Ethiopia’s decision to allow local and international investors to buy stakes in some of its largest state-owned enterprises, or SOEs, marks an important U-turn given the state’s distaste for capitalism.
Minority stakes in Ethiopian Airlines, Ethio telecom, Ethiopian Electric Power, and Ethiopian Shipping and Logistics Services Enterprise will be put up for sale; in addition, the government will seek the full or partial sale of railway projects, hotels, and sugar and other manufacturing industries.
Ethiopia’s potential will attract investors, says Jean-Pierre Chauffour, lead economist for Ethiopia at the World Bank.
Economic growth in Ethiopia averaged 10.9% for the 10 years between 2004 and 2015 before slowing to an estimated average of 9.2% between 2016 and 2018 – high compared to average global growth of less than 4%.
“With the proper regulatory environment, international investors will be keen to invest in Ethiopia and there will be a lot of appetite for stakes in Ethiopia’s SOEs,” says Chauffour.
The government will have at least two years to iron out the terms and conditions around the privatization drive; it recently announced the establishment of a Privatization Advisory Council of prominent figures from opposition political parties, media organizations, businesses and academia.
This is “to ensure the process is managed with utmost transparency and accountability,” says Tewolde Gebremariam, CEO of Ethiopian Airlines – which could be one of the more interesting candidates for privatization. Not only is Ethiopian Airlines Africa’s biggest airline with connections all over the continent, but Addis Ababa aspires to become Africa’s regional hub, the equivalent of Dubai or Abu Dhabi or Doha in the Middle East.
“Over the years, Ethiopian Airlines has grown tremendously, transforming itself into an aviation group consisting of different business units,” says Tewolde, adding that some of these business divisions are already of interest to outside investors. For example, Ethiopian Skylight Hotel has a management contract with a Chinese company, while the carrier’s logistics arm has a joint venture with DHL.
“Different SOEs are at different levels of development... [and] the privatization process should take this into consideration,” says Tewolde.
The bad news is that coveted stakes in the banking and financial services sector will remain off-limits for now.
Charles Robertson, global chief economist at Renaissance Capital, says: “Ethiopia has an ideological aversion to foreign involvement in the banking sector, but the government may be forced to liberalize the sector, given the current funding gap.”
He adds: “Selling stakes in some of Ethiopia’s largest SOEs is a quick way for the country to raise capital, but the government probably won’t get all the cash they hope for.”
Standard Bank, Ecobank and Kenya Commercial Bank have all opened representative offices in the country, poised to take advantage if the banking sector does eventually open up.
The privatization drive is one of several reforms that prime minister Abiy Ahmed has implemented in an effort to transform the country’s political and economic landscape – tackling high unemployment and a shortage of foreign exchange. Since taking over as prime minister in April, Ahmed has engaged opposition leaders, freed a number of journalists and political prisoners and lifted the state of emergency – which had been put in place following the departure of the previous prime minister, Hailemariam Desalegn, in February. One step towards regional stability in the horn of Africa came in July this year, when Ethiopia enforced a peace deal with Eritrea that was originally brokered in 2000.
“The driving force behind privatization is not only the urgent need to build supplies of foreign exchange, but also to improve the efficiency of state-owned enterprises and reduce corruption,” says Christopher McKee, CEO of PRS Group, a country risk rating and forecasting firm based in New York.
With foreign exchange reserves of about $3.2 billion, Ethiopia can cover just 1.2 months of imports. In July this year, Ahmed mentioned in a speech to parliament that Ethiopia needed approximately $7.5 billion to complete ongoing infrastructure projects.
“For the last five years, the currency has been overvalued by as much as 25%, meaning that investors will expect to lose a quarter of their investment,” McKee says. “If investors price this in, the government will not raise as much money as expected. Moreover, the fact that they will only be able to buy minority stakes in some of the larger, more profitable SOEs means that investors will have only a minority voice in the way in which the companies are run. Again, this might impact valuation.”
Ethiopia’s central bank devalued the birr by 15% in October 2017 – for the first time in seven years – in an attempt to boost export revenue, which is currently a third of the country’s target of $10 billion a year. According to the Central Bank of Ethiopia’s website, the birr was trading at 27.36 against the dollar in early August. In the parallel market, rates are about 31 birr to the dollar.
“Ahmed’s actions in other areas, such as foreign relations, suggest that he is sincere in his expressed desire for economic reform,” says McKee. “However, he will face obstacles. Chief among them will be resistance of vested interests and questions as to whether the Ethiopian state possesses the administrative capacity to pull this off successfully.”