Ethiopia Poised For Continued Growth

Summary

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Over the last decade, the investment community has praised the tremendous growth of the Chinese and Indian economies, leading to heavy investment and a reshaping of each country’s image. However, China’s economy has recently slowed down with GDP growth at 7.4% over the whole year, the slowest rate since 1990.

Despite a growth rate that would please most nations, investment institutions have now become wary of the Chinese economy citing the end of a monetary stimulus that spurred the tremendous growth. According to the Wall Street Journal, India passed China in recent quarters in economic growth.

And despite its tremendous maturation, India’s economy will soon be viewed as slowing and the world will turn somewhere else. I think it is clear that Africa will be the next untapped market that will provide the investment community with tremendous growth prospects.

This is the first part in a series of profiles of African economies. I will begin by profiling Ethiopia, a country in sub-Saharan Africa.

Profile:

Investors should take note of the urbanization in Africa as a key indicator in the shift from an agrarian based economy to manufacturing. Ethiopia is one of the leaders in urbanization with its capital city, Addis Abeba, forecasted to be the 5th most populous city in Africa by 2025. Another key indicator that suggests that Ethiopia is at the infancy of a tremendous growth cycle is its demographic advantages.

Ethiopia is forecasted to be the 6th most populous country in the world by 2050 and currently has a median age of 20 years old. According to the United Nations Population Fund, with proper governmental investment, a large, young population can lead to a boom in the economy. The United Nations Population Fund goes on to outline that “when a country’s working age population is larger than its number of dependents, it can reap a “demographic dividend” – an economic boom in which households are better able to save and invest and economies are more productive.”

Growth:

The “Horn of Africa” nation averaged a 10.7% economic growth rate over the last 10 years, more than double the annual average of countries in Sub-Saharan Africa which was 5.2%. Tangentially, Ethiopia’s growth has not been tied to the development of mineral resources like oil and gas which bodes well for the political stability of the country. Nations like the Congo, Sudan, Zimbabwe, and Nigeria which are rich in resources have seen their nations torn apart by civil war, in large part due to control over these resources.

The Ethiopian government has put a great emphasis on infrastructure investing in road and dam projects in order to provide reliable transport of goods, and also to provide cheap power to its landlocked inhabitants. Its single focus has led the nation to be one of the fastest growing in Africa, however, many have questioned the heavy-hand of the Ethiopian government. Foreigners are barred from investing in banking and telecoms entities, but the tide of foreign exclusion is shifting.

Debt:

Last year, the IMF stated that Ethiopia was on the precipice of shifting from low to moderate risk of debt distress. According to the IMF, Ethiopia’s total debt percentage of about 50% of GDP was manageable, but would be a concern should percentages rise. Government officials have rebuffed claims that debt percentages could become unsustainable citing their expenditure in public projects and works like industrial zones and sugar factories.

Influx of Foreign Investment:

Many investors fear allocating money abroad because of political uncertainties, and general unrest, but the truth is that since 1990, the rate of return on foreign direct investment in Africa has averaged 29%, nearly tripling FDI in Europe.

Over the last several years, Ethiopia has seen the likes of Hennes and Mauritz (OTCPK:HNNMY) source supplies from Ethiopia, consumer goods maker Unilever (NYSE:UN) is in the process of building a factory, and both Diageo (NYSE:DEO) and Heineken (OTCQX:HEINY) have bought breweries.

The recently purchased Heineken brewery in the outskirts of Addis Ababa is part of a 310 million euro investment in the country since 2011. Heineken’s brewery complements the already existing breweries in Ethiopia. Government officials have argued that Ethiopia’s attractiveness is partly due to the already existing infrastructure and factories in the country.

And in light of the current difficulty, to get direct exposure to the Ethiopian economy, it would be wise to purchase equities that are bound to capitalize on its growing consumer base. Heineken has reported that “Ethiopia’s average annual beer consumption of some 5 litres per capita is about half the average level for sub-Saharan Africa, excluding South Africa, offering scope for expansion among the population.” In addition, Heineken managed to purchase two local breweries: Bedele and Harar.

Other more speculative investment opportunities involve capitalizing on recent increase in exports of mineral resources. On February 10th, the share price of AIM-listed Nyota Minerals (OTC:NYOTF) almost quadrupled as the Ethiopia-focused gold miner invested in an exploration permit for nickel, base and precious metals in Italy. Another mining related investment opportunity is Premier African Minerals that recently announced development of a potash mining project in Ethiopia.

As mentioned earlier, it would be wise to wait on greater liberalization from the Ethiopian government before investing in the mining related companies.

Ethiopian Currency (Birr):

(click to enlarge)

As you can see above, the Ethiopian Birr has surged since 2007, in relation to the yen. Even with devaluation of the currency in 2010, Ethiopia’s tremendous GDP growth has propelled the birr to greater heights. Investors should take note of the birr’s relative strength and the possibility of even greater percentage increases as the Ethiopian economy continues to diversify and liberalize in the near future.

With the lack of a country specific ETF, currency trading is a way to get direct exposure to the Ethiopian economy.

Resource Wealth:

Ethiopia’s tremendous growth has not been the result of a great discovery of natural resources, but due to an emphasis on infrastructure and government expenditure that is transforming Ethiopia’s economy from agriculture based to manufacturing intensive. Another step in diversifying the Ethiopian economy and further increasing growth prospects is the growing exports of mineral resources.

The mining sector in Ethiopia has grown significantly with government estimates stating there are roughly 1 million employed miners in the country, making it an important source of foreign currency. According to the World Bank, “In 2012, mining was responsible more than 19% of the total value of exports, and up to 10% of foreign exchange earnings. Gold makes close to 100% of mining exports and most of it, about 2/3, comes from artisanal mining.”

Conclusion:

Ethiopia seems well positioned to continue to grow and garner foreign investment. A potential worry for investors is the single-party structure that has brought about the great growth, but has also stifled public dissent. If the Ethiopian government manages to expand liberties and foster a political environment that welcomes the dissent; the country should continue to be one of the leaders in Africa and a future hot spot for investment.