Ethiopia

I feel it still: Country risk still there despite high growth

C3

SENSITIVE RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD80.561bn (World ranking 67, World Bank 2017)
Population 104.96mn (World ranking 12, World Bank 2017)
Form of state Federal Parliamentary Republic
Head of government Abiy Ahmed Ali (PM)
Next elections 2020, legislative
  • Key partnership with China on Africa’s new silk road
  • State committed to meeting development objectives such as the MDGs and SDGs
  • The international community is supportive, particularly in times of drought-induced famine
  • High GDP growth rates in recent years, with an annual average +10.2% in 2006-16
  • Large domestic market (population over 95mn)
  • Fastest growing manufacturing sector in Africa.
  • Strong track record of attracting FDI from both advanced and emerging economies.
  • International agencies periodically question the commitment on protection of human rights
  • The region (Horn of Africa) is high risk. Ethiopia has borders with Sudan, South Sudan, Eritrea and Somalia - all offering challenges
  • The country is landlocked, which increases transport costs and vulnerability to external shocks.
  • High dependence on rain-fed agricultural output but recurrent drought, locust infestations etc. Water rights are a source of potential conflict in the Nile area.
  • Continuing aid dependence, despite significant external debt forgiveness and re-profiling.
  • Fiscal and current account deficits and weak foreign exchange reserves (about 3 months of import cover)

In a high growth regime

Ethiopia is one of the top performers in Africa when it comes to growth. GDP expanded by more than +9% per year on average during the last 7 years. Some might claim the impressive figure stems from backwardness. With 105mn inhabitants, Ethiopia is the second most populous African country (after Nigeria).

About half of population is still engaged in subsistence farming, but Ethiopia is also leveraging its high population, low labor costs, and infrastructure improvements as well as the good ties with key foreign investors in the manufacturing sector such as China and Turkey. The high growth rate of household income and urbanization fueled the development of consumer related sectors (e.g. car plants).

 

The potential is still high

The country attracts high levels of foreign direct investment as it began to develop its capital stock albeit from very low levels. This process is ongoing despite a poor regulatory environment – The World Bank’s Doing Business 2019 survey ranks Ethiopia 159th out of 190 economies surveyed. This very low ranking is not aligned with the current attractiveness of the country for foreign investors (USD 3 bn of net inflows per year) and should improve in the future, as a result of recent reforms.

However, poor indexes on key aspects are meaningful. It indicates that the current high growth environment is not protecting the country against insolvencies (including a severity risk). The main weaknesses are related to the protection of minority investors (178th) and a poor access to credit (175th). The development of the private sector is also inhibited by barriers to start a business (167th) and resolving insolvency (148th) aspects.

Developing power generation is central to a manufacturing hub strategy. The Grand Ethiopian Renaissance Dam (6000 MW) on the Blue Nile is one such project. Its key target is increasing hydro-electric capacity to 37,000 MW by 2037. Yet there are risks related to its negative impact on neighboring countries like Egypt.

As Ethiopia is landlocked, relations with Djibouti, which allows access to the red sea and Suez Canal through a railway network, are crucial to Ethiopia's positioning in China’s East Africa “new silk road”. Moreover, the ongoing normalization of diplomatic relations with Eritrea is also good news in that regard.

 

Imbalances and inequality: on a tightrope

 

Ethiopia’s growth model produces current account deficits. The country needs to import capital goods to build its capital stock. The current account deficit widened from -2.5% of GDP in 2011 to -11.6% in 2015. Increasing export potential led by the construction of textile plants and some import substitution allowed by new plants (e.g. car plants) helped to reduce it to -6.5% of GDP in 2018.

 

Yet, the current level of imbalances implies a liquidity risk for the country. Foreign reserves cover a mere 3 months of imports. This exposes the country to a downturn in case of capital flow reversal, also given the increasing external debt ratio (38% of GDP in 2018). Moreover, it means that with such a tight level of foreign exchange liquidity some debtors may well not have an appropriate access to it.

 

Despite decisive policy moves, the political risk is still high

 

Regular droughts and the political divide that still exist within the country go frequently hand in hand to nurture some downside risk to the overall favorable growth scenario.

 

Ethiopia has a long story of difficult relationship with neighboring countries, as well as between its regions. After a painful war in the eighties that left the population in a major threat, the political situation normalized progressively. However, the difficulty to engineer a policy acceptable for the different groups within the country implied some policy paralysis in some way and a key difficulty to reform the economy.

 

Some progresses have been made in the past, with the opening of the country to foreign direct investors. It implied the development of the manufacturing sector and provided the economy with the basic goods needed for its urbanization process. The new prime minister (Abiy Ahmed Ali was appointed in April 2018) made promising progresses on key aspects (relations with Eritrea, effectiveness of the Federal government power in all the regions) and should now stick with its efforts.

 

 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Somalia 15%
1
32% China
China 10%
2
8% United States
Kuwait 8%
3
8% Kuwait
Netherlands 8%
4
7% India
Saudi Arabia 7%
5
4% Saudi Arabia

Trade structure by product

(% of total)

Exports Rank Imports
Coffee, tea, cocoa, spices, and manufactures thereof 30%
1
12% Petroleum, petroleum products ans related materials
Vegetables and fruits 11%
2
7% Road vehicles
Crude animal and vegetable materials, n.e.s. 8%
3
7% Iron and steel
Leather, leather manufactures and dressed furskins 5%
4
6% Electrical machinery, apparatus and appliances, n.e.s.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Country Risk Analyst:

Stephane Colliac

stephane.colliac@eulerhermes.com      

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