Focus on Ethiopia’s Growth
Ethiopia is the darling-child of the moment. It’s the world’s largest country without a stock exchange. The country is big by almost every measure other than the size of its economy. Geographically, it is larger than Egypt or Nigeria and about the size of South Africa. Population-wise it is the second-most populous country in Africa after Nigeria. Its economy has been a long tear.
See Figure 1 below, since 2004, the economy has grown by at least 8% per year. This is expected to continue far out into the future; hence the excitement for Ethiopia. The country has experienced significant horror since its independence from Italy in 1941, since then the country has wrestled between authoritarian dictatorships and communism. In 1995, Meles Zenawi took over the country. He was certainly a dictator, but he also positioned the country well within the African union (Addis Ababa is often referred to as an NGO capital) and gave it the underpinnings it needed to really thrive. Since Zenawi’s death in 2012, Hailemariam Desalegn has been in power, and he’s done a good job of managing and curating economic growth.
Ethiopia is starting a very low base, its current GDP after 12 years of 8%+ growth is about $60bn, which places it lower than Syria in a country ranking and equivalent to the 600,000-strong country of Luxembourg. Things were very low, and really needed the basic core of a country to facilitate growth. Ethiopia has a literacy rate of approximately 50%, it isn’t pretty and females continue to lag, but it’s a vast improvement compared to about 23% in 1995 when Zenawi took over.
Why is Ethiopia interesting now?
Ethiopia does not have a stock exchange, its had a struggling commodities exchange since 2010, and its government debt is essentially the only fixed income investments available in the country. So, why is Ethiopia interesting right now?
Ethiopia is fresh and untouched. To an even greater extent than Myanmar would be considered. The only apt comparison that we could think of is if the DRC suddenly transitioned to a responsible honest government. Of course, Ethiopia has a much richer and deeper history than the DRC, being home to some of the oldest communities in the world of Christians, Jews, and Muslims.
Ethiopia, despite having almost 100mm people does not have more than one city larger than 1mm. It is a tremendously rural country with very poor infrastructure. Ethiopia’s urban population is expected to triple in the next thirty years, and we think these estimates are underestimating the change. Cities the size of Rome will appear from almost nothingness today. With urbanization comes a spike in education, life expectancy, and consumer demand. Urbanization is a core building block for a thriving, successful economy.
- Financial Reform
Ethiopia went from a country that was woefully antiquated in terms of its financial system to being controlled by the Italians to a dictatorship that made poor replicas of European models for financial administration and regulation. From there, the country became communist and devolved to a mess. However, from 1998 onwards, the country embarked on recreating its financial regulation and administration. It has been, to date, remarkably effective. Yes, timelines have been missed and commitments reduced, but the sum of change that the country has experienced in this time has been remarkable. For an in-depth look at the nature of the reforms, see here.
As part of the financial reform, the Commodities exchange has been a reasonable success. It trades in Coffee, Haricot Beans, Sesame, Maize, and Wheat. The benefit of the exchange is best said by the exchange itself;
“Before ECX was established agricultural markets in Ethiopia had been characterized by high costs and high risks of transacting, forcing much of Ethiopia into global isolation. With only one-third of output reaching the market, commodity buyers and sellers tended to trade only with those they knew, to avoid the risk of being cheated or default. Trade is done on the basis of visual inspection because there was no assurance of product quality or quantity, this drove up market costs, leading to high consumer prices. For their part, small-scale farmers, who produce 95 percent of Ethiopia’s output, came to market with little information and are at the mercy of merchants in the nearest and only market they know, unable to negotiate better prices or reduce their market risk.”
There are plans to add an equity exchange in the near future, but no firm dates have been provided. We would be surprised if we see anything before 2019. The big beneficiaries of date of the privatization in Ethiopia and the growth of companies have been private equity firms and international giants. The largest brewery is owned by Heineken, the telecom company is in a joint-venture with ZTE, and industrial companies have seen investment by Canada’s Fairfax Holdings.
Ethiopia has been one of the biggest beneficiaries of Chinese investment in Africa. To really visualize it, see this clip from the BBC. The extent of the benefit is highlighted well in this FT article. We firmly believe that Ethiopia will be the biggest beneficiary of China’s transition to a consumption economy. China’s first destination for outsourcing is and will continue to be for the foreseeable future, Ethiopia. China is helping Ethiopia build infrastructure, train its people, and develop its industrial base. There are of course criticisms, but China also helped launch Addis Ababa’s first mass transit rail line last year. The Capital now has over 30kms of light rail line with blueprints for further expansion in all directions. In all respects, we see this as being a positive trend for Ethiopia.
How can you invest?
If you cannot invest in public markets, what is the best way to get exposure into Ethiopia? Investing in private equity firms focused on Africa is one way; firms such as Fairfax and Renaissance Capital. Though dated, E&Y provides some good information on PE firms in Africa here. Generally speaking, you have to be an accredited investor to invest with PE firms.
Unfortunately, foreigners are currently unable to open accounts in Ethiopia unless you are of Ethiopian origin. Playing the currency becomes untenable as a result. Ethiopia does issue Eurodollar bonds, but you probably don’t want to purchase them, when 10-year notes yield about 6%. There are a lot safer and better ways to earn a 6% yield, without the risk of a Sovereign nation’s debt.
There aren’t many others ways to tap into the market. Most of the large companies with investments in Ethiopia do not have a large exposure to the country, their investments are a small fraction of their overall business.
We wanted to highlight the good story occurring in Ethiopia, knowing there aren’t a lot of material ways to invest for the individual investor. However, if you in any capacity are able to invest in a business in Ethiopia, we think the prospects are very exciting. We will keep track of the developments towards public markets for Ethiopia, and keep you notified. As always, any questions, please let us know.