Ethiopia: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: D
Risk Assessment2
Economic diversification will benefit growth in 2011
Ethiopia is expected to achieve growth in 2011 exceeding the overall trend for sub-Saharan Africa. The contribution of agriculture to economic activity continues to decline while that of industry and services has been risings. Many sectors, particularly those dealing in raw materials, have thus continued to develop: Coffee prices may be driven up thanks to adoption by the Ethiopian Commodity Exchange of the international coffee-labeling procedure. The textile sectors, cotton in particular whose production has been growing, continue to benefit from Turkish and Indian investments attracted by the low labor costs and the absence of customs duties on Ethiopian products in the American and European markets. Furthermore, royalties and taxes on gold mines have enabled the government to increase its revenues. Hydroelectricity projects, financed by international aid but as well by investors from emerging countries, are expected to enable the supply of electricity to Ethiopian homes (which presupposes, however, resolving the distribution problem) and transform the country into an exporter of energy to neighboring countries. This potential for electricity generation notwithstanding, frequent power failures remain a problem impeding development of the private sector. Ethiopia has succeeded meanwhile in stemming the rise in prices with the rate of increase falling in the past two years from over 64% to single-digit inflation in 2010 thanks especially to the easing of food prices.
Sustainable foreign debt but precariously low foreign exchange reserves
Exports will be underpinned this year by the birr devaluation carried out in September 2010 and by Asian demand (one-third of sales abroad), which will partly offset the slowdown in orders from Europe (over half of exports). Furthermore, Ethiopia's development prospects are expected to trigger an acceleration of foreign investments and remittances from the diaspora. These positive factors notwithstanding, the current account balance will deteriorate: imports of capital goods will accelerate significantly in phase with the growth of domestic demand, especially demand associated with infrastructure projects. And that could be compounded by the necessity of importing food products, despite the promising interim results of farm production in 2010 as the year draws to a close. Foreign exchange reserves have improved reflecting the increase in grants from abroad and IMF financing. They nonetheless remain below the threshold generally recommended for emerging economies. Although public sector debt and the fiscal deficit have stabilized at sustainable levels, foreign debt has continued to grow albeit remaining under control.
Despite the progress made political risk remains significant
Prime Minister Melis Zenawi and his EPRDP party (Ethiopian People's Revolutionary Democratic Party) won the elections in May 2010 with a crushing majority without that outcome sparking violence. The peace treaty concluded in October 2010 with the main branch of the National Liberation Front of the Ogaden constitutes undeniable progress, but the possibility of an intervention in Southern Somalia remains substantial and the risk of conflict with Eritrea is still present.
Strengths
- Significant hydroelectric potential
- Support of financial backers (HIPC/MDRI debt relief, food aid)
- Progress in diversifying the economy
Weaknesses
- Infrastructure deficiencies (transport and telecommunications) and poor business environment
- Significant risk of war with Eritrea and Somalia
- Vulnerability to weather conditions and volatile raw material prices
- Chronic shortage of food