When identifying who rules the roost in East Africa, look no further than Ethiopia; a country with business opportunities abound, and vast potential to still unlock.
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. And those willing to look beyond BRICs and MINTs should have 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 eight percent a year for more than a decade.
More than that, it has become Africa’s fastest growing non-oil economy. The Ethiopian government’s focus on growing 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. We should examine how it has solidified its position and what the opportunities are for businesses.
BUSINESS OPPORTUNITIES
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 percent of GDP) in infrastructure projects.
At the heart of the programme are railway, road and dam projects to give the landlocked nation cheap power and reliable transport. The programme’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 licence has been cut to 15 days, from 44 in 2004.
With China slowly running out of inexpensive labour, manufacturers are looking at low-income countries like Ethiopia. Textile manufacturers have already been attracted by the rich local supply of leather and cotton. For example, multinational retail clothing firms, H&M and Primark both source significant amounts of material from Ethiopia.
The Ethiopian government has developed specific industrial zones which 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 its plans to invest a further $2.2 billion in an industrial zone of its own, located in the Lebu area in the South Western outskirts of Addis Ababa.
Turkey is currently the leading country investing in Ethiopia; Turkish companies have invested $1.2billion capital in the last decade. Other big names that have recently announced investment plans include Unilever, GE and GSK.
With a growing population of 94 million, urbanisation and rising income levels Ethiopia is also surfacing as an attractive consumer market.
By 2020 Coca-Cola, hopes to sell 100 million 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 capitalise on figures showing the Ethiopian beer market has doubled over the past five years, with per capita consumption still relatively low compared to other East African countries.
COUNTRY CHALLENGES
However, the country is not without its challenges and there is some uncertainty ahead. The country will go to the polls on 24 May 2015. The next 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 Desalegnn, after the death of Meles Zenawi in 2012, who ruled the country for 21 years. The claim from many human rights activists of the 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 on loosening 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 the boom to continue, Ethiopia needs a stronger banking sector.
The World Bank’s ‘Investing across Sectors’ indicators show that Ethiopia has above-average restrictions on foreign equity ownership. It imposes restrictions on foreign equity ownership in many sectors, including telecommunications, financial services, media, retail trade and transport.
UNLOCKING POTENTIAL
A broad-brush view might suggest that the glory days for emerging markets are gone – but outside the BRIC countries especially, pockets of opportunity do exist. With its large scale investments in infrastructure, high growth rates and vast population, Ethiopia is a fine example of this.
Companies looking to invest in emerging markets would do well to take a granular approach. Emerging markets is too broad a term for what is not a homogeneous group of economies, just as Africa is not one single market, rather a vast and diverse continent with varying challenges and opportunities. Deep local knowledge of in-market intricacies is key to unlocking the potential.
As one of the largest audit and advisory firms in Ethiopia, BDO supports domestic and international clients in navigating the Ethiopian market and grasping the opportunities there.
We see Ethiopia as a major future market for our clients and can support them with deep local knowledge, combined with global expertise and the consistent delivery of exceptional client service.
By Anders Heede, CEO of EMEA, BDO and Million Kibret, CEO of BDO Ethiopia
