Archive for the 'Ethiopia' Category

“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.

Ethiopia to ring in new year with Eurobond

Ethiopia’s Finance Minister Sufian Ahmed has been meeting international banks about a planned Eurobond issue for the end of this year or early 2015. The advisors are likely to be Barclays, Citi and BNP Paribas. The are currently no details on the amount to be raised but the duration is likely to be “at least 10 years”.

Finance Ministry spokesperson Haji Ibsa told Reuters: “We are aiming for late December to early January at the latest as the time for our debut into the international capital markets.. Bonds are very much part of the plan to improve infrastructure.” He mentioned plans for railway, road and power links with neighbours such as Djibouti and Kenya.

Photo: www.ventures-africa.com

Photo: www.ventures-africa.com


Earlier this year Ethiopia achieved favourable international ratings. Fitch rating agency assigned a long-term foreign and local currency Issuer Default Debt Rating (IDR) of “B” with stable outlook, compared with Kenya’s ‘B+’ which issued a heavily oversubscribed $2 billion Eurobond in June 2014, according to Reuters. Standard & Poor’s (S&P) assigned “B/B” foreign and local currency ratings and also said the outlook was stable, see our May story here.

The Economist Intelligence Unit remains less optimistic, giving Ethiopia a rating of CCC, but it says the bond is likely to prove attractive to investors, as have other African issues.

According to the EIU: “The financing of similar schemes under the country’s Growth and Transformation Plan (GTP) has already seen external debt as a percentage of GDP treble over the past five years, to an estimated 33.9% in 2013, and the government hopes that issuing a Eurobond will both diversify sources of credit and help rebrand the country, thus attracting more international companies to operate there.

“If successful, the bond will reduce Ethiopia’s reliance on domestic borrowing, and suggests a slight moderation of the government’s previous determination to finance the 2010-15 GTP, and any successor programme, domestically, largely via direct central bank financing and by forcing private banks to purchase Treasury bills. However, it is unlikely that this will translate into a broader rethinking of the government’s commitment to a state-driven growth model or its insistence that certain key sectors, including banking and telecommunications, remain off limits to foreign firms. It would appear, therefore, that limits will remain on the government’s stated aim of rebranding the country and attracting a broader range of foreign operators.”

The EIU refers to Ethiopia’s strong economic growth rates, market size and substantial untapped resources. “However, we continue to flag the possibility that the government will struggle to fund its substantial infrastructure requirements and that, in the medium to long term, the authorities may have to cut spending significantly or return to the IMF for financing.”

In May Fitch was upbeat “Fitch expects real GDP growth of 9% in 2014 and 8% in 2015. Ethiopia’s growth over the medium-term can be sustained by large, untapped resources, including large hydro-electric potential”. However, it also warned about private sector weakness and inadequate access to domestic credit as limiting growth potential over the medium-term as public investment slows.”

Ethiopia lures manufacturing with cheap power and labour costs a tenth of China’s

Low-cost manufacturing is shifting from China to Ethiopia, lured by cheap electricity and labour costs that are a tenth of China’s. Ethiopia is building a name for producing clothes, shoes and other basic goods, while also tackling transport bottlenecks. Trade and Industry minister Tadesse Haile says he wants Ethiopia to export $1.5 billion of textiles a year in 5 years, from $100 million now.
Bureaucracy and slow and poor transport links means that costs are not as low as they should be, according to an excellent report by Reuters (see “Garment-making finds new low-cost home in Ethiopia”). Ongoing power cuts and sometimes poor telecommunications, both still state monopolies, could be added to the list.

Credit: Ethiopian Radio and Television Agency (ERTA)

Credit: Ethiopian Radio and Television Agency (ERTA)

Credit: China Daily

Credit: China Daily

Reuters journalist Aaron Maasho points to Government and foreign investors building factory zones. Companies from China, India, Turkey and the Gulf are setting up manufacturing. He quotes Nara Zhou, spokeswoman for Huajian Group, a Chinese company that makes over 300,000 pairs of boots and sandals a month for retailers such as Guess from a factory near the capital: “We have to move because of manufacturing’s development in China, due to the high increase in wages and in raw materials.. Ethiopia enjoys stability, the Government is eager to industrialize and there is also the low labour cost here – a tenth compared to China.”
Ethiopia is one of Africa’s – and the world’s – fastest-growing economies. Despite the government’s socialist roots, there is no minimum wage, letting firms such as Huajian pay salaries of $50-$70 a month – still higher than the average per capita income. Desta, one of 7,500 employees at Ayka Addis Textile and Investment Group, a Turkish-owned factory 20 kilometres west of Addis Abeba, told Maasho:”Almost every young person in this locality now works here…We all struggled to make ends meet beforehand. We can now afford proper healthcare or sending a child to school.”
Ethiopia’s electricity grid offers electricity at US$0.05 per kilowatt hour, compared with $0.24 cents in neighbouring Kenya and the country is investing heavily in hydropower generation. According to Minister Tadesse: “The availability of power and the cost is cheaper than any other country in the world. We are providing power, land and labour all very cheaply.” Kenya and Uganda are also chasing investment into textiles but cannot compete on input costs against Ethiopia, where wages are 60% lower than the regional average, according to Jaswinder Bedi, Kenya-based chairman of the 27-nation African Cotton and Textile Industries Federation: “Ethiopia is a new player…They are growing and they are growing rapidly.”
The Government projects gross domestic product (GDP) growth at 11% a year, and even the 8.5% forecast for the current year 2014/5 by the International Monetary Fund is impressive. The Government is keen to attract labour-intensive investment and jobs for the 90m Ethiopians – Africa’s second biggest population – with another 2-3m born every year and population growth forecast to continue over 2% a year until 2030.
The Government says it has introduced incentives such as tax holidays and subsidized loans to investors with interest rates as low as 8%. Cheap loans are attractive as inflation is often considerably higher (it has been up to 60%), and the currency has seen steady and managed devaluation, boosting exporters and manufacturers who substitute imports.
Transport remains a bottleneck, it takes on average 44 days to import or export a container, compared to 26 for Rwanda. Amare Teklemariam, chief executive of Ayka Addis, told Reuters: “Our logistics costs are second to inputs. It affects the competitiveness of the company”. Ethiopia is 141 on a 2013 World Bank trade logistics index.
The Government says it investing an amount equivalent to two thirds of GDP into new infrastructure every year, expanding the road network to 136,000 km by next year, from just 50,000 km in 2010 and it is already working on grand plans to build 5,000 km of railway lines by 2020 from less than 800 km at the moment.
For more background see the excellent Reuters report here.

Churchill Avenue, Addis Abeba (www.tourismethiopia.gov.et)

Churchill Avenue, Addis Abeba (www.tourismethiopia.gov.et)

Ethiopia gets credit ratings from S&P and Fitch, plans Eurobond

Ethiopia, Africa’s fifth biggest economy, is thinking of a debut Eurobond, after it received its first international credit ratings on 9 May. With a population of some 90 million it is second-most populous country in Africa, after Nigeria. Growth has been some 10% a year, making it the fastest-growing economy and this growth has been sustained through infrastructure investment rather than resources.

Fitch rating agency assigned a long-term foreign and local currency Issuer Default Debt Rating (IDR) of “B” with stable outlook. This matches Fitch’s ratings for Kenya and Uganda, according to Reuters. Standard & Poor’s (S&P) assigned “B/B” foreign and local currency ratings and also said the outlook was stable, reflecting the view that strong growth will be maintained over the next year and the current account deficit will not rise.

According to a press release from Fitch: “With an average real GDP growth of 10.9% over the past five years, Ethiopia has outperformed regional peers due to significant public investments in infrastructure as well as growth in the large agricultural and services sectors. Despite a track record of high and volatile inflation, it declined significantly in 2013, reflecting lower food prices and the authorities’ commitment to moderate central bank financing of the government.

“Fitch expects real GDP growth of 9% in 2014 and 8% in 2015. Ethiopia’s growth over the medium-term can be sustained by large, untapped resources, including large hydro-electric potential. However, the private sector’s weakness, reflecting the country’s fairly recent transition to a market economy, and its inadequate access to domestic credit, could limit growth potential over the medium-term as public investment slows.”

According to S&P press release: “The ratings are constrained by Ethiopia’s low GDP per capita, our estimate of large public-sector contingent liabilities, and a lack of monetary policy flexibility. The ratings are supported by strong government effectiveness, which has halved poverty rates over the past decade or so, moderate fiscal debt after debt relief, and moderate external deficits. Ethiopia’s brisk economic growth–far exceeding that of peers–also underpins the ratings.” S&P forecasts GDP growth at 9.1% in 2014, 9.2% in 2015 and 2016 and 9.3% in 2017. IMF estimates in the World Economic Outlook database are lower, at a still very creditable 7.5% for 2014 and 2015 and 7.0% for 2016 and 2017.

“Ethiopia’s economic growth has consistently well outpaced the average for peers in Sub-Saharan Africa, averaging at least 9% real GDP growth over the past decade, partly due to significant government spending in public sector infrastructure. We estimate that real GDP per capita growth will average 6.5% over 2014-2017. The government has primarily invested in transport infrastructure (roads and rail) and energy (power generation through hydro). Agriculture has also been a key growth driver.

“We estimate GDP per capita at a low $630 in 2014. However, strong economic growth has translated into significant poverty reduction and fairly homogeneous wealth levels. According to International Monetary Fund (IMF) data, poverty declined to about 30% in 2011 from 60% in 1995.

According to S&P: “We expect current account deficits to average 6% of GDP over 2014-2017, driven by rising imports of capital goods and fuel. Ethiopia has a services account surplus, predominantly due to Ethiopian Airlines’ revenues, and large current account transfers mostly made up of remittances that we estimate at about 10% of GDP. Over 2014-2017, we project that gross external financing needs should average 118% of current account receipts and reserves.”

Ethiopian Prime Minister Hailemariam Desalegn had told Reuters in October (see also below) that it planned a debut Eurobond once it had secured a credit rating, though he gave no time frame.

The state and state-owned companies continue to dominate the economy and key sectors such as banking, telecoms and retail are closed to foreign ownership, with state monopolies still dominating telecoms, power and other services and state-owned banks still predominant in banking despite many private banks existing. S&P says there could be room for an upgrade “if we saw more transparency on the financial accounts of Ethiopia’s public sector contingent liabilities and their links with the central government. We might also consider a positive rating action if we observed that monetary policy credibility was improving, either through better transmission mechanisms or relaxed foreign exchange restrictions on the current account.”

In December Reuters reported that Ethiopia had hired French investment bank and asset manager Lazard Ltd in a bid to select rating companies and secure its first credit rating

IMF director warns of risks to sustaining growth

In a presentation last November by Jan Mikkelsen, IMF Resident Representative for Ethiopia titled “Regional Economic Outlook for Sub-Saharan Africa & Macroeconomic Issues for Ethiopia” he praises solid growth and price stabilization but warns about a large fiscal deficit, an appreciating real exchange rate, declining competitiveness and increasing trade deficit. In his powerpoint presentation, he says there is a “Large fiscal deficit without appropriate financing options. This leads to: large domestic borrowing; crowding out of credit to private sector; risk of debt distress; large exposure of banking system to public enterprises; and inflation concerns. He is concerned about the “Non-functioning FX market, FX shortage, and competitiveness,” as well as “Failure to develop financial sector and markets”. (NOTE: The Ethiopian Government has resisted setting up an organized and regulated securities exchange, even for locals only, and this has led to a plethora of unregulated IPOs and problems for investors). Mikkelsen adds that Ethiopia is “Missing out on private sector dynamics – opening up! Tap into FDI flows!”

He warns that the Growth and Transformation Plan (2009/10-2014/15) had estimated to invest $36 billion in public-sector financing and had achieved $11.2bn of investment in the first 3 years, leaving $22bn to be invested in identified projects in the last two years, which would be 19.7% of GDP, of which 9.9% could be domestic financing and 9.8% external. He pointed out that this meant less credit to the private sector, with banks cutting back their credit growth to non-government and giving 83% of this “non-government” share to state-owned enterprises and only 17% to the private sector.

His policy recommendations included enhancing competitiveness via exchange-rate flexibility and cutting logistic costs for trade, phasing out the forced 27% bill holding restriction on banks by the National Bank of Ethiopia, developing a securities market and making interest rates flexible and that putting the private sector in the driving seat is the only way to create sustainable employment opportunities.

Bloomberg cited Finance Minister Sufian Ahmed in December saying: “The main challenge is investment financing needs. We know it’s huge.” He said funding targets would be met by increased domestic financing and borrowing as much as $1bn a year on non-concessional terms from China, India and Turkey and key projects will also be prioritized, he said. According to that report, the Government planned to spend ETB 105.2bn ($5.5bn) on infrastructure and industry including hydropower dams and sugar plants in the 12 months ended 7 Jul 2014 and ETB 70.7bn in the year to July 2015, according to the GTP that ends in mid-2015.

Ethiopia’s PM explains economic policy

The Reuters interview with Prime Minister Hailemariam Dessalegn gives good insight into the Government’s rationale for maintaining control. It is worth reading. He said other bonds could come from the rating.

The Government aims to move from a largely agrarian economy into manufacturing, including textiles. Hailemariam said this was no time for a change of tack, either by selling monopoly Ethio Telecom or opening up the banking industry – now dominated by 3 state banks – to foreigners. “Why does the government engage in infrastructure development? It is simply to make the private sector competitive because in Africa the lack of infrastructure is the main bottleneck. From where do we get this financing? We get this from government banks,” he said. “We engage ourselves in railway construction simply because we get revenues from telecoms.”

He said neighbouring countries which have opened up their banking industry to foreigners had lost a source of funds. “They have handed over their banks to the private sector and the private sector is not giving them loans for infrastructure development.”

He added that the Government was channelling loans to business, while income for the state from selling licences or taxes could not match Ethio Telecom’s annual revenue of ETB 6bn ($318m).

The Africa Report food for thought on the “great game” in East Africa

“East Africa is the most promising regional bloc. [It] has registered between 5 and 6% growth annually for the past decade. We estimate that regional gross domestic product will expand 18-fold by the middle of the century, from $185bn in 2010 to $3.5trn by 2050. This era is comparable to the period immediately after independence.” This is an intriguing article just published by The Africa Report, quoting Gabriel Negatu, regional director of the African Development Bank.
The article, by Parselelo Kantai in Nairobi and Juba, additional reporting by Patrick Smith in Addis Ababa, talks of the four leaders that dominate the East African “chessboard”. Here are a few sample quotes: “At international gatherings such as the African Union summit in Addis Ababa, the four gravitate towards each other: Ethiopia’s Hailemariam Desalegn, Kenya’s Uhuru Kenyatta, Rwanda’s Paul Kagame and Uganda’s Yoweri Museveni.
“Differing in age and political experience, they argue about many details but there is a critical point of consensus. If East Africa is to grasp the economic opportunities now available, there must be a determined effort to integrate its markets and economies, even if that means making concessions and compromises in the short term.
“All four run interventionist foreign policies – Ethiopia, Kenya and Uganda sent troops into Somalia, while Rwandan and Ugandan troops have been both invited to and expelled from the Democratic Republic of Congo.
“They all favour a statist hand on the economic tiller, but they are all building up business classes on whose political loyalty they can rely. All have supported Kenyatta in his attempts to avoid prosecution at the International Criminal Court.
“Economic growth and breaking away from dependence on Western markets are common imperatives. None of them enthuse about democracy, particularly in its Western, liberal variants.”
The article also gives insights on Uganda’s $8bn oil infrastructure deal of 5 February that will help reshape the region and its economies and 2 giant railway projects due for completion by 2020. It highlights the need for jobs and services to keep up with growth, and China’s giant role in reshaping the region.
It highlights regional diplomatic tensions too. The writers also point to joint pressure on Tanzania, sometimes seen as the laggard in the regionalization project, and give insightful perspective on the lessons from the South Sudan crisis, as well as letting key South Sudanese voices be heard. They write:
“For governments tempted to ignore the new underclass, South Sudan serves as a cautionary tale. An abiding weakness of governments in East Africa is their ethnocentrism: their tendency to favour crassly their ethnic support bases in the allocation of public sector jobs, appointments, commercial opportunities and government tenders.
“South Sudan’s crisis may have been exacerbated by its weak institutions, but the best illustration of this was the government’s failure to rein in cronyism, corruption and ethnic rivalries in the state sector.
“In South Sudan, these weaknesses caused a war. In other countries in the region, they produce bad elections and policy-making, and hold back burgeoning economies.”
The article speaks of the determination not to be proxies for foreign powers in any conflict and says the South Sudan crisis could give an opportunity to rebuild a state more suited to local realities.
For more, we recommend that you read the article in full here.

Nairobi Securities Exchange invites Ethiopian firms to list

Kenya has invited Ethiopian companies to list on the Nairobi Securities Exchange in a ground-breaking move that would let them raise capital and trade their shares. The Ethiopian Government has been slow to support development of its capital market, hampering investment and private-sector growth.

Churchill Avenue, Addis Abeba (www.tourismethiopia.gov.et)

Churchill Avenue, Addis Abeba (www.tourismethiopia.gov.et)


The invitation came earlier this month as Kenya’s President Uhuru Kenyatta visited Addis Ababa to strengthen trade and other ties. According to Reuters he told a joint meeting of executives from both nations: “Kenya stands ready to begin consultations for the regulations and guidelines that would allow Ethiopian companies to raise investment capital and trade at our Nairobi Securities Exchange.”
Ethiopia has one of Africa’s biggest economies, a fast-growing population of 85-90 million, and a booming economy which is forecast to grow at over 7% a year for each of the next five years, according to the International Monetary Fund (World Economic Outlook, Oct 2013).
Foreign multinational companies such as Unilever, Danish pharmaceutical company Novo Nordisk and many Chinese and Indian companies are opening a wide range of operations, including manufacturing. However, many Ethiopian companies have found it hard to raise the risk capital to seize the many opportunities, despite a strong human skills base, as outlined in this perceptive article in Financial Times.
The Government is 100% owner of the largest companies such as Ethio Telecom and Ethiopian Airlines and endowment companies linked to the key political parties are also major forces in the economy. There has been a programme of privatizing many state-owned companies in farming, manufacturing and others but Government retains key strategic industries and Reuters says they are resisting calls to liberalize the economy.
Kenyatta took Kenyan companies to look for opportunities in Ethiopia including executives of dairy company Brookside, Equity Bank and telecoms operator Safaricom. The 2 countries signed a special status agreement in 2012, detailing various areas of co-operation in trade, energy and infrastructure. A large transport corridor could link Ethiopia and South Sudan to a new Lamu port in Kenya. Ethiopia recently opened a grid to export electricity to Kenya with $1.5bn financing from the World Bank and the African Development Bank.
Analysts said Ethiopia would benefit if its firms take up the offer to tap Kenyan capital and Reuters quoted a analyst from Nairobi-based Standard Investment Bank in a note to clients: “The advantage for Ethiopia for this arrangement would be the ability to provide companies with an inflow of capital without necessarily running the risks of an open capital account economy which Kenya is already accustomed to.”
The Nairobi bourse is the powerhouse of Eastern Africa and there are already many dual-listings in the region and plans to create further links and harmonization with Dar Es Salaam, Uganda and Rwanda securities exchanges.
One Ethiopian lawyer told African Capital Markets News: “There is no law that prohibits Ethiopian companies to trade on another stock market. The President of Kenya has made his intention clear on the subject and there is no clear rejection or acceptance from its Ethiopian counterparty. The Ethiopian companies could benefit much. Principally they will be able to implement corporate governance policies and procedures that are lacking today and also be competitive over the world market.”
According to Million Kibret, managing partner of BDO Consulting Ethiopia, confirmed to African Capital Markets News that lawyers agreed “there is no law or directive or regulation that forbids interested Ethiopian companies to register at the Nairobi Securities Market. If their enrollment requires investment it will be up to the National Bank of Ethiopia to allow same.”
Kenyatta said that Kenya exported goods worth $53.2m to Ethiopia in 2012 and imported goods worth $4.1m in the same year.

More weather index insurance for African smallholder farmers

Weather insurance is a financial product aiming to help African farmers manage the volatility of drought and other weather crises. This week (14 Jan), IFC (www.ifc.org) signed 2 grant agreements with MicroEnsure Ltd to make more index-based weather insurance available to small-scale farmers in Rwanda and Zambia. Index-based insurance pays out on the basis of agreed weather data, such as rainfall as measured being lower than an agreed level, and is more efficient risk management tool than traditional indemnity-based agricultural insurance, which runs up high transaction costs and premiums.

The grants, valued together at about $650,000, aim to help mitigate the adverse effects of climate change and to strengthen food security. The funds come from the Global Index Insurance Facility (GIIF), which is a multi-donor trust fund implemented by IFC and the World Bank and funded by the European Union, Netherlands and Japan.

The GIIF grants are expected to help MicroEnsure to offer index-based insurance to an extra 90,000 small-scale farmers in Rwanda within 2 years and 15,000 small-scale farmers in Zambia within one year. Index-based insurance, which pays out benefits on the basis of weather data without costly field verification of losses, is a more efficient risk management tool.

Much of the farmland in Rwanda and Zambia, as in many other parts of Africa, is irrigated only by rain, and certain regions are vulnerable to drought from too little rain and floods and destruction from too much rain. To limit their losses due to extreme weather, smallholder farmers make minimal investments into their land, leading to reduced yields and continued food insecurity.

UK-based MicroEnsure has been operating since 2002 and works with mobile-network operators, banks, microfinance institutions, and other aggregators to provide insurance for the mass market. Shareholders include some of its managers and IFC, Omidyar Network and Opportunity International, which created MicroEnsure in 2005. It has a regional base in Nairobi and country operations across Africa and Asia. It has twice been awarded the Financial Times/IFC Sustainable Finance Award. The company has worked with local insurance companies in India, Malawi, the Philippines, Rwanda and Tanzania.

In Rwanda 90% of the labour force work in agriculture and in 2010 IFC agreed with MicroEnsure to design and provide index-based insurance and develop an outreach network to small farmers, while scaling up the insurance into a commercially viable and sustainable product. By March 2012, 6,208 maize and rice farmers were reported to be covered with weather station and satellite index products, with the aim to boost coverage to 24,000 farmers by December 2013. It works in Rwanda with Urwego Opportunity Bank which is a subsidiary of Opportunity International and local insurance companies Sonawara and Soros.

In Tanzania, MicroEnsure’s pilot project (Dec 2011-Apr 2012) worked to provide weather index insurance to 24,000 Tanzanian cotton farmers through the Tanzanian Cotton Board, supported by Gatsby Foundation, local underwriter Golden Crescent and a technical partnership agreement with reinsurer Swiss Re. It covers cover for value of inputs provided to farmers on credit.

IFC has also backed Kilimo Salama (“safe agriculture”) in Kenya to offer cover for inputs in the event of drought or excessive rainfall, in a partnership between Syngenta Foundation for Sustainable Agriculture and Kenyan insurance company UAP. Also available is cover for farm-output value, estimated on the expected harvest. A Nov 2010 grant from GIIF encouraged Syngenta to develop the product further, which uses weather stations to collect rainfall data and mobile SMS technology to distribute and administer payouts. It

For more information see IFC website on Rwanda and Tanzania and on Kenya.

Richard Leftley, CEO MicroEnsure and MicroEnsure Asia, said in an emailed press release: “As a pioneer in the provision of weather-index insurance to smallholders since 2004 we have seen the impact that these products have in unlocking credit to fund inputs, resulting in a dramatic increase in yields and rural income. Our on-going relationship with the team at IFC has been central to our growth in this sector.”

Gilles Galludec, IFC GIIF programme manager, said: “There is great potential for index insurance to strengthen economic security for smallholder farmers in Rwanda and Zambia while also serving to further the development of sustainable insurance markets in both countries. A reduction in weather-related risks also stimulates investment in farming by making it viable for financial institutions and agribusinesses to extend credit to smallholder farmers for long-term investment in the land. Index-based insurance is a powerful tool in the fight against poverty.”

GIIF is a multi-donor trust fund, launched in Africa in 2009, with the aim of expanding use of index insurance as a risk-management tool in agriculture, food security and disaster-risk reduction. It supports the development and growth of local markets for indexed/catastrophic insurance in developing countries, primarily in Sub-Saharan Africa, Latin America and the Caribbean, South Asia and Southeast Asia.

IFC is a member of the World Bank Group and focuses exclusively on the private sector, working with enterprises in more than 100 countries. Investments climbed to an all-time high of nearly $25 billion in the financial year 2013 www.ifc.org

The International Livestock Research Institute (www.ilri.org) is another organization backing index-based insurance, this time offering livestock cover for vulnerable pastoralists in Kenya and Ethiopia to cut climate-related risk. The product is called index-based livestock insurance and was launched in Marsabit District of Kenya in Jan 2010 with insurer UAP (it made payouts in Oct 2011 and Mar 2012) and in Ethiopia’s Borana zone in Jul 2012. For more information, see here. The product uses econometrics to measure links between livestock mortality and a Normalized Difference Vegetation Index (NDVI).