22 July 2014 News Round-Up (UPDATED)

Ethiopia’s birr is overvalued and the country would benefit from a devaluation to boost export revenue and accelerate economic growth, the World Bank said.

Reducing the currency’s value by 10 percent in real terms may lead to a 5 percent increase in stalled export earnings and a 2 percent increase in growth, Lars Moller, the bank’s chief economist in Ethiopia, told reporters today in the capital, Addis Ababa.

Ethiopia last devalued its currency by 17 percent against the dollar in September 2010. Since then, the birr has appreciated in real terms by more than 50 percent, leading to a currency that’s overvalued by 31 percent, Moller said at a presentation of the lender’s third Ethiopia Economic Update.

After growing at a rate of about 20 percent in previous years, annual Ethiopian goods exports have remained steady at about $3 billion for the past two years, primarily because of falling international commodity prices. Foreign earnings from goods may have grown about 8 percent in the fiscal year that ended July 7 from $3.08 billion last year, Prime Minister Hailemariam Desalegn said July 18 to reporters. The country uses the Ethiopian calendar.

Although the exact effect of devaluing the currency is uncertain, there would be some benefit to the country, Moller said.

‘Insufficient Depreciation’

“The bottom line is that Ethiopia competes on prices and the real exchange rate is overvalued,” he said.

A decision to adjust the exchange rate would be made on the basis of what its wider impact on the economy would be, State Minister of Finance Ahmed Shide said at the event. The birr is currently at 19.7495 per dollar.

Ethiopia, the world’s most populous landlocked nation, may grow as much as 8.5 percent this year and next, the International Monetary Fund said last month. The nation earns most foreign-exchange from state-owned Ethiopian Airlines, while coffee exports from Africa’s largest producer of the beans are the highest grossing commodity.

To boost exports, the World Bank also recommended focusing on adding value to commodity exports by expanding processing and packaging, building industrial zones, opening access to credit for small- and medium-size enterprises, and improving costly and time-consuming trade logistics.

Ethiopia is investing to tackle infrastructure bottlenecks such as power and transport networks that have been a barrier to growth, which should help the business climate, Ahmed said.

The World Bank estimates Ethiopia could earn $1 billion a year from exporting electricity by 2023 if all of its hydroelectric projects are completed as planned, Moller said.

To contact the reporter on this story: William Davison in Addis Ababa at wdavison3@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net Paul Richardson, Sarah McGregor, Andres R. Martinez

http://www.bloomberg.com/news/2014-07-22/world-bank-urges-ethiopia-to-devalue-birr-to-lift-export-revenue.html

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Unleashing the Potential of Ethiopia’s Export Industry

Lars Christian Moller                                                     Guang Zhe Chen
Lead economist and co-author of the report.         World Bank Country Director for Ethiopia

US Secretary of Commerce Penny Pritzker.Agence France-Presse/Getty Images

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US Commerce Secretary Penny Pritzker confirmed today that deals worth almost $1 billion would be announced at the US-Africa Business Forum in Washington DC early next month.

Ms. Pritzker told WSJ Frontiers that: “There will be announced at the summit at least $900 million in deals. It will be a combination of all different types of structures. But this is new money—and there will be more to come.”

The US-Africa Business Forum, which will be co-hosted by the Department of Commerce and Bloomberg Philanthropies, will bring together more than 200 U.S. and African businesspeople along with heads of state and other government officials, according to Ms. Pritzker. The aim of the business forum, which takes place alongside President Obama’s US-Africa Leaders Summit, is to “encourage U.S. private sector investment in Africa and vice versa,” she added.

More than 40 African heads of state are expected to gather in Washington for the presidential summit on August 6 to discuss economic development, security and governance.

The Wall Street Journal will be covering the summit and associated events in Washington with live updates on WSJ Frontiers as well as news and analysis at wsj.com/africa.

Write to Dan Keeler at dan.keeler@wsj.com.

 http://blogs.wsj.com/frontiers/2014/07/22/obamas-africa-summit-set-to-see-900m-in-deals-announced/

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Ethiopia: The Bilateral Relation Between Ethiopia and China…

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The bilateral relation between Ethiopia and China has never been at the height of its glory as it appears now, gossip observed. Ever since 200 Chinese laborers arrived in the highlands of Ethiopia in January 1868, building the road that led to the well known expeditions by Robert Napier’s (Gen.), against Emperor Tewodros, the Chinese reserve a significant place in building the nation’s physical infrastructure, gossip recalls.

From historical engagement of building roads, power plants and telecom infrastructure to the new undertakings of light railway to Addis Abeba and rail lines connecting the country to the sea, no other country than China has committed to making over five billion dollars available in a form of loans, gossip disclosed. In fact, the Chinese authorities have told members of Ethiopia’s top leadership their desire to see Ethiopia as a growth model for the entire continent, gossip learnt.

Gossip sees little surprise then in the high level visits and exchanges between the two countries. During one recent high profile visit by the Chinese Prime Minister, Li Keqiang, Ethiopian authorities have placed their requests to find financing on two major projects: the transmission line for the GERD, estimated to cost a little over one billion dollars, and the construction of railway line extending up north of Weldya, to link Mekelle and potash rich north-eastern part of the country.

Projected to cost 1.6 billion dollars, the idea of building a railway line between Mekelle and farther has first surfaced when the late Meles Zenawi was in office, gossip disclosed. Considering how expensive the project would turn out to be and in the absence of economic rationale that sways, Meles was reportedly reluctant to approve the project at the beginning, only to change his mind later on, claims gossip. Nonetheless, a disclosure of an agreement between the heads of the Ethiopian Railway Corporation (ERC) and the Chinese contractor, CCCC, provoked criticism within and outside of the administration, gossip disclosed.

During his visit to Ethiopia in May 2014, Prime Minister Keqiang had instructed his aides to look into the project for possible finance, gossip disclosed. Now Arkebe Oqubay (PhD), the Prime Minister’s point man for infrastructure and industrial affairs, is seen very keen and determined to see the project gets through, despite the grudges over its economic viabilities, gossip reveals.

Disappointingly to the senior EPRDFites though, the financing pledge by the Chinese Premier has not come handy to date, according to gossip. What should be far alarming, and contrary to the EPRDFites’ consolation that the nation’s debt sustainability ratio is in the category of low risk countries, the new leadership in China that is busy in restructuring foreign debts their country is owed has not demonstrated its customary enthusiasm in entering into new commitments, claims gossip.

Such state of affairs may explain the reason behind high level visits by senior EPRDFites, including one by President Mulatu Teshome (PhD), claims gossip. Having thought to have his years studying in the same college as Keqiang, and serving as a special envoy of his country to China, not to mention his fluency in Mandarin, his visits to textile, leather and telecom companies was trusted to lure more Chinese investors, and help him get hearings from Chinese authorities, according to gossip.

Despite little hopes among those who follow the case for the government, whether he succeeded is yet to be seen, claims gossip. In the meantime, though, two veterans EPRDFites, Abay Tsehaye and Bereket Simon, have paid a visit to the dragon nation to reassure Chinese authorities that Ethiopia won’t buckle on its international commitments, gossip disclosed. Theirs too is a result remaining on the suspense, claims gossip.

http://allafrica.com/stories/201407220580.html 

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Meeting the Challenge: Allana Potash Focuses on Ethiopia to Meet Demands of Changing Market

VANCOUVER, B.C., July 22, 2014 (GLOBE NEWSWIRE) – The potash market has seen its share of trials in recent months. Cartel dissolutions, soaring production costs and declining spot prices have created a challenging market. But Toronto-based Allana Potash Corp. (AAA.TO) is one company that has turned those challenges to its advantage.

Since 2009, Allana’s primary focus has been on the acquisition and development of international potash assets. A cornerstone of its activities is the flagship Danakhil Potash Project in the Danakhil region of Ethiopia, which is on track to become the first functioning potash mine in Africa.

“Unlike major projects that have faced cancellations or significant delays due to declining potash prices, Allana has a number of unique advantages, including an extremely low capital expense/operating expense model and a growing number of investment partners,” says Richard Kelertas, senior vice-president, corporate development, for the company. “What we have with Danakhil is a world-class, high-grade potash resource that we can access with cost-effective, proven mining methods.”

This business model has attracted the attention of partners such as IFC, a member of the World Bank Group, and Liberty Metals and Mining Holding LLC. In January, Allana announced its most significant partnership yet with Israel Chemicals Ltd. (ICL), the fifth-largest potash producer in the world. Under the terms of the agreement, ICL is now a minority shareholder at 16.4%.

“For a large potash producer to work with a junior partner is a major validation of the project for us,” says Farhad Abasov, Allana’s chief executive officer. “While ICL has taken minority positions before, they have never remained as just a minor investor. They add value to the operation and management and usually expand their ownership over time as they become more comfortable with the jurisdiction and the process.”

“They saw a great opportunity with this project,” says Kelertas. “Not only is the economy growing, Ethiopia is the ideal location to cost-effectively service African, Asian and Middle Eastern markets.”

There are three core components included in the ICL deal: financial support, a take-or-pay offtake for 80% of production, and technical cooperation. ICL’s investment stands at $25-million, with the potential to reach $84 million, assuming full exercise of its warrants. Production is planned to reach one million tonnes of muriate of potash (MOP) annually. MOP is the standard grade of potash that is applied to staple crops such as corn, wheat and soy. The project also has the potential to produce sulphate of potash (SOP), which is applied to cash crops such as vegetables and orchards, as well as golf courses.

The take-or-pay offtake is unique for ICL and the industry as a whole. In a traditional offtake agreement, a company will commit to taking a certain amount of production at a discounted price. If the product cannot be sold, the producer is responsible for the inventory storage.

In the take-or-pay agreement, ICL will pay for its percentage of output, whether it has been sold or not. “That almost guarantees a large bulk of cash flow for Allana because 80% of our output will be paid for regardless,” Kelertas explains. “That’s a tremendous advantage no one else in this industry has, and provides major comfort for banks providing debt financing because it shows we will be able to service our debts.”

“Nobody in this sector has done anything like this. But ICL saw a lot of potential and synergies,” Abasov says.

ICL also has invaluable expertise in the infrastructure needed for solar evaporation. This is a commonly used process in which water is utilized to extract and convey potash deposits close to the surface and deposited in solar evaporation ponds. ICL manages one of the world’s largest solar evaporation pond systems near the Dead Sea. In the case of the Danakhil project, water-soluble potash deposits will be flushed with brine from a natural aquifer and the liquid pumped to surface evaporation ponds. There the high temperatures will accelerate the process for more efficient production.

“ICL knows everything there is to know about solution mining, transportation, construction and logistics,” Kelertas says. “Without that we would have had to hire the expertise to bring the project into production.”

In fact, capex costs for the project are estimated to reach only US$642-million, with total opex at $125 per tonne (delivered on ship, including sustaining capex and transportation from the site). This pales in comparison to the multi-billion-dollar projects that have been abandoned or postponed due to declining potash prices in the face of rising production costs.

With Allana’s low capex numbers, Kelertas says it can continue to deliver a high rate of return once the mine is at its full capacity of one million tonnes per year. “The very low cost structure means that we can be profitable even at a US$300 to $350 spot price. Other projects won’t get off the ground unless the price is $500 or higher, so many of them are looking at 2020 or beyond before they might get back on the drawing board.”

Unlike other parts of Africa, Kelertas says, Ethiopia is a geopolitically stable and rapidly growing economy and a mining-friendly jurisdiction. “There’s a tremendous amount of infrastructure money flowing into Africa as we speak, especially on the agricultural side. Analysts and investors, including heavyweights Warren Buffet and KKR, are projecting that agriculture will be one of the biggest investment areas over the next five to 10 years in the continent.”

As a mining-friendly jurisdiction, Ethiopia has been investing billions on its transportation and distribution infrastructure. “Road, rail and port facilities are all being built for us,” says Abasov. “Plus we have all the water supply we need for sustained production.”

The African market will become a thriving market for potash as the continent’s food requirements expand. According to the United Nations, Africa will make up 25% of the world’s population by 2050, versus 15% today, and urban dwellers will quadruple during the same period. At the same time, increased demand on available arable land will drive a need for increased crop productivity and yield, which relies on sustainable potash production for fertilizer applications. Ethiopia’s Agricultural Transformation Agency reports that 100,000 to 400,000 tonnes of potash will be consumed by Ethiopia, Kenya and other East African nations over the next five years.

“Ultimately Allana’s success will hinge on three principles,” Abasov says. “First the shallow nature of the deposit and the hot climate offer a significant advantage in terms of cost structure. Second, we are able to attract project financing from large global financial institutions with mandates to spur economic development in emerging nations. In terms of general development, over $3-billion of foreign direct investment has been made in the agriculture sector in Ethiopia alone. Third, the Ethiopian government is extremely supportive. In fact, we are one of only a few projects that are fully permitted. In addition, the federal government is taking on many of the construction expenditures relating to infrastructure building that will help ensure the long term success of our project.”

Once production is in full force, Abasov estimates that 30% to 40% of output will be slated for the African market.

“To succeed, we have to make sure we are one of the lowest cost producers on the planet,” Kelertas says. “And we will likely be once we’re up and running at full capacity.”