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Home›Business›Expanding consumer base lures investors to Ethiopia

Expanding consumer base lures investors to Ethiopia

By alternativeafrica
December 12, 2017
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The World Bank again declared that the Ethiopian economy would be Africa’s most expansive in 2017; it is forecast to expand by 8.3% in 2017, ahead of rival Tanzania’s projected 7.2% and runner up Côte d’Ivoire’s 6.8%.

Ethiopia has overtaken Kenya as Eastern Africa’s regional economic giant in recent years, but its politics remains fragile and strained by ethnic tensions. Investors, however, are bullish about the country’s prospects over the next decade and seem willing to bet that its economic take-off will not long be delayed for much longer.

Ethiopia has attracted significant levels of Western and Chinese investors, with the secret of its success being government-led public spending on infrastructure and strong local demand for goods and services.

As a result of these low costs and rising consumer demand, many diverse types of international businesses have entered the Ethiopian market or set up production facilities there, including Unilever, Tesco and drinks giant Diageo. Testimonials from their senior staff feature prominently on the Ethiopian government websites, such as the Ethiopian Embassy in London.

Among others it quotes Diageo’s CEO Ivan Menezes: “Africa is hugely important for Diageo and Ethiopia is going to be one of the cornerstone markets for us… It’s got good demographics, very good economic growth and we’ve got good support from the government. I see a market the size of Ethiopia having significant opportunities for all players to grow.”

Seeking to look beyond pro-government sources, however, African Banker spoke with Tai Wondwosen, Head of Standard Bank’s representative office in Ethiopia, about the opportunities that had led Africa’s largest bank by assets to set up shop in Addis Ababa.

The primary lure, she told us, was the bank’s need to act as an entry point for clients seeking to invest in Ethiopia, although the company was also seeking to consolidate its East African presence.

With the Ethiopian government actively planning to attract more outside investment, her bank was already working on positioning itself to support Addis Ababa by using its client base to facilitate more financing and attract interested clients to the country.

She told African Banker: “Standard Bank has key clients from South Africa, East Africa and international firms who are currently operating, or seeking to establish themselves, in Ethiopia, and who require our services to unlock opportunities within that market.

“We see many opportunities in the infrastructure space as well as in power generation and transmission.  We also anticipate many opportunities in all consumer-related industries, as Ethiopia’s remarkable growth has been underpinned by high public investment and a growing consumer base.”.

Industry and manufacturing, she  added, “are a top priority for Ethiopia, are likely to start making a more significant contribution in the country’s GDP going forward which will largely be facilitated by the increase in electricity supply.” The growing consumer base that caught the eye of Standard Bank is part of the demographic boom which also attracted Diageo’s CEO Ivan Menezes.

Growing consumer base

Ethiopia is Sub-Saharan Africa’s second most populous nation, and private consumption per head is expected by the Economist Intelligence Unit (EIU) to rise by more than one-fifth over the 2017–21 period (although it warns that this should be seen in context: in 2021, Ethiopia’s private consumption per head is still expected to only be around $585).

Moreover, consumers remain relatively underserved according to the EIU, with substantial scope for the right investors who get in early enough. There are already signs this is happening, as the example of US-based Pizza Hut shows. This May, the company announced that it would open three outlets in Ethiopia in 2017, becoming the first major international restaurant chain to invest in the country.

Geography is also lending a hand to the Ethiopian boom, as the country is likely to be a key destination for Chinese investment under its new overseas investment initiatives.

According to Jane Morley, Regional Manager of the EIU’s Middle East and Africa team: “New opportunities are also opening up because of Ethiopia’s role in China’s Belt and Road Initiative. Ethiopia is likely to be one of key landing points for the maritime silk road, and will benefit from the Silk Road Fund (to which China has pledged some $124bn), meaning further investments in infrastructure.

“China is also likely to invest heavily in areas such as clothing and footwear – not least because of the cost advantage. McKinsey Global Institute recently put Ethiopia’s unit labour costs for the manufacture of polo shirts, for example, at $0.14 per unit, less than half the level in China or Vietnam.”

Unresolved ethnic tensions

There are, however, potential negatives to the story of Ethiopia as the next emerging market success story. First, the government is likely to retain its statist outlook, and investment in key sectors is thus likely to remain restricted. Second, there are tensions between ethnic groups over the exact boundaries of regional state areas; the Ethiopian federal model is based on ethnicity, which makes state governments sensitive about boundary changes and prone to react aggressively to what they perceive as incursions from other ethnic groups.

Finally, similar tensions reach into the heart of the federal government as well, with the perceived economic and political marginalisation of the Oromo and Amhara (respectively the largest and second largest ethnic groups in the country) the source of the protests which led to Addis Ababa imposing a state of emergency across much of the country until August.

Further violence is therefore possible, and if sustained, could raise the possibility of shareholder pressure or even disinvestment campaigns by human rights activists.

Too big a market to ignore

That said, according to a spokeswoman for the UK’s Department for International Trade, the most recent figures available for 2017 show that Ethiopia imported £186m in goods and services from the UK alone, with companies such as Unilever, Diageo, Pittards, Hela, Bagir, Kefi Minerals, and Altus Strategies already well established in the market there.

These companies have ridden out the violent protests of recent years and established themselves in Ethiopia despite occasional mutterings from the ruling left-wing Ethiopian People’s Revolutionary Democratic Front. Unstable as its politics may sometimes become, Ethiopia is clearly becoming too big for major companies to ignore in their calculations any longer.

Its economy could be a major driver of economic development for the increasingly integrated East African region, just as those of giants like China have been in Asia over the past three decades. Investors should therefore keep a keen eye open for the new opportunities ahead in Eastern Africa’s newest economic giant.

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