18 January 2014

Ethiopia - the Last Big Untapped African Market

Vibrant, growing and on the radar of many top executives - Ethiopia has come a long way. Zemedeneh Negatu, Managing Partner EY Ethiopia and Head of Transaction Advisory Services, explains what's happened.

A few weeks ago, in New York City, Ethiopia's Prime Minister Hailemariam Desalegn gave a presentation to a group of senior business leaders about the investment opportunities in his country. The audience included the CEO of one of the world's largest hotel groups, the COO of a 'Fortune 500' industrial enterprise famous for its construction tools and several other executives including private equity fund managers. Ethiopia has indeed come a long way in getting the attention of sophisticated global investors.

Attendance at similar road show presentations in Paris, Seoul and Tokyo, earlier this year was just as impressive: in Tokyo, there were over 400 people. So how did Ethiopia get to this point where global investors are starting to consider it as an attractive investment destination and even President Barack Obama has included it in his USD 7 billion Power Africa initiative? It's because Ethiopia's economy has averaged 10.6 percent annual growth between 2004 and 2011 according to a recent World Bank report. The economy has tripled since 2000 and is ranked amongst the fastest growing in the world.

Its USD 103 billion GDP is the fourth largest in Sub-Saharan Africa and is 25 percent bigger than Kenya's. But for many analysts Ethiopia's ascendance is best illustrated by the country's ambitious 6,000 MW USD 5 billion hydropower dam under construction on the River Nile. The dam, which is the largest in Africa and fully financed by the Ethiopians themselves, is a point of great pride for its people and the political leadership.

Foreign Direct Investment (FDI) For global investors seeking a rapidly expanding and potentially large market, the Ethiopian growth story, with a GDP EY forecasts at more than USD 400 billion by 2025 thus becoming the third largest in Africa, should stand out. Ethiopia offers growth opportunities in manufacturing, infrastructure, natural resources and most importantly, agriculture. One measure of investor sentiment about Ethiopia is the result from EY's recent Africa attractiveness survey which has rated the country as a moderate risk with high opportunity ranked at number four in Sub-Saharan Africa.

The research by EY and on the ground experience suggest that FDI into Ethiopia reached an estimated USD 1 billion in 2012, the highest figure ever, anchored by two Investments totaling over USD 415 million by global drinks giants Diageo of the UK, where EY was the M&A advisor, and Heineken. Over the next three years, our FDI estimate is USD 1.5 billion annually in sectors allowed for foreigners. We expect significant investments from China, the other BRICS, Middle East as well as an increasing flow from the developed economies including the US.

In the next few years, EY expects significant additional FDI in the promising oil and gas sectors which the UK's Tullow Oil is leading working with Marathon Oil of the US. Furthermore, one of the largest Wall Street private equity funds recently announced that it has committed USD 600 million for oil and gas investments focused on Ethiopia and a few other Eastern African countries.

Foreign investors, however, should note that two of the most attractive and extremely profitable sectors - financial services, where Ethiopian banks routinely pay out 40 percent annual dividends to local investors, and telecoms, which contributes USD 400 million annually to the State's budget - are off limits for FDI and the government has publicly and firmly indicated that it does not plan to open up these sectors for many more years, perhaps not even by 2020. But with Ethiopia's expected membership in the World Trade Organization (WTO) in 2015, many international investors have expressed hope that they will be allowed to invest in these key sectors sooner.

Already, some of the world's biggest telecom operators such as Vodacom of South Africa majority owned by Vodaphone of the UK have opened offices in Ethiopia to provide so called value-added services, while waiting for the sector to fully liberalize. A number of international banks, such as the PanAfrican Ecobank and the biggest financial institution on the continent, Standard Bank of South Africa, 20 percent owned by the Chinese, have announced that they are setting up representative offices, apparently as a first step. Growth Drivers Two key drivers of Ethiopia's economic growth which will be attractive to global investors are urbanization and demographics. Anyone who has visited the Ethiopian capital Addis Ababa will notice that the city is one giant construction site. This includes the 34km, USD 400 million modern light rail under construction. Throughout the city thousands of affordable apartments are being built close to a modern six-lane ring road. Addis Ababa is forecast to have over 6 million inhabitants by 2025. There are similar scenes in several other new urban centers, albeit on a smaller scale. If current trends continue, Ethiopia will be one of the fastest urbanizing countries in Africa over the next 20 years.

The other major growth driver is Ethiopia's demographic advantage: its large young population whose median age is around 20. As happened in China and India, Ethiopia has the potential to deploy millions of young people at a lower cost even compared to Chinese wages. For instance, manufacturing wages average about USD 80 per month in Ethiopia compared to more than USD 550 in China. Ethiopia's economic transformation is based on the country becoming one of Africa's leading manufacturing hubs and a top exporter of value added goods. Ethiopia is one of the last big untapped African markets. And despite the challenges the country will face as it transitions from a completely bankrupt socialist economy just over 20 years ago to a middle income capitalist economy by 2025, I am realistically optimistic and positive about its prospects. I also firmly believe that investors who come early, with a glass half full perspective will enhance their chances of success in a country which only now is receiving attention from global investors.

Ed.'s Note: The article was the Cover Story in the international business magazine "Acquisition International" published in the UK.

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