An Extraordinary Journey (Video)
On his recent trip to Africa in early July, US President Barack Obama announced his $7.bn Power Africa initiative focused on just six countries the US believes have the greatest potential to succeed in addressing the continent’s electricity needs.
To analysts of the Africa Rising narrative, the President’s inclusion of Ethiopia in his plan was an unmistakable affirmation that Ethiopia’s ambitious 10,000 megawatt power projects, including the huge $5.bn dam under construction on the Nile River, can transform Africa’s power sector. Furthermore, it’s seen as a tacit acknowledgement that the US intends to engage more economically with selected African countries that will increasingly matter in the coming years.
So how did we get to this point where even the US President is talking about investments in Ethiopia, which after all was the ’80s poster child of everything wrong about Africa and best remembered for the 1984 famine and the subsequent global Live Aid fundraising concerts?
It’s because during the past decade, Ethiopia has started to transform its economy; it is averaging 10% annual growth, albeit from a low base, according to a recent World Bank report. The economy has tripled since 2000 and is ranked amongst the fastest growing in the world. While still a relatively poor country, its $103bn GDP is the fourth largest in sub-Saharan Africa and is 25% bigger than Kenya’s.
Analysing how Ethiopia started to turn around in a relatively short period is a discussion best left to macroeconomists. But one thing is certain: its Developmental State economic model has played an important role. The model tries to emulate the Asian Tigers’ spectacular economic rise, in particular that of South Korea and China.
Under Ethiopia’s model, the state believes that the economic destruction during the previous socialist regime can only be reversed and industrialised rapidly if the state takes the lead and not wait for the newly emerging domestic private sector or foreign investors, because they may not be able to invest as fast or as much as needed.
As a result, the state has assumed a significant role over the economy – from regulations to strategy execution to ownership. For example, the state has made significant investments in infrastructure but it is also establishing some new companies which require big investments, such the planned fertiliser factories or upgrading the capacity of selected existing companies such as ethio telecom.
But at the same time the state is convinced that it has to gradually get out of the business of business by privatising about 200 companies which it inherited from the previous regime. Exceptions to privatisation are companies such as Ethiopian Airlines, the most profitable in Africa, the Commercial Bank of Ethiopia, the largest in East Africa and ethio telecom, which will remain under state ownership because they are considered critical for driving the economic growth.
The state also believes that it’s too early to allow foreign investment in the banking sector, although Ethiopians are allowed and in fact have established 17 highly profitable private banks, which fiercely compete for business against state-owned banks.
But the model has not been fully embraced by some of Ethiopia’s Western development partners including the World Bank and the IMF who have been pressuring the government to liberalise more, and in particular, open up the banking and telecoms sector to foreign investors.
The government has so far resisted the pressure and the expectation is that Prime Minister Hailemariam Desalegn, who assumed power 10 months ago after the unexpected death of his mentor, the late Prime Minister Meles Zenawi, will continue the same policies.
Foreign direct investment
The perception gap about investing and doing business in Ethiopia is moderating but is still a factor. While the facts tell a story of progress and growth, both the results of our annual investment attractiveness survey and anecdotal evidence from the numerous interactions I have with investors around the world, demonstrate that there is still a lag between the perception and the reality on the ground.
The government, in collaboration with the private sector, has made a concerted effort to encourage FDI into sectors allowable to foreigners. This included several recent high-profile global investment road shows held in Tokyo, Seoul, Paris and Moscow with more planned, including a big event in the US in October.
Our research and on the ground experience suggest that FDI into Ethiopia, while still relatively low in global terms, is picking up. FDI reached an estimated $1bn in 2012, the highest figure ever, anchored by two investments totalling over $415m by global drinks giants Diageo of the UK and Heineken of the Netherlands. Over the next three years, our FDI estimate is $1.5bn annually. We expect significant investments from China, the other Brics countries, Middle East as well as an increasing flow from the developed economies.
Additional FDI is expected in the promising oil and gas sectors, which the UK’s Tullow Oil is leading, working with Marathon Oil of the US. Warburg Pincus, one of the largest Wall Street private equity funds, recently announced that it has committed $600m for oil and gas investments focused on Ethiopia and a few other Eastern African countries.
One unique and very significant foreign investor is the Ethiopian born Saudi billionaire Sheik Mohammed al-Amoudi, who earlier this year announced plans for a $600m integrated steel factory in addition to a $350m cement factory he inaugurated in 2012 and which is one of the largest in Africa.
My view is that for global investors seeking a rapidly expanding and potentially large market, the Ethiopian growth story, with the second-largest population on the continent after Nigeria, and a GDP we forecast at more than $450bn by 2025, should stand out.
Ethiopia offers an opportunity for long-term growth especially in consumer products, infrastructure, labour-intensive manufacturing, oil and gas and, most importantly, agriculture. One measure of investor sentiment about Ethiopia is the result from our recent Africa business survey, which has rated Ethiopia as a moderate risk country with high opportunity, ranked at number six in Africa.
Two key drivers of Ethiopia’s economic growth that will be attractive to global investors are urbanisation and demographics. Anyone who has visited the Ethiopian capital Addis Ababa will notice that the city is one giant construction site.
This includes the 34 km, $400m modern light rail under construction. Throughout the city, thousands of affordable apartments are being built close to a modern six-lane ring road. Addis Ababa is forecast to have over 6m inhabitants by 2025. There are similar scenes in several other new urban centres of the country, albeit on a smaller scale. If current trends continue, Ethiopia will be one of the fastest urbanising countries in Africa over the next 20 years.
The other major growth driver is Ethiopia’s demographic advantage, its large young population whose median age is around 20. As happened in China and India, Ethiopia has the potential to deploy millions of young people at a lower cost even compared to Chinese wages, to build the industrial base the country needs.
For instance, manufacturing wages average about $80 per month in Ethiopia compared to more than $550 in China. The Chinese seem to have noted this trend, as I observed in my recent visit to the huge new Chinese industrial facility, called Eastern Industry Zone, 30 miles outside Addis Ababa.
The early outlines of China’s grand plans to leverage Ethiopia’s abundant resources are evident in the industrial park, especially at the world’s largest manufacturer of women’s shoes, Huajian Group, which has built a multimillion-dollar factory to manufacture high-quality footwear in Ethiopia for export to the US. Ethiopia’s flower export business is also a major beneficiary of the country’s demographic advantages. The cut-flower industry is less than a decade old and yet it employs tens of thousands of young, low-cost employees, mostly women, who help the country export competitively priced high quality flowers valued at $225m last year. Ethiopia is now the second-largest exporter of flowers in Africa.
I am often asked by international investors if Ethiopia’s growth is sustainable and what could knock it off track? My response is similar to the one I gave recently about Africa when I spoke at the New York Forum. Several factors could derail the country’s growth but none are Black Swans – Unknown Unknowns. Therefore the Ethiopian leadership and international investors should be able to anticipate them and execute their growth strategy accordingly. Like everywhere else in the world, job creation for millions of Ethiopians, in particular the young, should continue to be priority number one to ensure that the economic growth of the past decade does not go off track. The lesson from the EU is a cautionary tale as to how even very wealthy countries are struggling to find the right strategies with youth unemployment in countries, such as Spain at 50%. My view is the Ethiopian government alone cannot create the large number of jobs needed and therefore a public-private partnership and attracting large volumes of FDI will be essential.
Investment in infrastructure is also a key factor for staying on track and attracting FDI. In this regard, the state has a strong record of allocating almost 70% of the annual budget on non-recurrent expenditures, a much higher percentage than most other African countries including Nigeria, where it’s about 30%.
However, the success of the ambitious targets set by the government, for example the 5,000 km railway, universal access to power for 90m Ethiopians and connecting 50m telecom subscribers by 2015 (from 20m today), could be enhanced by broader participation of private investments.
My view is that Ethiopia needs to invest about $100bn in these types of infrastructure projects over the next 15 years. Therefore the state should consider shifting some of the infrastructure investment risks to the private sector to reduce the sovereign debt burden and also increase economic efficiency. The creation of capital markets in Ethiopia, including a bond market, could enable private sector financing of some of these infrastructure projects.
Furthermore, migration to industrialisation is essential to sustain Ethiopia’s economic growth. Moving up the value chain, especially in areas where Ethiopia has competitive and comparative advantages is a must. Ethiopia, for example, is the birthplace of coffee and today is by far the largest exporter of coffee in Africa. Therefore it must convert these types of commodities to high-value-added export products.
In conclusion, I am realistically optimistic and positive about Ethiopia’s economic prospects, despite the challenges the country will face as it transitions from a completely bankrupt economy two decades ago to middle income by 2025. My optimism is not based on wishful thinking – the numbers speak for themselves. I also firmly believe that it takes a positive mindset to succeed in an emerging market like Ethiopia. That’s why I choose the glass-half-full perspective.
Source: African Business Magazine