By Anders Heede of BDO |
Many emerging markets, especially in sub-Saharan Africa, have seen solid GDP growth in the past decade driven mainly by natural resources. But with falling commodity prices and Chinese demand dwindling, those with overly resource-dependent economies are being caught. Companies seeking to invest in emerging markets should be on the lookout for those countries that have invested in diversifying their economies. That will often mean having Ethiopia on their shortlist.
In 2012, Ethiopia was the 12th-fastest growing economy in the world, according to the World Bank. Hefty state-led investment has kept the economy of Africa’s second most populous nation growing at more than 8 per cent a year for over a decade. More than that, it has become Africa’s fastest-growing non-oil economy. The government’s focus on value-added activities has bolstered its transformation towards a diversified economy and, as a result, it is attracting the attention of ambitious businesses and investors alike. How has it solidified its position and what are the opportunities for businesses?
Most importantly, the country has invested in infrastructure. The government has delivered on its five year Growth and Transformation Plan, which has seen it making large investments (around 15 per cent of GDP) in infrastructure projects. At the heart of the program are railway, road and dam projects to give the landlocked nation cheap power and reliable transport. The program’s poster child is the controversial Grand Renaissance Dam on the Blue Nile, which will become Africa’s biggest hydro-power plant and turn Ethiopia into a regional power hub.
At the same time, reforms to business registration and changes to regulatory institutions have simplified rules, improved the quality of business support and considerably reduced the cost of doing business. The time required to clear customs for export and to secure a business license, for example, has been cut to 15 days, from 44 in 2004.
With China slowly running out of inexpensive labor, manufacturers are looking at low-income countries like Ethiopia. Textile manufacturers have already been attracted by the rich local supply of leather and cotton. Multinational retail clothing companies H&M and Primark both source significant amounts of material from Ethiopia. The government has developed specific industrial zones that will see the companies within them benefit from a tax ‘holiday’ of up to 17 years. Chinese shoe maker Hujian Group has already invested heavily in the Chinese-built Eastern Industrial Zone and last year announced plans to invest a further $2.2bn in an industrial zone of its own, located in the Lebu area on the south-western outskirts of Addis Ababa. Turkey is currently the leading country investing in Ethiopia – Turkish companies have invested $1.2bn in the last decade. Other big names that have recently announced investment plans include Unilever, GE and GSK.
With a growing population of 94m, urbanization and rising income levels, Ethiopia is also surfacing as an attractive consumer market. By 2020, Coca-Cola hopes to sell 100m unit cases in Ethiopia, putting it on par with Egypt and South Africa. Meanwhile, Heineken has just inaugurated what it claims is Ethiopia’s biggest brewery to capitalize on figures showing the Ethiopian beer market has doubled over the last five years, with per capita consumption still relatively low compared to other east African countries.
However, the country is not without its challenges and there is some uncertainty ahead. Ethiopians will go to the polls on May 24. The elections will likely see another win for the ruling EPRDF party that has claimed victory in every election since the fall of the Derg regime in 1991. It will be the first election to be held under the current prime minister, Hailemariam Desalegn, after the death in 2012 of Meles Zenawi, who ruled the country for 21 years. Complaints from many human rights activists about growing inequality and demands for freedom of press and political participation are likely to challenge the ruling party.
Investors will be keen to find out whether the government plans to loosen its grip on the economy – for example, many sectors remain closed off to foreign investors and even to domestic companies at times. Access to finance for the private sector remains difficult, even more so because of the government’s large infrastructure plans. For its boom to continue, Ethiopia needs a stronger banking sector. The World Bank’s survey on investing across sectors shows that Ethiopia has above-average restrictions on foreign equity ownership in many sectors, including telecommunications, financial services, media, the retail trade and transport.
Nevertheless, we see Ethiopia as a major future market for our clients.
Anders Heede is chief executive for Europe, the Middle East and Africa at audit and advisory firm BDO. Million Kibret, chief executive of BDO Ethiopia, co-authored this post.
Source: FT.com – Beyond Brics
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