Ethiopia's sprawling capital Addis Ababa
Ethiopia’s efforts to open its economy were bolstered in mid-December when the International Monetary Fund agreed a new lending programme which, coupled with the launch of the Addis Ababa stock market in 2020, will encourage greater foreign investor participation in, and the diversification of, one of Africa’s fastest growing economies.
The IMF is expected to agree this week a $2.9 billion financing package for Ethiopia, a country whose investment-led model has resulted in rapid economic growth but substantial macroeconomic imbalances.
Ethiopia has relied on domestic resources rather than foreign investment to fuel its rapid growth – foreign banks and portfolio investors are still forbidden – but the IMF agreement marks an ideological shift in thinking which may accelerate plans to liberalize its economy.
“It is a big deal because Ethiopia swore that they wouldn’t take an IMF programme, and it also shows the IMF is evolving on exchange rate policy,” says Bryan Carter, head of emerging market fixed income at BNP Paribas Asset Management. “[The IMF’s] number one reason for being is to give short-term balance of payments loans for things like FX flexibility.”
Real GDP is projected to be 7.4% in 2019 according to the IMF, while Ethiopia’s external current account deficit stood at 6.4% of GDP. Gross debt – at 61.5% – is not the highest in Africa but the IMF’s debt sustainability analysis showed Ethiopia remained at high risk of debt distress due to its small export base.
“The programmes are clearly to help the FX shortage and to help on domestic revenue mobilization,” says Guy Tossou, portfolio manager at BNP Paribas Asset Management. “It is positive and a catalyst for Ethiopia.”
Prime minister Abiy Ahmed has implemented an ambitious economic programme, which includes the part-privatization of several state-owned assets, in an effort to transform the country’s political and economic landscape. Ahmed won the 2019 Nobel peace prize for his efforts to resolve the border conflict with neighbouring Eritrea.
“The need for IMF support might also lead Ethiopia to open up the financial sector – the country needs financing,” says Charlie Robertson, Renaissance Capital’s global chief economist.
“But I’d not see the IMF as being the cause of this – rather it is the ambitious investment goals of the government which have led to an IMF deal and might encourage them to open up the financial sector.”
The government is committed to economic reforms, with the finance ministry confirming Ethio Telecom as the first of four planned privatizations, the others being Ethiopian Airlines, Ethiopian Shipping & Logistics Services Enterprise and Ethiopian Electric Power.
Privatization is seen by many as key to bringing in foreign investment, but progress has been slow. The government had set itself a deadline of 2019 for a part-privatization of Ethio Telecom, but at the time of writing this had not been met. Capital controls and an artificially strong currency have also deterred investors.
But with an IMF programme in place, analysts now expect a managed devaluation of the birr, removing one of the major barriers for entry for investors. One of the five pillars of the IMF’s programme is to address Ethiopia’s foreign exchange shortage and transition to a more flexible exchange rate regime.
Charlie Robertson, Renaissance Capital
“My guess is that the IMF treads softly in Ethiopia at first, and earns their trust,” says Robertson. “We do think the fund will encourage Ethiopia to allow a more realistic exchange rate for the currency, but we do not expect a free float.”
The currency is overvalued by 25%, says Renaissance Capital. “The parallel market is around 40/$ today, which happens to be in line with our longer-dated model estimate of the right rate for Ethiopia”, Robertson adds.
BNP Paribas AM’s Carter believes it is significant that the IMF programme and currency devaluation will happen simultaneously.
“Having looked at a lot of IMF programmes it is a big deal that they are offering the short-term bridge to facilitate the flexible exchange rate,” he says. “They have learned a lesson from the missteps in Nigeria and Egypt. Here, the money and the devaluation will happen at the same time, which is the right way to do it.”
Ethiopia is also committed to developing its local capital market and plans to open a stock exchange in 2020.
The country aims to develop a secondary market in government bonds which should create the basis for a broader securities exchange, according to Absa, while the formulation of its stock market should help accelerate the privatization process.
Financial market transparency is also set to improve, with Ethiopia planning a full roll-out for public companies of international financial reporting standards, says Absa.