Archive for the 'Ethiopia' Category

Egypt is Africa’s new #1 investment destination

The challenge for African economies is to adapt to commodity slowdown and sluggish production growth. Many countries have suffered stress in the past three years, and the latest report from a leading investment bank suggests the new winners – and who is lagging. Rand Merchant Bank’s (RMB) Where to Invest in Africa 2018 report shows changes in the top investment destinations in Africa.

South Africa is off the top spot, edged aside by Egypt, and Nigeria and Algeria have crashed out of the top 10. The theme is “money talks” and focuses on major sources of dollar revenues, important income-generators and investment opportunities.

But the report compares 191 global jurisdictions and measures African against country groupings. African countries are still at the lower end of the global-performance spectrum, which is still dominated by the US, UK, Australia and Germany.

In Africa, according to the RMB press release, there is a new pharaoh in town: “Egypt (#1) displaced South Africa (#2) largely because of its superior economic activity score and sluggish growth rates in South Africa, which have deteriorated markedly over the past seven years. South Africa also faces mounting concerns over issues of institutional strength and governance though in South Africa’s favour are its currency, equity and capital markets which are still a cut above the rest, with many other African nations facing liquidity constraints.

“Morocco (#3) retained its third position for a third consecutive year having benefitted from a greatly enhanced operating environment since the Arab Spring which began in 2010. Surprisingly, Ethiopia (#4), a country dogged by socio-political instability, displaced Ghana (#5) to take fourth spot mostly because of its rapid economic growth, having brushed past Kenya as the largest economy in East Africa. Ghana’s slide to fifth position was mostly due to perceptions of worsening corruption and weaker economic freedom.

“Kenya (#6) holds firm in the top 10 at number six. Despite being surpassed by Ethiopia, investors are still attracted by Kenya’s diverse economic structure, pro-market policies and brisk consumer spending growth. A host of business-friendly reforms aimed at rooting out corruption and steady economic growth helped Tanzania (#7) climb by two places to number seven. Rwanda (#8) re-entered the top 10 having spent two years on the periphery, helped by being one of the fastest reforming economies in the world, high real growth rates and its continuing attempt to diversify its economy.

“At number nine, Tunisia (#9) has made great strides in advancing political transition while an improved business climate has been achieved by structural reforms, greater security and social stability. Cote d’Ivoire (#10) slipped two places to take up the tenth position. Although its business environment scoring is still relatively low, its government has made significant strides in inviting investment into the country leading to a strong increase in foreign direct investment over the years resulting in one of the fastest growing economies in Africa.

“For the first time, Nigeria (#13) does not feature in the top 10, with its short-term investment appeal having been eroded by recessionary conditions. Uganda is steadily closing in on the top 10 though market activity is likely to remain subdued after a tumultuous 2016 marred by election-related uncertainty, a debilitating drought and high commercial lending rates.

“Though Botswana, Mauritius and Namibia are widely rated as investment grade economies, they do not feature in the top 10 mostly because of the relatively small sizes of their markets – market size has been a key consideration in the report’s methodology.”

RMB Africa analysts spoke on economic trends:

Neville Mandimika: “The last three years have sounded an alarm, amplifying what is now a dire need for the economies of Africa to shift their focus from traditional sources of income to other viable alternatives.”

Celeste Fauconnier: “Over the past three years, some African governments have had to implement deep and painful budget cuts, announce multiple currency devaluations and adopt hawkish monetary policy stances – all as a result of a significant drop in traditional revenues.”

Nema Ramkhelawan-Bhana: “Some countries have been more nimble and effective than others in managing shortfalls,” says and an author of the report. “But major policy dilemmas have ensued, forcing governments to balance economically prudent solutions with what is politically palatable.”

Where to Invest in Africa 2018 also includes 191 jurisdictions around the world, and measures Africa’s performance relative to other country groupings. The report is available via: www.rmb.co.za/globalmarkets/where-to-invest-in-africa-2018-edition.

Ethiopian Commodity Exchange (ECX) CEO resigns

The CEO of the Ethiopian Commodity Exchange (ECX), Ermias Eshetu, has tendered his resignation, according to a report in Ethiopia’s English weekly newspaper The Reporter. He will stay until a successor is found.

His decision took people by surprise, as he was publicizing the new working procedures he was planning to introduce in ECX. The resignation came after a stringent evaluation by the Board, which lasted the whole day. “The evaluation dwelled on the performance of the trading floor (ECX) and on the issue of who should leave and who should remain in office. The CEO tendered his resignation letter in the wake of the in-depth evaluation,” sources told The Reporter. It is part of Government efforts “to identify the weaknesses of ECX and reform the organization”.

The ECX management declined to comment to The Reporter.

The ECX was founded by agricultural economist Eleni Gabre-Madhin in 2008. Ermias had joined the ECX in January 2015, taking over from Anteneh Abraham, former vice president of Abyssinia Bank, who had resigned due to illness.

Electronic trading on ECX began in July 2015 and by January 2017 had replaced 89% of the open outcry trading, using a bespoke software built by Ethiopian engineers. According to a news report, ECX had started commissioning e-trading centres in different regions, including 3 set to be operational in the second quarter of 2017 and 4 were to follow. In the 2015-16 fiscal year (to July), the exchange traded 632,000 metric tons of commodities, worth ETB23 bn. They trained 760 users.

Ermias, 42, previously served Zemen Bank as Vice President for Marketing and Corporate Services since 2007. He lived for 20 years in UK, gaining technical and leadership experience at firms such as global IT giants IBM, Alcatel, Orange and MicroStrategy. He has a Master’s degree in international business from University of Manchester Management Business School and a Bachelor’s with honours in Computation from University of Manchester Institute of Science and Technology.

Ermias Eshetu (photo from http://innovation-village.com)

Do African commodities exchanges achieve the desired results?

The Ethiopian Commodity Exchange (ECX) was set up with backing from the Ethiopian Government. In a very readable 2012 paper by the founder and first CEO Eleni Gabre-Madhin outlining the origins, aims and implementation of ECX, she mentions the Government backing in replacing laws so that trade in commodities including coffee (which makes up 35% of Ethiopia’s exports from 2000-2014), has to go through the exchange, and the determined resistance from those who had previously dominated the export trade.

Ethiopian Commodity Exchange (photo from http://africabusinesscommunities.com)

She mentions funding: “Five initial donors — the US Agency for International Development, the Canadian International Development Agency, the World Bank, the International Fund for Agricultural Development, and the United Nations Development Programme — committed US$9.2 million in just two weeks. This figure grew over the years as commitments increased. The World Food Programme and the European Union joined the list, and donor funding eventually reached US$29 million.” Bill & Melinda Gates Foundation is mentioned in later articles as a donor.

Since the early days of ECX, payment has been guaranteed the day after purchase and there is a proud record of zero defaults (as on nearly all regulated exchanges worldwide). This is a big change on earlier problems faced by farmers and others with many buyers reneging on contracts. In addition Eleni’s aimed that the exchange should transform agricultural marketing countrywide, and she oversaw the construction of a host of modern regional warehouses and transport.

On the negative side, a news report in January 2017 in local The Reporter newspaper mentions ECX users reporting problems including increasing contraband and quality compromises by bribing the “cuppers” who grade the commodities.

A study by the International Food Policy Research Institute (IFPRI) in May 2017 suggests that with regard to coffee, the ECX had not brought enough transformation: “Before the establishment of the ECX, Ethiopia had a fairly well-functioning coffee auction floor in Addis Ababa… Second, the strict regulations that the ECX has introduced into the country’s coffee market have resulted in higher transaction costs. These costs could potentially cancel out the benefits of some of the ECX’s innovations, such as electronic payment systems. Finally, the Ethiopian coffee sector continues to face some inherent challenges that are not affected by the ECX—namely, weak infrastructure and low productivity”.

In February 2017 The Economist published an article about African commodity exchanges dubbing them “high tech, low impact”. It noted that ECX had not moved beyond spot trading since 2008 and futures contracts to help farmers manage price fluctuations are far behind the 5-year target.

The Economist verdict: “The Government made it viable by mandating that almost all trade in coffee and some other commodities go through the exchange. This might not be possible elsewhere. A monopoly imposed by fiat makes it more like a state marketing board than an exchange, says Thomas Jayne, an economist at Michigan State University.

“Another model might be the Agricultural Commodity Exchange for Africa in Malawi, which was set up privately in 2006 at the request of an association of smallholder farmers. But its volumes remain low. And its concentration on staple foods such as maize and soya leaves it vulnerable to the sort of government interventions that can sink exchanges. Trading in staples tends to be politically sensitive in times of food scarcity.

“Setting up national exchanges may be the wrong approach. The Johannesburg Stock Exchange plans to introduce a regional contract for Zambian white maize later this year. For lucrative export crops like coffee, well-established offshore exchanges may make more sense than starting from scratch at home. Better a functioning exchange somewhere else than a disappointing one on the doorstep.”

Ethiopian Commodity Exchange gets online trading platform

ECX buyers and sellers make deals. (Photo credit - John Humphrey. From www.globalisationanddevelopment.com)

ECX buyers and sellers make deals. (Photo credit – John Humphrey. From www.globalisationanddevelopment.com)


The Ethiopian Commodity Exchange (ECX) has unveiled an online trading platform that has capacity for nearly 5,000 times more transactions than its current “open outcry”. Since the ECX was started in 2008 trading has been done on a trading floor in its Addis Ababa headquarters by dealers trading directly with each other, and about 200 transactions a day could be done.
Initially, dealers using the eTRADE Platform would be based at the ECX HQ’s trading centre. However, eventually market players will be able to trade electronically from anywhere. The platform will be gradually rolled out to newly built ECX trading centres in regional cities Hawassa, Humera, Nekemte and, in the near future, an additional 4 centres. The ECX has trained and certified more than 445 ECX trading members and representatives who are qualified to trade on the platform.
The trading platform has been under construction for the past 2 years and was developed in-house at the ECX. It was unveiled on 8 October and, on launch day, a record $400,000 of coffee was traded according to this news release.
A test run was done on 20 July with trading in local washed and unwashed byproduct coffee. ECX says 2,390 metric tonnes of farm produce has been traded on the platform so far with a trade value of ETB 120 million (about $5.7m).
ECX chief executive officer Ermias Eshetu said: “The inauguration of this eTRADE platform sets a new course for Ethiopia and brings with it unparalleled economic and social benefits. The platform inevitably breaks the physical and time barrier of the current open-outcry trading platform and provides the ECX with vital economies-of-scale to trade a number of additional new commodities.”

Transforming life for small farmers
The Investment Climate Facility for Africa (ICF) and other partners have been supporting the programme, according to this news release. William Asiko, CEO of ICF, said the platform would bring a revolution to Ethiopia’s agriculture sector: “The modernization of ECX will help to improve the business environment for stakeholders involved in the commodities sector and give Ethiopian agricultural products a competitive advantage.
“But for farmers, this modernization will be life-changing. It will enable farmers to get better pricing for their produce, thereby creating a more equitable distribution of wealth that has far-reaching social implications.”
The ECX was founded with the aim of improving agricultural marketing – a large part of its success is due to the large network of warehouses, quality controls and logistics up and down the country, and its main aim is to empower smallholder farmers, including through better information about prices. The current Government 5-year Growth and Transformation Plan II, launched from July 2015, sees state-run ECX serving 24 “agro-centres” with increased storage and warehousing facilities and better transport links.
Ermias, who became CEO in January after coming from Zemen Bank, said in April that the Government is establishing an enterprise to oversee the upgrading of warehousing, which will rely on a mixture of public and private capital. Donors including the World Bank and Bill & Melinda Gates Foundation are considering supporting what will require “huge investment,” he said.
One key tool for ECX has been its short message service (SMS) and interactive voice response (IVR) notifications of market data to farmers and others. This was introduced in 2011 in Amharic and English and gives real-time access to commodity prices. The SMS service processes 800,000 transactions a month and the IVR handles 1m calls a month, according to the news release. An upgrade was unveiled on 8 October which expands to Oromiffa and Tigrinya languages and introduces menu-based services (USSD) and new interfaces.

ECX mulls trading securities
Earlier this year it was also considering whether it could trade securities, including stocks and bonds, as part of its 5-year expansion plan. Ermias told Bloomberg in April: “We want to be a marketplace for any kind of stock, be it derivatives, agricultural commodities, financial instruments. That’s the ultimate vision.” He added that formal discussions have not yet begun on trading securities.
“With the two components, logistics and scalability, we will be able to introduce multiple commodities to the market,” he said. “ECX must offer the truly transparent marketplace for anything that’s going on in the Ethiopian economy.”
He said the market could move from coffee and sesame seeds, which account for more than 90% of volumes and are the two biggest generators of foreign exchange in Ethiopia, to sugar and grains such as corn and then add equities, government debt, power and metals.
Bloomberg cites Yohannes Assefa, the director of Stalwart Management Consultancy, a Dubai-based group working on Kenyan and Tanzanian exchanges, saying that ECX has capacity to expand beyond agricultural commodities within 12 months: “The existing platform is robust and the regulatory system is mature and well managed.”
The main problem would be changing government regulations, and Yohannes warned this “may require serious internal consultation before a change of policy.”

Exporters want futures
Bloomberg adds that coffee exporters such as Fekade Mamo, general manager of Addis Ababa-based Mochaland Import and Export, criticize the ECX for not allowing futures trading to hedge positions in a volatile global market. Ermias said it would take more than a year to build necessary steps for this, including insurance options for farmers in case they can’t deliver, better access to credit and the strengthening of the legal system.
Donors including USAID and the United Nations have supported the ECX when it was launched in order to boost efficiency of food markets in a nation where millions regularly went hungry. It had strong support from the Government, which decreed that exporters of coffee – Ethiopia is Africa’s biggest producer – must buy from traders on the bourse before they can export and within a year the ECX was the main route for coffee exports.
In 2014 it traded ETB 26.2 billion birr ($1.3bn) worth of goods.

ETB 1.6m for trading seat
In May the 17th trading seat was auctioned and won by an individual, Abayneh Zerfu, who bid ETB 1.6m ($76,000), according to this story in Addis Fortune newspaper, which said there were 4 bids. The ECX manages the bid if a member sells his or her seat and they are only allowed to do this after trading for 3 years and meeting requirements. Yohannes Hamereselassie, member development specialist at the ECX, said the original price for a seat was ETB301,000.

The new e-trade facility (credit ICF Africa)

The new e-TRADE facility (credit ICF Africa)


The ECX developers of the eTRADE platform (credit ICF Africa)

The ECX developers of the eTRADE platform (credit ICF Africa)

Why do Africa’s commodity exchanges fail and why do donors love them?

Commodity exchange trading floors have failed in in Zambia, Uganda, Nigeria, Zimbabwe, and Kenya. However, this has not deterred donors, according to a recent article on Bloomberg, and at least 8 commodity exchanges started in sub-Saharan Africa over the past 20 years with the aim of improving food security for local populations.
Exchanges are a distraction from other initiatives that would better serve poor farmers, Nicholas Sitko, a Michigan State University agricultural economist who’s based in Zambia, where a commodity exchange closed in 2012, is reported as saying: “We’ve learned that no amount of money pumped into them and no amount of government effort to get them off the ground can force them to work,” he says.

Attracting donors
Why were donors attracted to commodity exchanges, which analysts said suffered from the same flaw: a top-down approach that’s better at attracting foreign aid than at improving farming practices and developing transportation and communications networks. Donors like exchanges because they look like institutions in their own countries, says Peter Robbins, a former commodities trader in London who’s studied African exchanges. And “African leaders like to show off trading floors to show how modern their countries have become,” he says.
Even the famous Ethiopia Commodity Exchange, started in 2008 with the help of foreign donors including US and United Nations to improve food distribution in a country where millions often went hungry, has not proved as effective as desired. This is despite strong Government backing, including decrees that almost all buying and selling of coffee, sesame seeds, and navy beans for export must take place on the exchange.
According to Bloomberg: “With its buyers and sellers in coloured jackets and open-outcry trading floor displaying real-time market data from around the world, the ECX has been a prime example of what an exchange can and can’t do. The government ordered export coffee trading onto the exchange shortly after it opened, hoping it would jump-start activity and help attract other business. That didn’t work: Small amounts of corn and wheat are traded, but coffee and sesame seeds account for about 90% of exchange volume.

Enough warehouses
“Eleni Gabre-Madhin, who founded the ECX and served as its first director, says one obstacle for the exchange was that the state didn’t build enough warehouses to store bulky items such as cereals.” ECX Chief Executive Officer Ermias Eshetu said ECX will re-strategize from the bottom up in the Government’s next 5-year Growth and Transformation Plan II starting in July so that it can handle staple foods and is now allowed to license private warehouse operators to expand storage capacity.
Fekade Mamo, general manager of Mochaland Import and Export and a former ECX board member, was reported saying that Ethiopia’s fragmented, barter-based agricultural economy would have to modernize before it can benefit from a Western-style commodity exchange, according to: “The objective was to bring about an equitable food supply system.. That has completely failed.”
On the positive side, founder Eleni says farmers who use the exchange have seen benefits: Posting prices publicly has boosted their income, and centralized trading means buyers don’t default on contracts. Gary Robbins (no relation to Peter), chief of the economic growth and transformation office at the U.S. Agency for International Development in Addis Ababa, says commodity exchanges can encourage a consistently higher crop quality, a key condition for global trade, says. ECX
Eleni left the ECX in 2012 and has been working with investors, including International Finance Corp.—an arm of the World Bank—and Bob Geldof’s 8 Miles private equity fund, to establish an exchange in Ghana. Next she hopes to help set up one in Cameroon.
Shahidur Rashid, a food-security analyst with the International Food Policy Research Institute in Washington, says the problem is that conditions for success, such as large trading volumes, a strong financial sector, and a commitment to transparency, don’t yet exist in most countries: “A new institution should add value, and I struggle to find that value,” Rashid says. “Every country does not need an exchange. Nor is it any good to establish them in places where they will fail.” But he also says that under the right circumstances, exchanges can make sense.

Insights of private equity in Ethiopia – Schulze Global Investments

Schulze Global Investments is the longest-established private equity firm in Ethiopia. It is run by a family office and is extremely well networked. It has made several deals, but apparently no exits yet although prospects are improving.
SGI Ethiopia has also not been much in the media. In this interview, Dinfin Mulupi of HowWeMadeItinAfrica.com interviews Blen Abebe, vice president at SGI Ethiopia, who highlights the importance of a local team for successful private equity. For the full story, have a look at the original interview here.

Blen Abebe (photo reprinted from HowWeMadeItinAfrica)

Blen Abebe (photo reprinted from HowWeMadeItinAfrica)

So how has SGI been able to navigate this unique environment?

At Schulze Global, most staff are Ethiopian-Americans and the fact that you look Ethiopian and speak the native language ensures the locals can relate to us. For example, we have closed deals partly because we were on the ground and could relate better to locals than other private equity firms. And it makes sense, because most family businesses have been passed down through generations so they wouldn’t necessarily trust, or be willing to work with, you before they get to know you. That is why Schulze Global ensures it has people who know both the foreign and local culture.

What are some of the challenges SGI faces in Ethiopia?

Well, being the first one on the ground can have both positive and negative effects. For example, when Schulze Global opened its office back in 2008 most people had never heard of private equity. So we literally had to go through a teaching process of what it was we are doing. And to add to that, most companies confuse us with a bank so we must almost always explain the difference between a private equity firm and a bank.

After they understand the private equity structure, then the next challenge is agreeing to the terms that are in the term sheet.

Do you see in the future any likelihood of an exit?
We haven’t done any exits yet, but the future looks positive as we are seeing many entrants into the market. Therefore an exit via a strategic buyer should be attainable.

With more private equity funds coming in, how will things play out?
Competition is definitely increasing. We see it already. In fact, in one deal we are currently looking at, the sponsor is telling us they are also being courted by another fund. But our strength has always been that we have been in Ethiopia the longest, so we know what works and what doesn’t. And that long presence, even a small thing like knowing where our office is and the fact that they can visit us anytime, gives the local sponsors comfort – and at the same time gives us some leverage compared with other funds using the “fly-in and fly-out” model.

“Africa’s largest” Helios III private equity fund to close at $1.1bn

Leading African private investment firm Helios Investment Partners says it is about to close its 3rd Africa-focused private equity fund at the $1.1 billion limit. The firm said yesterday (12 Jan) it had already passed its $1bn target. Helios Investors III L.P. fund will “acquire and build market-leading, diversified platform companies, operating in the core economic sectors of the key African countries, with an emphasis on portfolio operations as a creator of value”, according to a press release.

The company says Africa’s attraction to investors stems from growth driven by factors specific to the continent, including economic liberalization, technology driving increasing productivity, demographic dynamics and urbanization. The Financial Times describes it as “the first $1bn-plus Africa-focused private equity fund.”

Tope Lawani, co-founder and Managing Partner of Helios Investment Partners, commented in the press release: “Much has been made of the rise of the African consumer, and that does, from time to time, give rise to potential investment opportunities. However, as discretionary incomes remain low and the cost of basic goods and services is high, Helios believes that addressing the supply side of the economy is generally more attractive.

“Helios’ strategy focuses on investing in businesses that lead the provision of core economic infrastructure: de-bottlenecking the economy; increasing efficiencies; and reducing living costs for households and operating costs for businesses.”

Economic woes bring buying opportunities
According to the Financial Times, many countries’ economic prospects are troubled by falling commodity prices. Increased interest rates in US cause capital flows out of developing markets. In an interview Mr Lawani told the paper that in the near term many African countries were going to suffer an “adverse impact” on their currencies as capital flew back to the US: “We are witnessing sharply lower commodities prices and it is reasonable to expect African currencies to lose value against the dollar,” he said.

He claimed that the downturn would turn into an opportunity for investors holding large amounts of US dollars, such as Helios. “It is an excellent time to invest: asset values are going to come down.”

From Helios Investment Partners website

From Helios Investment Partners website

Investor appetite matures
The company says that over 60% of the new capital committed comes from their existing investors, and other leading global institutional investors have joined them. The investor base for Helios III includes sovereign wealth funds (SWF), corporate and public pension funds, endowments and foundations, funds of funds, family offices and development finance institutions across the US, Europe, Asia and Africa.

Helios investment team is supported by Helios’ dedicated Portfolio Operations Group, based in Lagos and Nairobi, who work in active partnership with portfolio company management to create value within the firm’s portfolio by driving operational improvements. Helios has already made one investment through Helios III, acquiring an interest in ARM Pensions, Nigeria’s largest independent pension fund manager with over $2.2bn of pension assets under management. It has built a robust pipeline of proprietary opportunities.

Dabney Tonelli, Investor Relations Partner of Helios Investment Partners, commented: “Achieving, and exceeding, our fundraising target for Helios III underscores the global demand for experienced, institutional, Africa-focused private equity specialists and the strength of the relationships we have built with the world’s leading private equity investors.”

Helios was established in 2004 by Nigerian-born Tope Lawani and Babatunde Soyoye. It raised the previous record for Africa’s biggest private equity fund at $908m in 2011. Through various investment types, such as business formations, business formations, growth equity investments, structured investments in listed entities and large scale leveraged acquisitions across Africa, it has aggregated more than $2.7bn in cpapital commitments, according to its website.

The Financial Times adds: “Africa still attracts a tiny proportion of the world’s private equity money, even compared with other emerging regions, notably Asia and Latin America. But interest has increased recently, buoyed by strong economic growth. After stagnating for two decades, African gross domestic product per capita has surged almost 40% since 2002, fuelled by high commodity prices, the rise of a small consumer class, and cheap Chinese loans.”

Africa deals
It says that buyout groups raised $3.3bn for Africa funds in 2013, down from a peak of $4.7bn in 2007.

The FT points to US buyout private equity firms Carlyle’s $698m fund and regional deals by KKR (which invested $200m in a Afriflora, an Ethiopian exporter of roses, in June 2014 from its $6bn European fund according to this Wall Street Journal story and a KKR press release) and Blackstone. In June 2014 Edmond de Rothschild amassed $530m for its first private equity fund focusing on deals in Africa, managed by Amethis, majority-owned by the Swiss private banking group and founded by Luc Rigouzzo and Laurent Demey, two former top executives at French development financial institution Proparco. There has also been increased multinational deal-making, including French insurer Axa entering Nigeria, an alliance between SAB Miller and Coca Cola, and a merger in South Africa’s retail sector.

Demand soars for Ethiopia’s debut $1bn Eurobond, yields 6.625%

Ethiopia saw soaring demand yesterday (4 Dec) for its debut $1 billion Eurobond, after a quick investor roadshow. Total demand was $2.6bn and the yield on the 10-year bond was settled at a relatively low 6.625%, at the lower end of the 6.625%-6.75% price guidance.
According to this report in the Financial Times: “The debut sees one of the biggest, most closed — and, some observers say, most promising — African nations joining a number of other countries in the region that have issued similar bonds in the past 5 years. Africa has become a magnet for pension funds, insurers and sovereign wealth funds seeking higher-yielding assets.”
A Bloomberg report cites Standard Bank Group that African governments such as Ghana, Kenya, Senegal and Ivory Coast and corporates issued a record $15bn of Eurobonds this year as they try to benefit from investor appetite for higher returns before the US Federal Reserve raises interest rates expected next year. The bank says they raised $13bn in 2013. Sovereign issuers accounted for 71%.
It quotes Nick Samara, an Africa-focused banker at Citigroup in London, saying ““Pricing at a 6-handle is very attractive” for the country, similar to Zambia.

The move jumps ahead of the earlier schedule suggested in this report.

Ethiopia needs $50bn over 5 years

The FT quotes Kevin Daly, senior portfolio manager at Aberdeen Asset Management, that the bond’s yield “is decent value for the deal given the limited knowledge and different nature of the Ethiopian economy and the challenges it faces compared to these countries”. Bloomberg says he said Ethiopia made a strong case for infrastructure development and financing needs at investor meetings, “which suggests they will be looking to come back to the market in near term.”.
According to Bloomberg, Finance Minister Sufian Ahmed said on 7 Oct that Ethiopia will probably need to invest about $50bn over the next 5 years, of which $10bn to $15bn may come from foreign investors. Most will be used to develop sugarcane plantations, a 6,000-megawatt hydropower dam on a tributary of the Nile River and the country’s railway network.

Grand Ethiopian Renaissance Dam (credit: www.water-technology.net)

Grand Ethiopian Renaissance Dam (credit: www.water-technology.net)

Claudia Calich, emerging market bond fund manager at M&G told the FT that Ethiopia was one of the region’s weaker credits: “I am concerned over lack of transparency and levels of SOE [state owned enterprise] debt.” Mark Bohlund, senior economist for sub-Saharan Africa at consultants IHS, said investors were attracted to Ethiopia on the back of “strong economic growth prospects and limited external indebtedness”. He added: “We wish to highlight that there are still non-negligible risks to repayment.”

Fast 9% growth, limited foreign reserves

Deutsche Bank and JPMorgan were the lead managers for the bond and Lazard advised the Federal Government of Ethiopia.
The bond includes new clauses recently promoted by organisations such as the International Capital Markets Association and dubbed “anti-vulture” clauses. They aim to make it more difficult for investors to hold out against restructuring plans if the country defaults on its debt, as happened recently with Argentina.
Ethiopia first credit ratings came in May, as reported here. Moody’s Investors Service rates it a non-investment grade B1 with a stable outlook, while Standard & Poor’s and Fitch Ratings awarded B, one grade lower.
Ethiopia has some of the fastest growth rates in Africa, around 9%, according to the International Monetary Fund. According to Reuters, the IMF said in a September report that the risk of Ethiopia facing external and public “debt distress” remained low but said it was on the “cusp of a transition to moderate” risk. It estimated public debt at 44.7% of GDP in fiscal 2013/14. Ethiopia’s foreign reserves covered only 2.2 months of imports in 2013/14 and capacity to increase this remains under pressure due to limited capacity to increase exports and foreign investment.

African debt warning

According to the African Development Bank’s Making Finance Work for Africa website (www.mfw4a.org), a few weeks ago the IMF warned African States against rushing to issue Eurobonds, saying they may face exchange-rate risks and problems repaying debts. African governments facing falling levels of foreign aid are on a borrowing spree to pay for new roads, power stations and other infrastructure, prompting concern this could raise debt levels and undermine growth.
“It comes with some risks,” the director of the IMF’s African Department, Antoinette Sayeh, told Reuters. “Whereas what it costs the countries to issue these bonds can often look lower than what they would pay on domestic borrowing… the real cost in the final analysis will also depend on the evolution of exchange rates in the course of the life of the bond issuance.”
Kenya’s debut $2bn Eurobond had launched at 6.875% in June but fallen to 5.90% when it issued a new tranche in late November, indicating that investors did not share the IMF’s concerns. Kenya’s 10-year bond was trading at 5.88% on 4 Dec and Kenya has a much higher average gross domestic product (GDP) per capita and much better advanced African capital market and securities exchange than Ethiopia. The bond prospectus listed Ethiopia’s GDP per capita at $631.50 in fiscal 2013/4.

$1.4bn petroleum pipeline proposed for Ethiopia

Private companies have proposed to the Ethiopian and Djibouti governments a $1.4 billion pipeline to bring petroleum to a distribution centre in Awash, Ethiopia. It would take two years to complete.
The companies which made the proposal 6 months ago are Black Rhino Group, owned by private equity firm Blackstone, and MOGS (Mining, Oil & Gas Services), owned by Royal Bafokeng Holdings, a South African investment group, according to this report in Addis Fortune newspaper.
Ethiopian Petroleum Supply Enterprise (EPSE) plans to import 2.9 million tonnes of fuel this year and last year this was 2.6m tonnes. Some of the fuel comes from Sudan.
They are proposing to build 550 kilometres of pipeline, carrying oil directly from the vessels at the port to a storage facility in Awash, from where it would be distributed by trucks from Awash to the rest of the country, including Addis Abeba. According to the report, the Djibouti government has told Black Rhino and MOGS that the current port infrastructure is not big enough to meet Ethiopia’s long-term needs with Ethiopia’s demand for refined fuels growing 10% a year.
The pipeline would bypass the congested port and road. The report quotes Demelash Alamaw, assistant to chief executive at EPSE, that it is inefficient to use fuel trucking fuel up from the coast. The project is expected to reduce the supply problem caused by truck shortages, as well as reduce the cost of transport.
Brian Herlihy, CEO and founder of Black Rhino, presented the proposal on 21 Nov at a meeting on “Powering Africa: Ethiopia Meeting,” at Radisson Blu Hotel, Addis Abeba, organized by UK-based company Energy Net Ltd.
He said the Ethiopian Government is studying the proposal and Djibouti is happy. If the Ethiopian Government gives a green light to the project the company will proceed to study the environmental and engineering condition of the construction,
Fortune reports that officials at the Ministry of Water, Irrigation & Energy (MoWIE), confirmed that the proposal had been submitted and they would look at it before deciding to discuss it further with other stakeholders, such as the Ministry of Finance & Economic Development (MoFED), the Ministry of Foreign Affairs (MoFA), and Ministry of Transport (MoT).

Ethiopia’s $865m rail finance part of $15bn rail projects

China rolling stock for Ethiopia (photo from: www.tigraionline.com)

China rolling stock for Ethiopia (photo from: www.tigraionline.com)

The Ethiopian Government recently closed a $865 million financing package to fund part of the development of the country’s giant new railway infrastructure. One banker on the deal was reported by Reuters as saying: “This is a huge financing for Ethiopia, it is the first commercial deal of this size we have seen. Banks have a growing appetite for the Ethiopian market and we expect to see more deals like this.”

ERC is busy with 8 railway routes stretching 5,060 km, at a cost of $2m-$3m per kilometre. This includes rebuilding the Addis Ababa-Djibouti railway and lines heading north and south-west. A 36.5km mass transit railway is also being built in the capital, Addis Abeba.

The latest financing is split between a $450m commercial loan for 7 years, which includes a syndicate of lenders from Europe, Africa, the Middle East and the US, and pays 375 basis points over Libor. There is also a $415m 13-year loan backed by the Swedish Export Credit Guarantee Board (EKN) with Eksport Kredit Fonden (EKF) and Swiss Export Risk Insurance (SERV) export-credit agencies also included. The financing will be used to build the Awash-Weldia/Hara Gebeya Railway Project, one of the key railway corridors that will form part of the national railway network and connect northern and central parts of Ethiopia.

Turkey’s global rail company

Parastatal Ethiopian Railways Corporation (ERC) is undertaking the project construction, which will be built in the next 3 years. Turkey’s Yapi Merkezi Insaat ve Sanayi AS is the appointed contractor on the project and will design and construct the 389km railway line starting north east of Awash and going north through Kombolcha to Weldia under a 3-year $1.7bn project signed with ERC in Dec 2012. It will connect with the Addis Abeba-Djibouti line being built and with the Woldia/Hara Gebeya-Semera-Dicheto-Elidar project which will connect northern Ethiopia with Tajourah port in Djibouti, according to this report.

Credit Suisse acted as co-ordinating commercial facility arranger and export credit agency facility lead arranger. Some of the loans have already been disbursed. In addition, Deutsche Bank was the mandated lead arrangers for the EKF financing ($181m), ING Bank for the EKN financing ($83m) and KfW IPEX-Bank for SERV backed facilities ($151m).

In addition, Turk Eximbank provided a parallel financing of $300 million for the Turkish goods and services under the same project. Yapi Merkezi is a leading transportation infrastructure company and built the Dubai Metro Project, Casablanca tramline and Ankara-Konya high-speed rail line.

The financing has also been arranged under the OECD Common Approaches for Officially-Supported Export Credits and Environmental and Social Due Diligence which commit OECD countries to taking environmental and social impacts into account when granting officially supported export credits.

China’s $3bn finance to reach Djibouti

Export-Import Bank of China has pledged loans totalling $3bn to support Chinese railway construction companies on the 756km line from Addis to Djibouti, according to this in-depth overview of Ethiopian and Chinese relations. It runs parallel to the abandoned Imperial Railway Company of Ethiopia track built between 1894 and 1917. China will also provide most of the rolling stock, including locomotives worth millions, according to this story in Financial Times.

India to add $300m

In June 2013, India’s Exim Bank approved a $300m loan at 1.75% interest to finance a link from Asaita (670km from Addis) to Djibouti’s planned port at Tajourah. Debo Tunka, deputy CEO and head of infrastructure development at ERC reportedly said: “The new line will be very important for Ethiopia because it will give us an access to a second port and boost economic activities in the country,” The credit will be released once feasibility studies are done and contractors are still to be appointed. Tajourah will have a dedicated terminal for shipments from Allana Potash which is developing a $642m potash in northeast Ethiopia, according to Bloomberg.