Ethiopia: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Growth not easing up
Economic activity remained strong in 2015 (fiscal year ends on 7 July), mainly driven by domestic demand. Exports of goods and services, however, contracted with the drop in oilseed and gold prices and declining revenue from tourism, while imports grew strongly. The manufacturing, construction and agricultural sectors showed strong momentum whilst the services sector, which continues to make the biggest contribution to growth, slowed.
Agricultural production suffered from the drought at the beginning of the 2016 fiscal year, but growth should continue to benefit from the implementation of a major public investment program, which is on-going within the 2nd Ethiopian Growth and Transformation Plan. This continues to be focused on improving transport, energy supply (including continuation of the Grand Renaissance Dam project), telecommunications and information technology associated infrastructures. The manufacturing sector is at the core of the new plan. The leather, shoe, textile and agri-food sectors will likely continue to be key driving forces in its expansion.
Despite the progress made in economic terms and the prospects of more sophisticated product ranges, the country remains highly dependent on commodities, in particular agricultural, and as a result, vulnerable to climatic hazards and movements in global prices. There remains much work to be done to improve the business climate and competitiveness. Limited access to credit, red tape, weak infrastructure and lack of skilled labor are all disadvantages. Inflation, which stayed below 10% until mid-2015, is rising following the lack of rain and the resultant rise in food costs.
Growing internal and external imbalances
The current account deficit increased in 2015 as a result of the decline in exports of goods and services (oilseeds, gold, travel) and the increase in imports. There was, however, a slight increase in coffee exports and expatriate workers' remittances. The current account deficit is likely to stabilize at a slightly lower level in 2016 and 2017 thanks to a recovery in exports, driven by light industry, horticulture and the sale of electricity, and a more reasonable rate of growth in imports. The fall in agricultural commodity prices should largely be offset by the fall in the cost of imported oil. However, the over-valuation of the Ethiopian currency (birr) will continue to drag down competitiveness. The possible rebalancing, in the medium-term, of economic growth in China (leading foreign investor), in favor of consumption, should have a positive impact for the country, which should continue to benefit from the relocation of Chinese companies. The increase in foreign direct investment and in government and SOEs borrowing helped boost currency reserves in 2015, although these still only represent two months of imports, which is not enough. The budget deficit is growing slowly as expenditure is increased on reducing poverty and on modernizing infrastructure. The public debt-to-GDP ratio should increase up until 2018 and then fall thanks to the completion of the ongoing public investment projects. However, whilst the sustainability of the debt is not in question, the danger of over-indebtedness has increased because of the wider use of non-concessional external borrowing.
A difficult regional context and enduring internal tensions
Ethiopia is in an unstable region with serious security and political stability issues. Relations between Ethiopia and Eritrea, formerly at war, remain tense. The instability in Somalia presents a threat to the security of its neighboring countries, including Ethiopia. Tensions also remain between Ethiopia and Sudan and Egypt concerning the Grand Renaissance Dam. Finally, domestically, the continued presence of separatist and rebel movements, as well as dissension between Christians and Muslims, has to be borne in mind. The Ethiopian People’s Revolutionary Democratic Front, which maintains its grip on the country, is likely to retain power until the next parliamentary elections (2020).