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BMI’s Ethiopia Country Risk Report
Bereket Gebru
These seem to be trying days for Ethiopia as unrests and conflicts between different groups draw a glimpse of the harsh days that await us if we do not rectify the situation while it is still early. The social cohesion could use more pampering to create a sense of trust between people. Citizens should feel confident enough to live and work anywhere they want in their own country.
The strain this social instability would exert on the country’s ongoing economic development is significant. Considering the country managed to reduce the number of poor people by half recently, interrupting such a momentum would mean lingering poverty in the lives of millions of Ethiopians.
A research on the political, economic and social realities of the country and forecasts on the fate of the country in the near future would be very informative and essential. BMI Research, a research firm that provides macroeconomic, industry and financial market analysis, covering 24 industries and 200 global markets, has come up with just such research. The internationally renowned research company founded in 1984 and acquired by Fitch Rating in 2014 is familiar to us as it came up with a report entitled “10 key emerging markets of the future” last year.
In its report on future emerging markets, BMI shortlisted 10 emerging market (EM) countries set to become new drivers of economic growth over the next 10 years and forecasted that they would cumulatively add USD4.3trn, roughly the equivalent of Japan’s economy currently, to global GDP by 2025. These 10 countries are Bangladesh, Egypt, Ethiopia, Indonesia, Kenya, Myanmar, Nigeria, Pakistan, Philippines and Vietnam.
In a report they are going to release on January 01, 2018, BMI has included Ethiopia Country Risk Report. The executive summary of our country’s risk report reflects some of the fears that we all have harboured in ourselves. The executive summary is made up of core views, key risks and macroeconomic forecasts.
Core Views
- Ethiopia’s growth will remain relatively robust in the coming years owing to infrastructure investment and increased export opportunities. However, we note that inflationary pressures will squeeze consumers in the short term, while political risks will offer longer-term headwinds.
- After being devalued in October, we expect that the Ethiopian birr will continue to depreciate in the coming months, in line with the central bank’s managed float regime. However, we note that the birr remains overvalued despite this move, meaning that risks are still weighted to the downside.
- Inflation in Ethiopia will rise in the coming quarters, largely owing to the higher cost of imported goods following the devaluation of the birr in October. That said, we do not expect any further monetary easing after the bank hiked the deposit rate by 200 basis points.
- Ethiopia’s current account deficit will gradually narrow in 2018 and 2019 as recent currency devaluation suppresses demand for imports and boosts export competitiveness. Coupled with our expectation for robust foreign direct investment and continued access to concessional financing, the narrowing current account shortfalls will begin to allow Ethiopia to build up its foreign reserves, positioning it to more comfortably defend the crawling peg in the near term.
The verdict from the above core views is that the economic growth is expected to stay robust with inflation and political instability pausing themselves as the greatest threats to it. The government of Ethiopia has been carrying out measures to control the ill-effects of the currency devaluation on inflation. Despite the inevitable rise in inflation, cautionary measures could help ease the harm. Finding a working solution for the problems at the back of the political instability is also within the reach of Ethiopians. Therefore, ensuring these factors should be considered a priority to sustain the development of the past fifteen years.
Key Risks:
- Clashes along the borders of Oromia and other regions such as Amhara and Somali will pose risks in the coming quarters, compounding investor fears about general instability in key areas of the country which generate economic activity.
- As is the case for many African nations, Ethiopia is highly susceptible to volatility in global markets particularly commodity prices (notably coffee and gold), which can, in turn, pose both upside and downside risks to export revenues and headline growth.
- Public sector debt levels have risen dramatically since the implementation of government’s Growth and Transformation Plan II and the need for government financing will increase. Public enterprises such as the Ethiopian Electric Power Company have significant amounts of government guaranteed debt, and if these companies fail to make returns on investment this could add pressure to the government debt burden.
In the section that deals with macroeconomic forecasts, the report states that Ethiopia’s Real GDP growth in 2017 is 6.2% with the figure expected to increase to 7% in 2018. The nominal GDP in USD has been earmarked at 68.5% billion for the year 2017. However, the figure is expected to rise to 68.9 billion USD in 2018. With the recent devaluation of currency expected to lead to surging inflation levels, the 6.5% inflation rate in 2017 is expected to rise to 7.5% in the coming year.
