2015 Quarter 1 ETHIOPIAN SNAPSHOT

ETHIOPIAN
SNAPSHOT
2015 Quarter 1
Inflation – According to the Ethiopian Central Statistical Agency (CSA), food price inflation increased for the fourth consecutive month in February, reaching
the highest level since January 2013. Ethiopia’s food inflation rate increased from 7.1% y-o-y in January to 9.6% y-o-y in February. In turn, non-food inflation
decreased over the month, dropping from 8.2% y-o-y in January to 6.8% y-o-y in February. The overall consumer price index (CPI) inflation rate reached
8.2% y-o-y in February, slightly higher than the January figure of 7.7% y-o-y.
Growth – Ethiopia has in recent years consistently been one of the fastest growing economies in Africa. Pro-poor economic growth over the last decade has
led to a considerable increase in per capita GDP and an impressive drop in the national poverty rate. The country has been able to maintain an average real
GDP growth rate of around 10.2% p.a. over the 2008-13 period. Medium-term growth will be highly dependent on the government’s debt management
strategy, as well as the extent to which authorities can improve the business environment. Real GDP growth is expected to oscillate around 8% p.a. over the
medium term.
National development plan – The 2014/15 fiscal year (FY, ending July 7) marks the final year of the government’s five-year Growth and Transformation
Plan (GTP). The GTP aims at sustaining high and broad-based economic growth and achieving the Millennium Development Goals (MDGs) targets by 2015.
The GTP’s strategy is to effectively build the country out of poverty, with a key focus on large infrastructure investment projects.
OPPORTUNITIES
STRENGTHS
Developing the hydropower sector, which would diversify exports and supply
stable electricity to Ethiopia, thereby supporting growth.
Immense area of land available for commercialising agriculture, which is
currently dominated by smallholder farming.
Development of the manufacturing sector, particularly agro-processing and
leather industries.
Integrating Ethiopia into the neighbouring East African Community (EAC).
Very high economic growth rates recorded in recent years.
Substantial natural resources and favourable demographics ensure that strong
prospects will continue for economic growth.
Increasing interest from India, Saudi Arabia and China in developing the
economy.
Strong donor support enables the country to access additional resources,
enabling capital investment and faster growth.
VULNERABILITIES
WHAT IS BEING DONE?
Economic structure: heavy reliance on agricultural sector, production mainly
via smallholder farming.
Country has a structural budget deficit, resulting in strong dependence on
donor aid.
Repressive economic policy towards investors - foreign investment prohibited
in banking, insurance and media sectors, and limited in others.
Development of the agro-processing and leather industries, promotion of
commercial farming enterprises.
Government is focusing on increasing tax revenue to fund fiscal expansion, but
still relies on donor aid for around 20% of fiscal revenue.
Increasingly allowing privatisation of public enterprises, which may indicate
future relaxation of restrictive policies.
While borrowed funds are being used for productive investments, off-budget
financing distorts analysis of actual debt levels.
Increasing debt levels due to GTP financing.
MEGA TRENDS
Population
96,633,458 (July 2014 est.); Age 15 - 64: 53%
Population growth rate (%)
2.89% (2014 est.)
Life expectancy at birth
Total population: 60.75 years; male: 58.43 years; female: 63.15 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 1.2%; People living with HIV/AIDS: 793,705 (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 49.1%; male: 57.2%; female: 41.1% (2015 est.)
and write)
Urbanisation
Urban population: 18.6% of total population (2013); Urban population growth: 4.9% (2013)
Population below $1.25 (PPP) poverty line 36.8% (2011 est.)
Unemployment rate
17.5% (2012 est.)
Employment (% of total)
Agriculture: 85%; Industry: 5%; Services: 10% (2009 est.)
Labour participation rate (% of total
population ages 15+)
83.7% (2013)
Business languages
Amharic, Arabic, English
Telephone & Internet users
Main lines in use: 761,450; Mobile cellular: 25.65 million; Internet users: 1.84 million (2013)
Sources: CIA World Factbook, World Bank, Trading Economics, UNESCO, ITU, UNAIDS & NKC Research
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Total
Ethiopia
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
175
110
Doing Business 2015 (1 best, 189 worst)
189
132
Global Competitiveness 2014-15 (1 most, 144 least competitive)
144
118
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
187
173
0
Source: NKC Research
178
149
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
B/Stable
B/Stable
B1/Stable
Standard and Poor’s (S&P) affirmed Ethiopia’s long- & short-term foreign & local currency sovereign credit rating at “B/B” with a stable outlook in early
November last year. According to the agency, Ethiopia’s economic growth continues to outpace the average for its peers, and its large service exports and
remittances support the current account position. In turn, the country’s ratings are constrained by the low GDP per capita, large public-sector contingent
liabilities, and a lack of monetary policy flexibility. Looking at the fiscal balance, Ethiopia's current fiscal position is similar to that of its peers, but off-budget
borrowing by state-owned enterprises may not necessarily be reflected in the headline fiscal deficits. More recently, in early April, Fitch Ratings affirmed
Ethiopia’s long-term foreign & local currency Issuer Default Rating (IDR) and short-term IDR at “B” with a stable outlook. According to the agency, the
country’s rating balances weaknesses such as the economy’s high exposure to weather & commodity price shocks as well as weak development & governance
indicators, with strengths such as strong economic growth associated with improved public and external debt ratios since debt relief in 2005-07. The agency
continued to note that Ethiopia’s macroeconomic performance is broadly in line with peers. While the government’s development strategy has made
commendable progress over the past decade, overall development and World Bank governance indicators remain weak.
Furthermore, Moody’s Investors Service assigned Ethiopia a first-time local- and foreign-currency issuer rating of “B1” with a stable outlook in early May
last year. According to the agency, the rating is driven by Ethiopia’s relatively unsophisticated economy and low per capita income, balanced by a track-record
of strong economic growth over the past decade. The agency noted that the country’s weak institutional strength is in line with similarly rated peers, while
Ethiopia’s largely favourable debt burden is balanced by increasing reliance on non-concessional financing.
Infrastructure
Diversity of
the Economy
Banking
Sector
Continuity
of Economic
Policy
GDP Growth
Fairly limited,
but improving
Dominated by
agriculture
Underdeveloped
Stable, but poor
Strong
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Low
Low
Fiscal and current Fair, but below
account deficits
potential
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Daily Trading
Volume
N/a
N/a
N/a
N/a
N/a
N/a
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Underdeveloped
Limited
28-days to 364-days
(T-bill)
No
Yes
Macro-economic overview
The omnipresent role that the Ethiopian government plays in the country’s economy means that economic development is highly dependent on the
effectiveness and success of government policies. The government’s ambition to become a regional electricity powerhouse and manufacturing hub could
greatly benefit the country if the return on the substantial government investment is realised. To date, the strategy has delivered robust GDP growth and
progress toward MDGs. In addition, development has been widespread, resulting in a remarkable reduction in poverty. The Ethiopian government has adopted
the philosophy of a “developmental state”, whereby a proactive public sector leads the development process and the private sector is oriented to support the
development goals. The government’s growth strategy has received some criticism for crowding out private investment, and consequently hampering
development of the private sector. Off-budget financing by public enterprises as well as the government’s dependence on external budgetary support add
salient elements of risk to the country’s fiscal position. In addition, greater use of external borrowing will bring an additional source of uncertainty through
exchange rate risk, which is particularly worrying when considering the country’s inadequate external liquidity position.
Still, while the growth model bears inherent risks, it has succeeded in supporting considerable development for an extended period of time. Ethiopia’s
economic prospects remain positive. A continuation of the current investment programme while incorporating a policy shift towards creating a more
accommodating business environment would greatly enhance the country’s medium- to long-term outlook. In addition, energy exports could provide the
catalyst for more widespread integration in the East African region, while an increase in the availability of energy would also enhance the investment potential
of the region. The country boasts an immense area of arable land, some of the most favourable demographics worldwide, an abundance of natural resources
including mineral wealth and renewable energy potential, as well as a favourable geographic location in close proximity to both Asia and Europe.
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Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Service/GDP
42.9%
Agriculture/
GDP
45.3%
Industry/GDP
11.8%
The agricultural sector remains a cornerstone of the Ethiopian economy. Ethiopia’s agricultural sector currently produces maize, sorghum, wheat, sugarcane
and pulses in significant quantities, generating 9% of Africa’s annual maize production. The agricultural sector is also a salient source of employment, with
roughly half of the rural population directly engaged in agriculture as an economic activity. In turn, the government’s GTP has had a particularly positive
impact on Ethiopia’s industrial sector, with large infrastructure projects supporting the construction sector, while public policy is also centred on supporting
the development of a robust manufacturing sector. The Ethiopian government is expanding infrastructure as it seeks to become a regional electricity exporter
and manufacturing centre, and utilising the country’s low-cost labour and cheap power from Africa’s second largest hydropower resources to attract foreign
investment in manufacturing. Furthermore, Ethiopia’s services sector has shown strong growth for numerous years. The usual drivers of consumer service
demand such as rising incomes, favourable demographics, and behavioural changes linked to urbanisation are all present in the country.
Real GDP Growth & Net FDI/GDP
13.0
Source: NKC Research
4.5
12.0
4.0
11.0
3.5
10.0
3.0
9.0
2.5
8.0
2.0
7.0
1.5
6.0
1.0
5.0
0.5
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
We have adjusted our GDP growth forecast upwards to take into account the increasing use of external financing by government, which should ease some of
the credit constraints on the domestic financial sector, while lower global energy prices could also provide a boost for local industry. Our FY 2015/16 GDP
growth forecast has been raised from 7.3% to 8.1%. While Ethiopia’s overall economic outlook remains positive, significant downside risks remain. Any
deterioration in fiscal operations or the government’s balance sheet could have a serious impact on economic growth in the country. Furthermore, the lack of
clarity regarding project funding creates an additional source of risk that might have an impact on the sustainability of the current growth path. Turning to FDI,
a total of 80 investment projects with an aggregate capital of Etb5.8bn were licensed by the Ethiopian Investment Agency and Regional Investment Offices
during Q2 of 2014. This reflects a slight increase from the 78 (Etb19.8bn) projects licensed in the previous quarter, but significantly lower compared to the
176 (Etb5.4bn) foreign investment projects licensed in Q2 2013.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
2016F
Mineral fuels, oils & distillation products
Machinery & boilers
Main Imports: % share of total
2014E 2015F
2016F
Mineral fuels, oils & distillation products
20.04
16.63
15.32
Machinery & boilers
16.93
16.51
15.04
Electrical, electronic equipment
13.87
14.12
13.48
Vehicles other than railway, tramway
9.55
9.50
9.51
Electrical, electronic equipment
Vehicles other than railway, tramway
Main Exports: % share of total
Coffee, tea, mate & spices
Oil seed, oleagic fruits, grain, seed &
fruit
Edible vegetables, certain roots &
tubers
Live trees, plants, bulbs, roots & cut
flowers
Source: NKC Research
0.0 0.5 1.0 1.5 2.0 2.5 3.0
2014E 2015F
2016F
Coffee, tea, mate & spices
22.23
23.56
23.04
Oil seed, oleagic fruits, grain, seed & fruit
18.09
16.91
16.02
Edible vegetables, certain roots & tubers
15.36
16.25
15.78
Live trees, plants, bulbs, roots & cut
flowers
5.39
5.41
5.44
According to the most recent figures from the National Bank of Ethiopia (NBE), total exports in the Q3 2014 reached around $720m, reflecting a 14.1% y-o-y
increase, but a 25.2% q-o-q decrease. While coffee exports accounted for just over a quarter of the exports over the period, amounting to $183m, the
substantial q-o-q drop in exports is largely due to a 44.2% q-o-q reduction in coffee exports. In turn, total imports in Q3 2014 reached $3.7bn, reflecting a
2.1% q-o-q and 26.6% y-o-y rise. Products related to the government’s infrastructure investment programme continue to dominate imports, particularly
industrial capital goods (28.1% of total imports). Overall, this resulted in a merchandise trade deficit of just under $3bn in Q3 2014, which is 12.1% q-o-q and
30.1% y-o-y wider than previous deficits, largely due to the strong growth in imports.
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Current Account & Budget Balance
(% of GDP)
0.0
0.0
-2.0
-1.0
-4.0
-2.0
-6.0
-3.0
-4.0
-8.0
Source: NKC Research
-5.0
-10.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
The country’s $3bn merchandise trade deficit in Q3 2014 was accompanied by a $29m deficit in the country’s income account. This income account deficit,
which is 28.6% q-o-q narrower but 4.6% y-o-y wider than previous deficits, was largely driven by interest payment outflows, amounting to $26m. On the other
hand, the country recorded a significant $1.2bn surplus in the transfers account in Q3 2014. This was largely made up of private transfers, amounting to
$931m, while official transfers accounted for the remainder. Furthermore, Ethiopia recorded a surplus of just over $67m in the services account in the quarter
under analysis. This reflects a significant 88.3% q-o-q increase, but a 73.7% y-o-y decrease compared to previous quarters. Overall, the country recorded a
$1.8bn current account deficit in Q3 2014, which is 28.6% wider than the deficit recorded in Q3 2013. Looking at government finances, a continuation of the
government’s expansionary fiscal policy will weigh on the fiscal balance, while public debt steadily increases over the medium term. After increasing from
around 2.03% of GDP in FY 2012/13 to an estimated 2.97% of GDP in FY 2013/14, the fiscal deficit is expected to oscillate around 4% of GDP for the
remainder of the forecast period.
Average CPI (% change, y-o-y)
35.0
Source: NKC Research
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
The Ethiopian inflation environment benefited significantly from strong agricultural output in the East Africa region in 2014. This pushed food inflation to a
multi-year low of 2.9% y-o-y recorded in October 2014. In addition, the NBE has also contributed to monetary stability through limited recourse to directly
finance the fiscal budget, while base money growth targets – the NBE’s primary tool to achieve its inflation objectives – have been in line with the central
bank’s inflation targets. However, the benefits from the strong agricultural performance seem to have peaked at the end of 2014, and we expect other factors to
push consumer price inflation higher over the short term. More specifically, the government’s ambitious investment drive will inject liquidity into the
economy, while the birr exchange rate has been under notable pressure in recent weeks.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Josphat Mwaura – designation is Partner
Tel +254 20 280 6100
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
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