployment (especially for the youth), onerous regulations, widespread poverty and a shortage of foreign currency. These problems, particularly the foreign exchange crunch, have heaped pressure on Ethiopia's leaders to make a greater break with its centrally planned past — even as some parts of the ruling class remain hostile to free markets.

Abiy and his allies have pushed for greater economic liberalization, announcing the partial privatization of state-owned enterprises like the telecommunications company Ethio Telecom (the government's local cash cow) and flagship carrier Ethiopian Airlines (the largest generator of crucial foreign currency). The government said it would break Ethio Telecom into two to stimulate competitivity — something that has sparked a frenzy among telecom companies in the United Kingdom, France, South Africa, China, Vietnam, Kenya and elsewhere that are eager to jump into the untapped market.

A chart showing Ethiopia's top import partners from 2008 to 2017.

The partial sell-off of the telecom sector — the biggest prize for foreign investors — will also serve as a barometer of Ethiopia's broader privatization push. At present, there is no doubt that Ethio Telecom has a huge number of subscribers, but the company's other particulars remain a mystery to outsiders, as there is no public data on the firm's financials or other critical information. Accordingly, the suitor that Ethiopia ultimately picks will provide a window into Addis Ababa's intentions. After all, Western multinationals will demand transparency in the bidding process, as well as any partnership in the ownership of Ethio Telecom, but Vietnamese or Chinese firms, for example, might be more flexible on transparency, meaning they could grab the inside track in the process. Until Addis Ababa provides more information about the tender process, it will be impossible to rule out the specter of cronyism in the deal.

In recent years, Ethiopia has garnered notable attention from the likes of China, Middle Eastern powers and others. Investments in industrial parks, sugar plants, major infrastructure projects and other areas have helped Ethiopia pursue its development aims. The peace agreement between landlocked Ethiopia and coastal Eritrea will be a further boon for Addis Ababa's investment profile, as reopened roads and access to Eritrean ports will reduce the congestion at Djibouti's port and facilitate more trade.

A map showing ports around the Horn of Africa.

Cause for Pause

However, Ethiopia's economy also has challenges that will give all investors pause for thought. Besides political risk, the biggest problem for investors is the country's liquidity woes — a reality that will continue into 2019 and beyond. Indeed, the emphasis on critical — but expensive — infrastructure projects like the Grand Ethiopian Renaissance Dam has created an acute foreign exchange shortage. To construct these projects, Ethiopia's central bank has forced private lenders to hand over their foreign currency holdings to enable the import of necessary construction materials. As a result, the amount of foreign currency has diminished to such an extent that Ethiopians are suffering from a shortage of imported medicine, while investors are also forced to wait long periods to exchange their birr for U.S. dollars.

Given the great burden that the projects have placed on the economy and average Ethiopian, Addis Ababa is desperate for the projects to succeed. But another reason for its angst stems from the funding models for the projects — loans, mostly from China. In fact, the repayment schedules for some of these loans began even before the completion of the projects, complicating Addis Ababa's ability to pay them back. Relatedly, key infrastructure projects like the much-touted Addis Ababa-Djibouti Railway, which was inaugurated earlier this year, must soon show signs of a return on the investment. If not, investors and creditors may take their business (and money) elsewhere if they perceive a greater risk of default on Ethiopia's white elephants.

A chart showing Ethiopia's top export partners from 2008 to 2017.

Another issue is Ethiopia's lack of a stock exchange, owing to its Marxist-Leninist past. (Ethiopia remains one of the largest countries in the world not to operate an exchange). For one, this restricts local and foreign participation in the economy, reduces transparency and increases inefficiency in the economy. At the same time, it discourages some foreign institutional investors like private equities, investment banks and hedge funds from considering the country, thereby decreasing potential investment.

Last, and perhaps most significant, is the question of structural economic reform. So far, Addis Ababa has said little about implementing deeper changes to the top-heavy economy. For one, the country's bureaucracy is notorious for excessive regulations and an aversion to risk — an attitude that stems in part from a drive to maintain state supremacy over the economy by crowding out the private sector. The stance stifles entrepreneurship that could foster bottom-up economic growth and ease youth unemployment, which has fomented instability. At the same time, Ethiopia's leaders have devoted little attention to the agriculture sector, which currently employs 85 percent of the workforce and dominates exports (previous leaders focused on the issue far more in previous years). Ultimately, if Ethiopia fails to boost this critical sector, its export growth will continue to stagnate.

The effects of Ethiopia's ongoing foreign currency crunch and the lack of foreseeable structural economic reforms could hinder the country's ambitions, deterring foreign investors. Nevertheless, the reopening of supply chains to coastal Eritrea, along with the prospect of privatization, have captured the imagination of many investors — suggesting that the promise of Ethiopia will be too good to ignore in the years to come.

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