Ethiopia at a crossroads: which way is it heading?
- Abundant agricultural, mineral and hydrological resources
- Government is willing to reform
- One of the fastest-growing countries in the region
- Elevated external debt versus current account receipts
- Regularly reported foreign exchange shortages
- Ethnic tensions
Since 2000, Ethiopia has been one of the fastest-growing economies in Africa. In the first 19 years of the new millennium GDP growth was on average at a high 9.1%. Main driver: big public sector investments in infrastructure. But rising public debt forced Ethiopia to slow down on infrastructure investments. Still, economic growth is expected to remain around 7% in the medium term.
New political wind, new prospects?
In 2018 an important shift took place, when Ahmed Abiy became prime minister. Abiy belongs to the Oromo, the largest ethnic group, representing 35% of the population. Ethiopia remains a complex multi-ethnic federation, where the 6% Tigrayans until to recently held a strong political, economic and military control.
The new prime minister has initiated sweeping political and economic reforms. The reapproach with Eritrea ended a decades old conflict. Overall, these changes increased his popularity. But they also unleashed a new wave of ethnic unrest. moreover, the upcoming elections in 2019 and 2020 could be an additional polarising factor. The ongoing ethnic tensions largely explain Ethiopia’s high political violence risk rating: 5/7.
Moderate business environment risk
Ethiopia’s systemic commercial risk rating is moderate: category B.
But there are downsides:
- The Ease of Doing Business indicator remains well below the Sub-Saharan average.
- Corruption is rather widespread, in spite of Prime Minister Abiy’s efforts to purge it.
- Regular foreign exchange shortages remain an issue.
- Since 2017, the country has been suffering from double-digit inflation.
High public debt
The public deficits are the result of the low tax-to-GDP ratio. Between July 2012 and July 2018, public debt increased from 42.5% to 61.1% of GDP and expanded from 300% to almost 500% of public revenues. The government announced two countermeasures:
- It will refrain from new mega projects and aims to fund ongoing projects by concessional financing.
- It will launch a comprehensive Tax Transformation Programme to increase revenues.
Vulnerable trade balance
Since 2012 Ethiopia witnessed wide current account deficits, which worsened in 2014. After the devaluation of the Ethiopian birr, the deficits have slightly improved to an estimated -6% of GDP in 2019. They’re expected to gradually narrow to -3.4% in 2024 due to constrained public spending and to the diversification of export products. The government also aims to join the African Continental Free Trade Agreement and to speed up the process to join the WTO.
Risk factors are:
- a potential increase of oil prices;
- droughts or low prices, affecting the export of soft commodities like coffee, tea and spices;
- the rising trade tensions between the US and China, an important lender to Ethiopia
Positive indicators are:
- stronger export growth due to multiple export-oriented infrastructure projects reaching completion;
- slower external debt build-up after the IMF’s risk of debt distress warning in 2017.
Export diversification for a brighter future
Presently, Ethiopia’s exports consist of:
- Private transfers, mainly from the Ethiopian diaspora in the US: 45% of current accounts receipts;
- (air) transportation: 21% of current accounts receipts;
- soft commodities, especially coffee: around 8% of current accounts receipts;
- manufacture exports: only 3% of current account revenues;
- donor assistance, because Ethiopia is still one of the largest aid-recipient countries in the world.
Efforts to diversify should gradually take effect:
- Ethiopia strives to become a leader in light manufacturing in Africa to create jobs for its young population. This is quite a challenge because Ethiopian enterprises struggle to finance their expansion.
- Hydroelectricity exports are likely to grow after the Grand Ethiopian Renaissance Dam will come on-line. It is the largest hydroelectrical power plant in Africa.
- Extraction of the extensive natural gas deposits in the Ogaden Basin could start in 2020 and would be exported to China.
- Ethiopia possesses the largest livestock herds in Africa, offering an untapped export potential of meat and dairy.
Ethiopia’s medium- to long-term risk classification is 6/7. The Main challenge is whether the infrastructure projects will effectively be able to generate the foreseen rise in export receipts.
Liquidity under pressure
Firstly, the short-term debt is rising – albeit from a low level – due to infrastructure developments. Secondly, wide current account deficits weigh on the already limited foreign exchange reserves. lastly, Ethiopia’s primary commodity exports are prone to global price movements that affect foreign exchange earnings. This results in frequent foreign currency shortages. That is why, since 2017, Credendo’s short-term risk classification of Ethiopia has been 6/7.
How a climate control company realises cool growth in EMEA with flexible risk cover
Daikin Europe produces world-class air-conditioning, refrigeration and heat pump systems. It manages the whole European, Middle Eastern and African region, using a single credit management policy underwritten by each affiliate. Daikin Europe’s relationship with Credendo spans 3 decades.
„Each EMEA business area has its own credit culture with specific KPI’s,“ says Mark Vermeersch. „Take the KPI’s payments overdue‘. It depends intimately on the region involved. Germany is very different from the Turkish, Middle East and African markets, which are complex and challenging.“
Covering the highest commercial risks across Africa
To cover its rising volume of Middle East and Africa payment risks, Daikin Europe uses a whole turnover policy from Credendo – Short-Term Non-EU Risks. They tackle the huge African market from their Dubai office and are heavy users of Credendo cover, given the high commercial risk across Africa.
Mark Vermeersch explains: „Credendo provides the highest level of coverage of any credit insurer in these markets, where the mix of payment security often necessitates traditional and standby letters of credit. Our Japanese parent is very sensitive to bad debt, and so we target a cover ratio of about 80% of outstanding receivables. I have asked for, and received, higher ratios from Credendo, for certain individual projects or customers.“
Excess of loss: offering flexibility and autonomy
For the French credit market, Daikin Europe uses a Credendo Excess-of-Loss policy. „It’s so evolved that day-to-day risk monitoring by the insurer is unnecessary,“ notes Marc Vermeersch. Next to its overall flexibility, he stresses another strength of Credendo’s Excess-of-Loss policy: „Its lack of restrictions on credit decisions, as they are based on Daikin’s internal credit management, approved upfront by the insurer. It’s difficult to find that elsewhere.“
Top-up cover for the challenging Italian market
„The commercial risks in Italy are considerable, and this policy provides the additional coverage to support our sales staff in their drive for new customers and increased turnover. Classic insurance does not cover this“, observes Marc Vermeersch.
Tailor-made expertise for worldwide cover
Via their accustomed Credendo contacts, Daikin Europe taps into the expertise of Credendo Short-Term Non-EU Risks and Credendo Excess & Surety. Their trusted Credendo advisors can also offer them direct access to the know-how of Credendo Short-Term EU Risks and Credendo Single Risk.
Marc Vermeersch concludes: „Credendo’s approach dovetails with the Japanese style of business partnerships, and the concept of ‚kaizen‘ – continuous improvement in small steps. They listen, they accommodate our contract terms, and they maximise cover when needed.
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