Ethiopia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Remarkable track record of growth and poverty reduction
- Public investments in infrastructures
- Economy diversification effort
- Strong hydropower potential
- Vulnerability to weather conditions and changes in world commodity prices
- Isolation of the country
- Insufficient level of foreign exchange reserves
- On-going difficulties in the business and governance environment
- Unstable regional context
- Exacerbated ethnic tensions
Rapid Growth despite Inflation and Political Risk
Despite the obstacles to growth (drought, ethno-political tensions), activity remained buoyant and even rebounded in 2016/2017. In 2017/2018, it is expected to remain robust but, nonetheless, it will stagnate, constrained by inflation and political risk. The price increase following the 15% devaluation of the national currency (birr) should put pressure on household consumption and weigh on growth. This devaluation should nonetheless help to improve the competitiveness of exports that were low. Also, they should rebound thanks to better agricultural production, coffee and oleaginous fruits (sesame) in particular, after being affected by drought conditions in 2016 and 2017. In addition, the opening of several industrial parks, including those of Hawala and Mekelle, should allow the country to increase its leather, footwear and textiles exports and, thus, begin to realize the country's goal to position itself as a large manufacturing hub. Under Ethiopia's Growth and Transformation Plan II, public investment will also remain strong, particularly in the transport, telecommunications and energy sectors with the "Renaissance Dam" project with a production capacity of 6,000 MW. An effort will also be made in the coming months with respect to social infrastructure (hospitals and schools). Private investments, still limited in an economy predominantly controlled by the State, should benefit from new Prime Minister Abiy Ahmed’s reforms. In May 2018, the latter announced that public firms’ capital will now be opened to private investors. Among the firms targeted by the measures, investors will be allowed to choose between the national company of electricity, the telecommunication one, Ethio Telecom, as well as the national airline, Ethiopian Airlines.
A Sustainable Fiscal Position but Persistent External Imbalances
The budget deficit is likely to remain relatively low. The 2017/2018 budget is up almost 10% from the previous fiscal year. This increase is mainly directed towards capital expenditures in infrastructure projects. Revenues are expected to increase in line with GDP growth and thus allow the budget deficit to remain relatively stable. However, the increase in revenues will remain constrained by the collection of domestic receipts, which is still sub-optimal; tax revenues represent less than 14% of the GDP, compared with a relatively low average of around 20% in sub-Saharan Africa. This point has therefore been prioritized by the Ethiopian authorities in the 2017/2018 budget. The deficit is financed by foreign loans and grants (about 18% of the budget).
The current account deficit would remain high in 2017/2018, but the devaluation of the birr should reduce the pressure on external accounts. Indeed, the weaker currency should constrain the growth of imports and support the competitiveness of exports, especially manufactured goods and foodstuffs. Transfers by expatriate workers will remain a significant positive contribution in the current account. The favorable economic situation in Europe and the United States could have a beneficial effect on these transfers. Foreign direct investment flows, particularly in infrastructure and industry, should finance the current account deficit. Strengthening Ethiopia's external position could help replenish some foreign exchange reserves, which remain at a low level (around 2.5 months of import coverage).
Debt is still relatively high (33.5% of GDP), but given the still large share of concessional loans (around 60% of the external debt stock), the associated risk remains moderate.
A New Prime Minister to Try Relieving Ethnical Tensions
After several months of protests, the Prime Minister Hailemariam Desalegn, member of the Ethiopian Peoples' Revolutionary Democratic Front (EPRDF) in power since 1991, resigned in February 2018. Since November 2015, there has been a resurgence in ethno-political tensions in the country. In October 2016, Amharas demonstrations demanding more representation and political freedoms killed at least 600, following a deadly melee launched by the security forces. With similar grievances, the Omoro movement has been protesting against the Tigrayans minority’s dominance within the government coalition. Trying to ease tensions, the EPRDF named a leader of the Oromo party (Oromo People’s Democratic Organisation), member of the governing coalition, to succeed to Mr. Desalegn. Mr. Abiy Ahmed, member of Parliament, has become the first chief of government belonging to the Omoro ethnic group since 1991. Chosen for his reformist programme, Mr. Ahmed ended the emergency state implemented in February 2018 before its term. His government has also started to slowly free the numerous political prisoners. However, clashes on the border between the Oromia and Somali regions keep occurring from time to time and continue to threaten the stability of the country.
From the international point of view, the new government of Abiy Ahmed created the surprise announcing its eagerness to definitively end the territorial conflict which has opposed Ethiopia to Eritrea since 1993. The government declared itself ready to fully implement the Alger agreement signed in 2000. Finally, as one of only two guests from Sub-Saharan Africa at theOne Belt, One RoadForum (with Kenya), Ethiopia has maintained an increasingly close relationship with China.