WITH the commodities slump dominating the headlines, many investors may have failed to notice that a previously unloved, nonresource country in the heart of Africa has been one of the world’s fastest-growing economies for a few years running. Ethiopia has been among Africa’s most impressive performers over the past decade, averaging 10.9% annual growth in 2004-2014, despite not producing any oil.
This is not a fickle growth rate driven by an overinflated commodities market — and a number of companies are beginning to sit up and take notice of the potential.
Significant spending on infrastructure, a nascent consumer market, a stable economy, and competitive labour costs are major elements driving investment opportunities in Ethiopia.
SEVERAL first-mover opportunities are arising for investors and businesses looking to expand into a yet untapped investment opportunity in Eastern Africa.
This is the last sizeable country in the world that has not had sweeping telecommunications liberalisation.
Ethiopia reminds me of south China when I was there in the early 1990s — there is massive expenditure on infrastructure and a growth mentality that is not driven by "big bang" liberalisation, but rather a more gradualist approach.
In terms of its political economy, Ethiopia is arguably seeking to mimic the Chinese growth model: it is embarking oneconomic reform with strong centralised political control.
This country is home to the continent’s second-largest population: it has more than 90-million people and it is forecast to top 100-million by 2020.
But in light of Ethiopia’s socialist past, market entry is not easy.
There are often significant regulatory hurdles to overcome, and each business case needs to be carefully planned, preferably in partnership with experts with deep sectoral expertise in frontier markets.
But significant changes are beginning to make this country increasingly attractive and are turning that old picture on its head.
A number of multinational companies — such as Heineken, the Blackstone Group, KKR, General Electric, Orange, Etur Textile, the BDL Group, Diageo, SABMiller, PPC and Starwood Hotels — have made significant investments in Ethiopia in recent years.
What attracted them is that Ethiopia has implemented tax incentives for investment in high-priority sectors, which are tourism, agroprocessing, leather and leather goods, manufacturing, textiles, chemicals and pharmaceuticals, and mineral and metal processing.
Again replicating the Chinese model, from 2012 the Ethiopian government established state-run and private industrial zones. These special economic zones — often financed by Chinese sovereign wealth — include a range of investment, tax and infrastructure investment incentives.
In July last year China Civil Engineering Construction Corporation signed a $246m deal to construct the first of these new parks, the Hawassa Industrial Park, with another four being planned.
ETHIOPIA also has five privately owned industrial zones. Of all the talk of industrialisation in Africa, I would argue that Ethiopia presents the greatest potential for low-end but high-employment-generating manufacturing.
As the cost of production along the eastern coastal provinces of China has risen significantly, its offshoring abroad holds out great potential for Ethiopia.
The largest investors in Ethiopia’s manufacturing sector are Chinese companies in the automotive, textile and garments industries.
The Ethiopian government is revising its commercial code to facilitate private investment and enhance the business operating environment.
This will include a focus on simplifying regulations for potential investors, standardising accounting practices to assess operating liabilities such as tax accurately, increasing the protection of shareholders, and modernising trade and registration procedures and processes.
Last year the country became a full member of the Common Market for Eastern and Southern Africa. The regional body aims to create a common market with the free movement of capital and labour, and with no tariffs levied on goods. Through it, Ethiopia enjoys preferential access to 19 countries with a combined population of 390-million.
Although agriculture remains an important contributor to Ethiopia’s economy, its share of gross domestic product (GDP) has been steadily decreasing.
In 2014 the sector made up 42% of value add to GDP — down from 52% in 1990. Services also made up 42% in 2014, and industry 15%.
Industry in Ethiopia includes a small but growing manufacturing (4%) sector. Despite its share of GDP declining, agriculture remains the backbone of the country’s economy, accounting for almost 80% of employment and up to 70% of export earnings.
THE African growth story has fundamentally changed since the collapse in oil and solid commodity prices since 2014. However, there is a rapid shift in the centre of gravity of growth on the continent, from West to East Africa.
Arguably, investor sentiment towards western African economies, such as Nigeria and Angola, has soured in recent times, but high-growth East Africa is offering the growth that capital requires.
Ethiopia is still viewed through a lens that is shaped by its traumatic past of communism, civil war and famine. This view is now obsolete.The country is forecast to be the world’s best-performing economy this year, which is a feat considering the global economic slowdown, changed Africa narrative and, all too often, the instability of its neighbours. It’s a true frontier economy that presents long-term opportunity for capital seeking to invest in one of Africa’s newest growth prospects.
• Martyn Davies is MD, emerging markets and Africa at Frontier Advisory Deloitte