Country Reports - Ethiopia

28 Aug 2014 IHS Economics and Country Risk

Our Take

Key Points
New prime minister continues same old policies.
Economy continues to grow impressively, but problems abound.
State maintains control of key economic sectors.
Government prioritises infrastructure development.

Analysis
Six-Factor Country Risk - Ethiopia
Risk

Score

Description

Political

4.00

VERY HIGH

Economic

3.75

HIGH

Legal

4.00

VERY HIGH

Tax

3.50

HIGH

Operational

3.50

HIGH

Security

4.25

VERY HIGH

Overall

3.84

HIGH

12-Month Rating Trend

Negative Trend

Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of enhanced Country Analysis & Forecast suite of services.

Sovereign Risk Ratings - Ethiopia

Medium-Term
Sovereign Risk Outlook

55(B+)

High Payments Risk

Stable

Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of enhanced Economic and Sovereign Risk services.

New prime minister continues same old policies. Having been promoted to the country's highest political office following the sudden death in office of his
predecessor, Meles Zenawi, in August 2012, Prime Minister Hailemariam Desalegn has continued to follow the path set out by Meles as he serves out the
latter's remaining term until 2015. However, despite the policy continuity, Hailemariam has adopted a more collegial style of leadership, compared to the more
"presidential" style of his predecessor, while promoting several of his allies and sidelining individuals associated with Meles. The new prime minister has also
launched an anti-corruption drive, targeting a number of senior government officials and businesses figures, which may be expanded once the 2015 election is
out of the way.
Economy continues to grow impressively, but problems abound. Ethiopia has been among Africa's fastest-growing economies in recent years and
certainly one of the best-performing non-oil economies in the region. Although double-digit economic growth was sustained over 2004-10, the current
macroeconomic policy of large-scale public spending is projected to slow growth to below the governments estimated 10% in the short to medium term.. A
strong policy focus on boosting economic growth has brought problems, including periods of spiralling inflation and a large current-account deficit.
State maintains control of key economic sectors. The government's continued refusal to liberalise the key sectors of telecoms and banking, as evidenced in
the states choice to possibly delay World Trade Organization accession as a precautionary measure, is a major impediment to economic growth. The absence
of competition and innovation has resulted in Ethiopia having one of the lowest mobile phone/internet penetration rates in the world, with the state-owned Ethio
Telecom remaining the only operator. IHS expects the government to maintain its effective control of key sectors, such as banking and telecoms, for the
foreseeable future.

2014IHS.

2014 IHS.. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be
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Government prioritises infrastructure development. As part of the so-called Growth and Transformation Plan (GDP), Ethiopia is in the process of a huge
infrastructure development campaign, which the authorities believe will help to transform the economy. This sees the development and upgrading of the
country's power, road, air, rail, and telecommunications facilities, with a brand new railway network, including a new light railway system in Addis Ababa, and
the construction of a number of hydroelectric power stations that will allow the country to export power to neighbouring countries among the projects currently
being implemented.

Forecast Summary
IHS is forecasting economic growth in the high single digits in coming years. The government has outlined an average real GDP growth of 11.0% to
14.9% under two scenarios in its current five-year plan that runs to June 2015, underlining that the focus of fiscal and monetary policy will remain on supporting
growth rather than suppressing inflation. Under the regime of former prime minister Meles Zenawi, who died in August 2012, the government placed a strong
emphasis on infrastructure projects, most notably hydropower dams, as the key features for economic growth, with the 5,250-megawatt Grand Ethiopian
Renaissance dam as the most grandiose scheme at an estimated cost in excess of USD5 billion. While these projects are likely to remain a stimulus to the
economy, IHS is forecasting slower economic growth in the coming years on the back of a less-conducive external environment and the need for a more
balanced policy mix to address the recurring problems of high inflation and the widening current-account deficit.
Inflation is likely to remain in the single digits in the short term. After a difficult three-year period during which the rate of inflation accelerated
rapidlypeaking at 64.2% in July 2008the rate decelerated considerably throughout 2008 and 2009 before bottoming out and reentering double-digit rates in
October 2010 and accelerating rapidly in 2011, reaching a peak of 40.6% in August, due to drought conditions impairing food supply and the central bank
financing of the budget. With domestic and global food prices rising and fiscal and monetary policy in Ethiopia likely still expansive, we see a risk that consumer
price inflation will return to double digits over the medium term after having dipped to an average of 8.1% in 2013, with concomitant pressures on disposable
income and private consumption.
The continued discrepancy between strong domestic demand and weaker external demand is likely to keep Ethiopia's external position under
pressure. Having been buffeted by a series of shocks to the balance of payments, including declining reserves, Ethiopia's economy is likely to remain under
pressure due to the continued uncertainty in the global economy. This has led to below-projected export receipts and remittances as well as slow inward direct
investment, pushing the current-account deficit to USD3.6 billion, or 7.6% of GDP in 2013, according to IHS estimates. The rapid economic growth of the past
seven years, fueled by expansive fiscal and monetary policy, has led to a massive increase in imports, which has widened the trade deficit and weighed on the
birr. While increased energy, horticultural, and mineral exports should boost foreign-exchange earnings, we expect the trade and current-account deficits to
remain wide, as domestic demand growth continues to outpace that of Ethiopia's main export markets.

Changes Since Last Forecast

August interim forecast versus July interim forecast
GDP

Up

We upgraded our estimate for real GDP growth in 2013 from 7.7% to 9.4%, largely on the back of expectations for a better
performance in gross capital formation growth and net exports.

Trade

Down

deficit
Current

We adjusted our estimates for both exports and imports in 2013. With the latter adjustment being more significant, we reduced
our estimates for the trade deficit from USD8.6 billion to USD8.4 billion, or from 14.6% to 14.7% of GDP.

DOWN

Account

Partly as a consequence of the above and a higher estimate for incoming transfers, we reduced our estimates for the current
account deficit from USD3.8 billion to USD3.6 billion, or from 8.0% to 7.6% of GDP.

deficit
Inflation

DOWN

The momentum of non-food prices has continued to slow, prompting IHS to adjust our consumer price index forecasts.

Country Risk - Overall Statement

Overall
Ethiopia remains a promising destination for foreign investment, despite challenges associated with it being an underdeveloped country. Since coming to
power in 1991, the Ethiopian People's Revolutionary Democratic Front (EPRDF) administration has taken a number of positive steps to address some of the
main concerns cited by investors, such as reforming the tax and legal environments, protecting investments from forceful takeover, easing the repatriation of
dividends, and signing deals to avoid double taxation and improve the business climate. However, there is still a lack of policy consistency in both areas amid
allegations of routine political interference in the workings of the judiciary. Among the areas prohibited from foreign direct investment (FDI) are media,
transport, and retail, as well as key sectors such as banking, telecoms, and power generation. The private sector also remains excluded from the latter two,
due to the government's preference for state-led development policies, which risk limiting Ethiopia's growth potential, while restricting competition and
innovation in these sectors. Notwithstanding such challenges, the authorities continue to put a great deal of resources into upgrading the country's transport
and communications infrastructure to facilitate more rapid economic growth, while boosting its power output in response to the growing demand and in
anticipation of future domestic and regional needs. Elsewhere, Ethiopia's security environment continues to be an area of concern, with the government
currently fighting off low-level insurgency threats from a number of nationalist and secessionist movements at home, as well as from radical Islamists in

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neighbouring Somalia, due to its military involvement in Somalia. Its long-running border conflict with Eritrea remains as a threat to Ethiopias stability while
government restriction of political freedom have limited the political space in which opposition parties, civil-society groups, and the independent media can
operate. The government also faces growing accusations of religious intolerance, with the country's Muslim population charging that the authorities are trying to
interfere in the way they practise their faith.

Economic: Country Risk Statement

Ethiopia remains one of the poorest countries in the world and one of the largest aid recipients. The 17 years (197491) that Ethiopia spent under the rule of
the Communist-oriented military junta, the Dergue, were particularly ruinous, with the country adopting a disastrous collective system of farming blamed for
undermining its agriculture-based economy, as well as for fueling a perennial food crisis. Average annual GDP growth during the 1980s was just 1.1%, with the
country racked by drought and a long-running civil war. Since ousting the dreaded military regime in 1991, the ruling Ethiopian People's Revolutionary
Democratic Front (EPRDF) government has pursued a macroeconomic strategy focused on agricultural development as the catalyst for the economy, with the
government being at the heart of the policy. Although the annual GDP growth rate has picked up significantly, averaging 10.9% between 2004 and 2013,
poverty is still widespread. While Ethiopia has made encouraging progress in weaning itself from its over-reliance on its main commodity, coffee, the country's
economic prospects remain vulnerable to external factors such as commodity price fluctuations and adverse weather conditions. To help lift economic activity,
the government has undertaken heavy investment in the hydropower sector, aimed at increasing electrification and raising foreign-exchange earnings by
exporting power through transmission lines to neighboring countries. While this should underpin economic activity in the years ahead, the continuance of
robust economic growth in the medium term will be dependent on the government moving towards a further liberalization of the economy, which will be
challenging for the EPRDFs state-centric ideology. Nonetheless, with the current policy mixwhich is heavily focused on supporting economic growth through
public expenditurehaving resulted in increasing volatility in the inflation rate and Ethiopias external accounts, the government may be forced to reconsider
other options to achieve its aims. It is thus encouraging that the government has opened up to some more innovative options, such as joining the World Trade
Organization and issuing an international sovereign bond to finance infrastructure investment.

Short-Term Outlook

Key Points
IHS is forecasting economic growth in the high single digits in coming years.
Inflation is likely to remain in the single digits in the short term.
The continued discrepancy between strong domestic demand and weaker external demand is likely to keep Ethiopia's external position under pressure.

Analysis
IHS is forecasting economic growth in the high single digits in coming years. The government has outlined an average real GDP growth of 11.0% to
14.9% under two scenarios in its current five-year plan that runs to June 2015, underlining that the focus of fiscal and monetary policy will remain on supporting
growth rather than suppressing inflation. Under the regime of former prime minister Meles Zenawi, who died in August 2012, the government placed a strong
emphasis on infrastructure projects, most notably hydropower dams, as the key features for economic growth, with the 5,250-megawatt Grand Ethiopian
Renaissance dam as the most grandiose scheme at an estimated cost in excess of USD5 billion. While these projects are likely to remain a stimulus to the
economy, IHS is forecasting slower economic growth in the coming years on the back of a less-conducive external environment and the need for a more
balanced policy mix to address the recurring problems of high inflation and the widening current-account deficit.
Inflation is likely to remain in the single digits in the short term. After a difficult three-year period during which the rate of inflation accelerated
rapidlypeaking at 64.2% in July 2008the rate decelerated considerably throughout 2008 and 2009 before bottoming out and reentering double-digit rates in
October 2010 and accelerating rapidly in 2011, reaching a peak of 40.6% in August, due to drought conditions impairing food supply and the central bank
financing of the budget. With domestic and global food prices rising and fiscal and monetary policy in Ethiopia likely still expansive, we see a risk that consumer
price inflation will return to double digits over the medium term after having dipped to an average of 8.1% in 2013, with concomitant pressures on disposable
income and private consumption.
The continued discrepancy between strong domestic demand and weaker external demand is likely to keep Ethiopia's external position under
pressure. Having been buffeted by a series of shocks to the balance of payments, including declining reserves, Ethiopia's economy is likely to remain under
pressure due to the continued uncertainty in the global economy. This has led to below-projected export receipts and remittances as well as slow inward direct
investment, pushing the current-account deficit to USD3.6 billion, or 7.6% of GDP in 2013, according to IHS estimates. The rapid economic growth of the past
seven years, fueled by expansive fiscal and monetary policy, has led to a massive increase in imports, which has widened the trade deficit and weighed on the
birr. While increased energy, horticultural, and mineral exports should boost foreign-exchange earnings, we expect the trade and current-account deficits to
remain wide, as domestic demand growth continues to outpace that of Ethiopia's main export markets.

Assumptions
Despite criticism over the narrowing of political space and concerns about policy direction following the demise of Prime Minister Meles Zenawi in
August 2012, the ruling Ethiopian Peoples' Revolutionary Democratic Front government will remain in power beyond the next elections, scheduled for
2015.

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The current "no-peace, no-war" border stalemate with neighboring Eritrea will continue, or be settled peacefully, without the two countries deciding to
settle the issue militarily.
The government will continue to invest heavily in physical infrastructure as part of its development strategy, despite the policy being questioned by the
International Monetary Fund, which has warned the spending drive could undermine price stability and crowd out private-sector investment.
International economic assistance, upon which Ethiopia still depends heavily, is likely to continue to flow steadily despite the occasional disagreement
with bilateral and multilateral partners due to the government's refusal to accept certain policy prescriptions and its reluctance to introduce genuine
political reforms.
Economic growthaided by domestic consumption and a continued diversification of exportsis likely to slow somewhat in the next few years, but will
remain among the highest in sub-Saharan Africa.

Changes Since Last Forecast

August interim forecast versus July interim forecast
GDP

Up

We upgraded our estimate for real GDP growth in 2013 from 7.7% to 9.4%, largely on the back of expectations for a better
performance in gross capital formation growth and net exports.

Trade

Down

deficit
Current

We adjusted our estimates for both exports and imports in 2013. With the latter adjustment being more significant, we reduced
our estimates for the trade deficit from USD8.6 billion to USD8.4 billion, or from 14.6% to 14.7% of GDP.

DOWN

Account

Partly as a consequence of the above and a higher estimate for incoming transfers, we reduced our estimates for the current
account deficit from USD3.8 billion to USD3.6 billion, or from 8.0% to 7.6% of GDP.

deficit
Inflation

DOWN

The momentum of non-food prices has continued to slow, prompting IHS to adjust our consumer price index forecasts.

Alternative Scenarios
Ethiopia's agrarian-based economy is highly vulnerable to adverse weather conditions, such as the droughts that have decimated agricultural production
in recent years. Eritrea could escalate the still-unsettled border dispute into an all-out war, if the government feels there is no other option but to force
the issue militarily, as Ethiopia continues to reject an international border arbitration ruling. With Ethiopian troops having reentered Somalia in November
2011, Addis Ababa could also find itself more deeply involved in the Somalian conflict on an undetermined basis were security conditions to deteriorate
again.
The government's failure to plan adequately for Ethiopia's growing energy demand in the short term resulted in the country suffering prolonged power
blackouts throughout 200809. The completion of three hydropower plants in 2009 and 2010 has at least temporarily curbed the problem by more than
doubling the country's power-generating capacity. Nonetheless, the government must keep investing in the power sector to meet rising demand and
support the expansion of the manufacturing sector.
The development of Ethiopias manufacturing, part of the governments Growth and Transformation Plan, takes off to a higher degree than anticipated,
giving economic growth a further boost.
Ethiopia's development partners could tighten their purse strings due to the sustained narrowing of political space. Ethiopia's continued refusal to settle
its border dispute with Eritrea, per the UN resolution, could lead the country into another round of costly fighting with its neighbor or see some of its
development partners withhold their assistance.

Data

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Key Macro-Economic Indicators

2010

2011

2012

2013

2014

2015

2016

2017

2018

Real GDP (% change)

12.6

11.2

8.5

9.4

8.6

8.4

8.3

7.7

7.5

Nominal GDP (US$ bil.)

26.6

30.3

41.6

47.7

53.2

57.0

62.3

67.9

72.3

Nominal GDP Per Capita (US$)

297

330

442

494

537

562

600

638

664

Consumer Price Index (% change)

8.1

33.2

22.8

8.1

7.4

9.3

10.0

9.1

9.0

-1.5

-5.4

-4.1

-3.7

-3.5

-3.1

-2.8

-2.6

-2.4

89.39

91.73

94.10

96.51

98.94

101.41

103.90

106.42

108.96

-1.6

-2.6

-7.2

-7.6

-7.0

-6.4

-0.2

0.1

0.1

BOP Exports of Goods US$bn

2.4

3.0

3.2

3.1

3.6

4.1

4.6

5.3

5.9

BOP Imports of Goods US$bn

7.4

8.3

10.5

11.5

12.5

13.5

14.5

15.5

16.5

16.55

17.21

18.18

19.06

21.88

24.61

27.21

29.64

31.79

Fiscal Balance (% of GDP)

Population (mil.)
Current Account Balance (% of GDP)

Exchange Rate (LCU/US$, end of period)

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Medium- and Long-Term Outlook

Key Points
Economic prospects remain strong, albeit with serious challenges.
Ethiopia's medium- and long-term outlooks remain favorable.

Analysis
Economic prospects remain strong, albeit with serious challenges. Ethiopia's economy has, over the past decade, enjoyed its best spell in modern
history. Its medium- and long-term growth prospects remain strong despite the recent slowdown, during which annual GDP growth slowed from double-digit
rates over 200311 to 8.5% in 2012 and an estimated 9.4% outturn in 2013. On the flip side, the government has taken some positive steps in its effort to
diversify the economy and thus become less reliant on its leading export, coffee, and foreign aid as its main sources of foreign exchange. The Growth and
Transformation Plan for fiscal years 2010/112014/15, presented in August 2010, is largely focused on developing the agricultural sector. However, the most
daring policy decision on the economic front has been to invest billions of dollars in upgrading Ethiopia's physical infrastructure, including the building and
upgrading of thousands of kilometers of roads and the construction of several large hydropower dams. The government is hoping that this will sustain the high
real GDP growth rates, and has so far taken only limited measures to support the expansion of private-sector credit by opening up the economy for increased
competition.
Ethiopia's medium- and long-term outlooks remain favorable. IHS is forecasting annual real GDP growth to average around 8% over the medium term.
Large private-sector investment, especially in the agro-industry sector, combined with public infrastructure development, is expected to drive real GDP growth
in the coming years. Nevertheless, risk to economic growth outlook remains high. Ethiopia's growth prospects over the medium to long term remain dependent
on a large array of factors. Continued electricity shortages, reduced foreign aid, and/or a sharp drop in coffee prices would place our projections at risk. The
agricultural sector, the biggest employer in the economy, is also vulnerable to exogenous factors such as droughts pushing up food prices and, by extension,
inflation.
Growth
GDP

Key Points
In the current five-year economic plan, the Growth and Transformation Plan, the government has outlined two scenarios for economic growth.
Large hydropower projects, such as the Gilgel Gibe III and Grand Ethiopian Renaissance dams, will underpin gross fixed capital formation in the
upcoming years.
The authorities' continued inability to contain inflation will probably drag on economic growth.

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Analysis
In the current five-year economic plan, the Growth and Transformation Plan, the government has outlined two scenarios for economic growth: a
baseline scenario with GDP growth averaging 11% and a high scenario with growth averaging 14% over the period. As in the previous five-year plan,
agriculture is the main sectoral focus, although other sectors, such as manufacturing, construction, and services, are expected to become increasingly
significant if the growth rate in the past decade is anything to go by. Despite the rhetoric, Ethiopia's economic fortunes in the coming years will to a large extent
remain dependent on remittances, foreign aid, and weather patterns in spite of the government's progress in boosting its external-sector performance and its
quest for economic diversification. Commodity prices will remain a risk factor, because of volatility in the price of key export items, such as coffee, and upward
pressures on the import side, mainly from oil. Our more conservative forecasts see Ethiopia's GDP growth slowing slightly to 8.09.0% in 201415, following
an estimated 9.4% outturn in 2013, although the government still insists that it is on course to record continued double-digit growth. Impetus for growth is
expected to come from strong domestic demand driven by robust activity in the agricultural, services, trade, tourism, and construction sectors, despite the
expected slowdown in the growth of remittances and overseas development assistance.
Large hydropower projects, such as the Gilgel Gibe III and Grand Ethiopian Renaissance dams, will underpin gross fixed capital formation in the
upcoming years. When completed, the projects will undoubtedly boost the economy by improving power supply and stabilizing the external accounts through
exports to neighboring Djibouti, Kenya, and Sudan. In addition, foreign manufacturers are setting up shop in Ethiopia, which should boost foreign-exchange
earnings over the medium term. Nevertheless, the requirement that private banks allocate a substantial share of their lending funds to government bonds to
support the national development plan will reduce the available credit and affect capital investment in the private sector.
The authorities' inability to contain inflation will probably drag on economic growth. Capital controls imposed in January 2011 proved to be largely
inefficient with price growth accelerating to 40.6% in August 2011, before moderating over 2012 and 2013 to 8.1% on average in the latter year. We believe
this is a cyclical low with higher inflation likely to weigh on private consumption in the near to medium term. The sharp swings in consumer price inflation will
likely keep the risk premium demanded on investments in Ethiopia at an elevated level. Ethiopia received sovereign credit ratings from the three main rating
agencies in May 2014, which will aid its aim of issuing a Eurobond in order to finance infrastructure investment. We expect Ethiopia to issue a debut
USD500-million eurobond in 2015.

Data

Economic Growth Indicators

2011
Real GDP (% change)

2012

2013

2014

2015

2016

2017

2018

11.2

8.5

9.4

8.6

8.4

8.3

7.7

7.5

Real Consumer Spending (% change)

3.4

8.2

8.2

8.7

8.2

8.1

7.7

7.5

Real Government Consumption (% change)

3.9

7.3

7.8

8.5

8.0

8.0

7.7

7.5

-0.9

16.6

12.1

10.4

9.9

9.1

7.7

7.5

Real Exports of Goods and Services (% change)

2.5

-3.0

9.9

7.6

9.6

9.2

7.7

7.5

Real Imports of Goods and Services (% change)

-0.9

22.2

4.3

8.5

8.4

8.4

7.7

7.5

Real Fixed Capital Formation (% change)

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Nominal GDP (US$ bil.)

30.3

41.6

47.7

53.2

57.0

62.3

67.9

72.3

Nominal GDP Per Capita (US$)

330

442

494

537

562

600

638

664

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Inflation

Key Points
IHS expects inflation to rise moderately in 2015.
There is a substantial risk of further devaluation of the birr, reinforcing the inflationary cycle.

Analysis
IHS expects inflation to rise moderately in 2015.
Consumer price inflation in Ethiopia fell from 8.5% year-on-year (y/y) in June to 6.9% in July, according to the Central Statistical Agency. On a month-on-month
(m/m) basis, the growth in the consumer price index (CPI) accelerated from 0.5% to 0.6%. Food prices, with a 53.0% weighting in the new CPI, increased from
0.2% in June to 1.8%, but this was largely seasonal, with the y/y rate easing from 6.2% to 5.8%. Non-food prices fell by 0.8% m/m, following a 0.7% increase in
June, with the y/y rate falling back from 11.5% in May and 11.0% in June to 8.2%, the lowest level recorded in the new CPI based in December 2011. The July
CPI reading was slightly lower than our forecast (7.2%) and constitutes a continued mitigation to the upside risks to inflation we identified earlier this year. This
is due to a stronger-than-expected moderation in non-food prices countering the expected increase in food prices, as evidenced in July. We expect inflation to
remain in the high single digits in the second half of the year before accelerating next year, as demand-side pressures rise. We now forecast inflation to
average 7.4% in 2014, down from 8.1% in 2013, before rising to 9.3% in 2015. Among the upside risks to inflation are the renewed acceleration in domestic
credit expansion in the fourth quarter of 2013, the latest available data in late August 2014, lifting credit growth to 30.6% in December, and the potential for
adverse weather affecting food supply (the UN declared a fourth year of drought in neighboring Djibouti on 12 June).
There is a substantial risk of further devaluation of the birr, reinforcing the inflationary cycle. With high inflation having eroded the improvement in price
competitiveness from the Ethiopian birrs 20% devaluation in September 2010, the prospect of new devaluation, which would only serve to prolong the high
inflation rate, remains tangible. In addition, we see a risk the government will again revert to central bank financing, as it did in 2011, as its priority remains to
boost economic growth through state-led investment projects. As a consequence, with the economic recovery from the policy-induced 200809 slowdown still
looking vulnerable, we believe the government will opt to tolerate a higher inflation rate in the short term.

Data

Inflation Indicators
2011

2014IHS.

2012

2013

2014

2015

2016

2017

2018

page 7 of 15

Consumer Price Index (% change)

33.2

22.8

8.1

7.4

9.3

10.0

9.1

9.0

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Exchange Rates

Key Points
Foreign-exchange policy remains unchanged despite a disagreement in government.
A nominal effective exchange rate appreciation raises need for new devaluation.

Analysis
Foreign-exchange policy remains unchanged despite a disagreement in government. A disagreement over monetary policy has allegedly emerged within
the core leadership of the ruling Ethiopian People's Revolutionary Democratic Front, prompted by reports of a shortage of foreign exchange in the economy in
late 2012. Central Bank Governor Teklewold Atnafu refuted these reports, arguing they are based on unfounded rumors in the business sector, which have
prompted panic requests for foreign currency. Opponents of this view, which include influential Industry Minister Mekonnen Manyazewal, according to media
reports, claim there is an expanding gap in the supply and demand of foreign exchange in the economy, which threatens to stunt economic development by
impeding imports for investment projects. Foreign-exchange shortages are common in economies operating under a fixed or managed exchange-rate regime,
especially if they are also running a current-account deficit, as is the case with Ethiopia. While timely current-account data are not available for Ethiopia, the
sharp widening of the trade deficit in 2012 to USD7.3 billion, or 13.5% of GDP, was compounded by weaker coffee prices in 2013, which depressed export
revenue while import growth also slowed. IHS estimates that the trade deficit widened to USD8.4 billion, or 14.7% of GDP, in 2013, with the current-account
shortfall also widening to USD3.86 billion, or 7.6% of GDP. Similarly, while the reduction in consumer price inflation from a cyclical peak of 40.6% y/y in
September 2011 to an average of 8.1% in 2013 and 6.9% in July 2014 has bolstered confidence in holding the domestic currency, an extended shortage of
foreign exchange in the economy could force the Ethiopian authorities to devalue the birr again.
A nominal effective exchange rate appreciation raises need for new devaluation. The Ethiopian birrs 20% devaluation in September 2010 was
significantly larger than previous devaluations. Although that devaluation brought the birr closer in line with its real value and boosted Ethiopia's trade accounts
in its immediate aftermath, the cycle of the birr becoming overvalued in real terms in recent years as a result of Ethiopia's comparatively high inflation has yet to
be convincingly broken. The government appears intent on keeping the currency stable, but this aim is complicated by inflation remaining considerably higher
than in the United States, which is again making the currency overvalued in real terms.

Data

Exchange Rate Indicators

2011

2014IHS.

2012

2013

2014

2015

2016

2017

2018

page 8 of 15

Exchange Rate (LCU/US$, end of period)

17.21

18.18

19.06

21.88

24.61

27.21

29.64

31.79

Exchange Rate (LCU/US$, period avg)

16.90

17.70

18.63

19.80

22.59

25.29

27.85

30.72

Exchange Rate (LCU/Euro, end of period)

22.26

23.99

26.28

28.44

30.76

35.10

38.83

42.16

Exchange Rate (LCU/Euro, period avg)

23.50

22.75

24.73

26.69

28.83

32.04

36.22

40.52

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Policy
Monetary Policy

Key Points
Public-sector borrowing needs will continue to strain credit availability.
IHS is identifying the risk of renewed fiscal dominance of monetary policy amid persistent upward pressures on government expenditure.

Analysis
Public-sector borrowing needs will continue to strain credit availability. Domestic credit increased by 29.5% year on year (y/y) in December 2013, an
acceleration compared with 23.4% in June, according to the National Bank of Ethiopia (NBE). We view this as an indication that growth in the aggregate has
bottomed out after decelerating steadily since early 2012. In mid-February 2013, the NBE reduced the reserve requirement ratio for commercial banks from
10% to 5% to address a liquidity shortage threatening economic growth. The reserve requirement was previously reduced from 15% to 10% in January 2012.
Banks were also given a two-year grace period to restructure their loan portfolios, so that 40% of loan advances comprise short-term loans, in order to reduce
the mismatch between assets and liabilities. IHS views the reduction in the reserve requirement ratio as a symptom of the authorities continued difficulties in
mobilizing domestic financing for its infrastructure-investment plans without inhibiting credit availability for the private sector.
IHS is identifying the risk of renewed fiscal dominance of monetary policy amid persistent upward pressures on government expenditure. The
government eased reserve requirements for commercial banks in early January 2012 in order to increase funds available for lending amid negative real deposit
growth. The reason for the easing of reserve conditions is that the government was facing a severe fiscal pinch in 2012, with the sharp uptick in inflation to
double-digit rates over fiscal year (FY) 2011/12 (1 July30 June), year, raising its costs on both the expenditure and financing sides. To counter these
pressures, the government resorted to heavy-handed measures, such as obliging commercial banks to invest in government bonds at a highly negative interest
rate, but we believe this will be insufficient to adequately solve the financing situation. With the government likely to face increasing pressures to raise public
wages in response to higher inflation, while at the same time remaining committed to large-scale infrastructure projects to drive growth, we see an increasing
risk that it will continue to periodically resort to central bank financing of the government budget or further reserve-requirement reductions in situations of fiscal
stress. The reduction in base money in FY 2011/12 contributed to bringing consumer price inflation back into single digits in FY 2012/13 following the high
inflation of the previous fiscal year. Reserve money increased 12.4% in 2012 and 12.5% in 2013, below nominal GDP growth.

Data

2014IHS.

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Monetary Policy Indicators

2011

2012

2013

2014

2015

2016

2017

2018

Short-term Interest Rate (%, end of period)

0.90

0.90

0.91

0.91

0.91

0.91

0.92

0.92

Long-term Interest Rate (%, end of period)

8.03

8.03

8.04

8.04

8.04

8.04

8.05

8.05

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Fiscal Policy

Key Points
Fiscal policy remains focused on infrastructure development.
The prime minister has opened for a Eurobond issue.

Analysis
Fiscal policy remains focused on infrastructure development. The Ethiopian parliament passed a budget for fiscal year (FY) 2014/15 (JulyJune) worth
ETH179 billion (USD9.2 billion) on 7 July before going into recess. The budget was presented to parliament on 9 June by State Finance Minister Abraham
Tekeste and was deliberated in the Budget and Finance Affairs Standing Committee in the following weeks. The budget constitutes a 15.6% increase on the
ETH154.9-billion budget for the current fiscal year, with budget recurrent expenditure up 38% to ETH45 billion, capital expenditure up 4% to ETH67 billion
(from ETH64.32 billion budgeted in FY 2013/14), and allocations to regional governments up 18% to ETH 51.5 billion. The remaining ETH15 billion in
government revenue is allocated to projects aimed at achieving the eight millennium development goals. Total domestic revenue is projected at ETH115 billion,
with the remainder to be raised through non-tax sources and foreign aid and loans. The FY 2014/15 budget entails a stronger projected increase in recurrent
expenditure in healthcare and other areas and less in capital expenditure than in previous fiscal years. We believe this is due to a desire to not set capital
expenditure targets too high and to focus more on completing existing capital projects in the five-year Growth and Transformation Plan, which expires in June
2015. The projected economic growth rate of 11% in FY 2014/15 is higher than our real GDP forecasts of 8.6% and 8.4% in 2014 and 2015, respectively.
The prime minister has opened for a Eurobond issue. Prime Minister Hailemariam Desalegn started speaking in mid-October 2013 about the governments
plans to attain a credit rating and issue a debut sovereign bond. The former was finally attained in early May 2014, and IHS expects a debut USD500-million
Eurobond issue in 2015. The IMF continues to advise the Ethiopian authorities to seek concessional external financing for its Growth and Transformation Plan
and to adjust the level of public investments if scaled-up external financing on manageable terms is not forthcoming. The IMF also said that there was scope
for improving the functioning of the foreign-exchange market and that greater exchange-rate flexibility would help to clear the foreign-exchange market and
promote the traded-goods sectors competiveness.

Data

External Sector

Key Points
Notwithstanding the rise in exports in recent years, Ethiopia's overall balance-of-payments position is likely to remain deep in the red in the medium term
as imports outpace exports.

Analysis
Notwithstanding the rise in exports in recent years, Ethiopia's overall balance-of-payments position is likely to remain deep in the red in the medium
term as imports outpace exports. The trade deficit, which widened from USD7.3 billion in 2012 to an estimated USD8.4 billion in 2013, is unlikely to improve
in coming years as remittances, foreign aid, and investment inflows continue to drive domestic demand. Despite improvements in goods exports to USD3.2
billion in 2012, before falling back somewhat to an estimated USD3.1 billion in 2013, the sharp increase in imports in recent years underlines the challenge
ahead. With little domestic supply of vital goods, further devaluations of the Ethiopian birr are unlikely to lead to much import substitution. Therefore, IHS
expects the trade deficit to narrow somewhat to around 14% of GDP in 201415, but continue to weigh heavily on the current account. While rising remittances
and energy and mineral exports should help contain the current-account deficit, there is still a high probability Ethiopia will experience renewed
balance-of-payments pressures if it does not tighten fiscal and monetary policy and/or allow another birr devaluation. Foreign-exchange reserves dropped to

2014IHS.

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1.8 months of imports in September 2013, according to the National Bank of Ethiopia. They then improved somewhat in the fourth quarter, according to the
International Monetary Fund (IMF) and the Ethiopian authorities. IHS Economics sees a possibility Ethiopia will require assistance from the IMF in 201415 to
bolster its foreign-exchange reserves toward the targeted three months of import cover.

Data

Trade and External Accounts Indicators

2011

2012

2013

2014

2015

2016

2017

2018

Exports of Goods (US$ bil.)

3.0

3.2

3.1

3.6

4.1

4.6

5.3

5.9

Imports of Goods (US$ bil.)

8.3

10.5

11.5

12.5

13.5

14.5

15.5

16.5

-5.3

-7.3

-8.4

-8.8

-9.4

-9.8

-10.2

-10.6

-17.7

-17.6

-17.6

-16.6

-16.5

-15.7

-15.0

-14.6

Current Account Balance (US$ bil.)

-0.8

-3.0

-3.6

-3.7

-3.7

-0.2

0.1

0.1

Current Account Balance (% of GDP)

-2.6

-7.2

-7.6

-7.0

-6.4

-0.2

0.1

0.1

Trade Balance (US$ bil.)

Trade Balance (% of GDP)

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

2014IHS.

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Key Indicators and Forecasts

Data (Forecasts)
Detailed Macro-Economic Indicators
2010

2011

2012

2013

2014

Real GDP (% change)

12.6

11.2

8.5

9.4

8.6

8.4

8.3

7.7

7.5

Nominal GDP (US$ bil.)

26.6

30.3

41.6

47.7

53.2

57.0

62.3

67.9

72.3

Nominal GDP Per Capita (US$)

297

330

442

494

537

562

600

638

664

1,871

2,071

2,205

2,387

2,569

2,770

2,982

3,194

3,415

11.4

3.4

8.2

8.2

8.7

8.2

8.1

7.7

7.5

4.6

-0.9

16.6

12.1

10.4

9.9

9.1

7.7

7.5

Real Government Consumption (% change)

12.3

3.9

7.3

7.8

8.5

8.0

8.0

7.7

7.5

Real Imports of Goods and Services (% change)

14.7

-0.9

22.2

4.3

8.5

8.4

8.4

7.7

7.5

Real Exports of Goods and Services (% change)

-6.5

2.5

-3.0

9.9

7.6

9.6

9.2

7.7

7.5

8.1

33.2

22.8

8.1

7.4

9.3

10.0

9.1

9.0

Short-term Interest Rate (%)

0.90

0.90

0.90

0.91

0.91

0.91

0.91

0.92

0.92

Long-term Interest Rate (%)

8.03

8.03

8.03

8.04

8.04

8.04

8.04

8.05

8.05

Fiscal Balance (% of GDP)

-1.5

-5.4

-4.1

-3.7

-3.5

-3.1

-2.8

-2.6

-2.4

89.39

91.73

94.10

96.51

98.94

101.41

103.90

106.42

108.96

2.6

2.6

2.6

2.6

2.5

2.5

2.5

2.4

2.4

Current Account Balance (US$ bil.)

-0.4

-0.8

-3.0

-3.6

-3.7

-3.7

-0.2

0.1

0.1

Current Account Balance (% of GDP)

-1.6

-2.6

-7.2

-7.6

-7.0

-6.4

-0.2

0.1

0.1

Trade Balance (US$ bil.)

-5.0

-5.3

-7.3

-8.4

-8.8

-9.4

-9.8

-10.2

-10.6

-18.7

-17.7

-17.6

-17.6

-16.6

-16.5

-15.7

-15.0

-14.6

BOP Exports of Goods US$bn

2.4

3.0

3.2

3.1

3.6

4.1

4.6

5.3

5.9

BOP Imports of Goods US$bn

7.4

8.3

10.5

11.5

12.5

13.5

14.5

15.5

16.5

Exchange Rate (LCU/US$, end of period)

16.55

17.21

18.18

19.06

21.88

24.61

27.21

29.64

31.79

Exchange Rate (LCU/Yen, end of period)

0.20

0.22

0.21

0.18

0.21

0.23

0.26

0.28

0.30

Exchange Rate (LCU/Euro, end of period)

22.11

22.26

23.99

26.28

28.44

30.76

35.10

38.83

42.16

Nominal GDP Per Capita (PPP$)

Real Consumer Spending (% change)
Real Fixed Capital Formation (% change)

Consumer Price Index (% change)

Population (mil.)
Population (% change)

Trade Balance (% of GDP)

2015

2016

2017

2018

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Debt Indicators
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Foreign Exchange Earnings (US$ bil.)

3.6

5.1

6.3

6.5

7.3

8.3

9.3

10.6

12.1

13.7

Portfolio Investment, Net (US$ bil.)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

2014IHS.

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Portfolio Investment, Net (% of GDP)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Foreign Direct Investment, Net (US$ bil.)

0.2

0.3

0.6

0.9

1.7

2.1

2.3

2.4

2.6

2.8

Foreign Direct Investment, Net (% of GDP)

0.8

1.1

2.1

2.1

3.6

3.8

3.9

3.8

3.6

3.6

Foreign Exchange Reserves, Excl. Gold (US$ bil.)

1.8

2.7

2.3

2.1

2.7

3.2

3.9

4.3

4.7

5.2

Import Cover (Months)

2.4

3.3

2.3

1.8

2.0

2.2

2.3

2.3

2.4

2.4

Total External Debt (US$ bil.)

5.2

7.3

8.6

10.5

11.9

13.7

16.2

18.1

20.3

23.2

18.4

27.6

28.4

25.1

25.1

25.4

27.6

28.2

28.8

30.6

144.4

145.1

136.9

161.3

164.2

164.7

174.0

171.0

168.1

169.7

Short Term External Debt (US$ bil.)

0.0

0.3

0.2

0.0

0.0

0.1

0.1

0.1

0.1

0.1

Short Term External Debt (% of total external debt)

0.9

4.3

2.0

0.4

0.4

0.4

0.4

0.3

0.3

0.3

Short Term External Debt (% of international reserves)

2.5

11.6

7.7

1.7

1.7

1.6

1.5

1.5

1.5

1.5

Total External Debt Service (US$ bil.)

0.1

0.2

0.4

0.4

0.6

0.8

0.9

1.0

1.1

1.1

Interest Payment Arrears (US$ bil.)

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.3

62.9

13.4

16.2

46.7

56.2

53.7

54.1

49.9

45.9

41.0

Total External Debt (% of GDP)

Total External Debt (% of forex earnings)

External Liquidity Gap (% of forex earnings)

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from quarterly
Sovereign Risk forecast bank (SRS).

Key Facts and Demographics

Area:

2
1,127,127 km (sq miles 435,186)

Language:

Amharic and English(official), Oromiffa, Tigrinya, Sidamigna, Guaragigna, Somali, Arabic and Welaitigna

Religion:

Ethiopian Coptic Christianity, Christianity, Sunni Islam

Time Zone:

GMT +3

Population:

91,730,000 (2012, World Bank)

Neighbours:

Djibouti, Eritrea, Kenya, Somalia and Sudan

Capital City:

Addis Ababa

Primary Airport:

Addis Ababa Bole International

Primary Port:

Djibouti-ville (Djibouti)

Currency:

Ethiopian Birr (ETB)

External Trade

Overview
Ethiopia's principal export is coffee, which, despite its recent fall in terms of importance, still accounts for over one-third of the country's foreign-exchange
earnings. Other exported goods include khat (a mild stimulant classified as a narcotic in some countries), gold, cut flowers, leather products, live animals, and
oilseeds. The country's traditional import destinations include Saudi Arabia, the United States, Switzerland, and Italy, with China now becoming a very
significant source. Major export destinations are Germany, China, Japan, Saudi Arabia, Italy, and Djibouti (whose port Ethiopia relies on heavily). Given the
small size of its economy, Ethiopia's top trade partners can fluctuate wildly on account of one-off, expensive imports, such as aircraft and ships. Ethiopia's
principal import commodities are food, petroleum products, chemicals, machinery, motor vehicles, cereals, and textiles. Also, in common with many African
economies, China is becoming by far Ethiopia's most significant trading partner, overtaking traditional partners such as the US, Europe, and the Middle East.
Ethiopia allocated significant resources in the generation of hydroelectric power and geothermal energy. The ambitious Growth and Transformation Plan is
expected to help Ethiopia produce between 8,000 and 10,000 MW of energy to satisfy its domestic needs and for export to Djibouti, Kenya, and Sudan.

Data
2014IHS.

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Data
Ethiopia: Major Trading Partners, 2013
EXPORTS

IMPORTS

Country

Billions of USD

Percent Share

Country

Billions of USD

Percent Share

China

0.3

13.0

China

2.1

15.3

Saudi Arabia

0.2

8.3

Saudi Arabia

1.1

8.1

Germany

0.2

8.3

India

1.0

7.2

United States

0.2

8.1

United States

0.7

5.6

Belgium

0.2

7.1

Italy

0.4

3.0

Japan

0.1

3.8

Turkey

0.4

3.0

Netherlands

0.1

3.4

France

0.3

1.9

Djibouti

0.1

3.0

Germany

0.3

1.9

Israel

0.1

2.9

Belgium

0.2

1.8

Italy

0.1

2.8

Sudan

0.2

1.5

Source: IMF, Direction of Trade

Ethiopia: Major Trading Partners, 2000

EXPORTS

IMPORTS

Country

Billions of USD

Percent Share

Country

Billions of USD

Percent Share

Germany

0.1

21.5

Yemen

0.2

19.6

Japan

0.1

12.9

Italy

0.1

9.5

Djibouti

0.0

11.3

China

0.1

7.1

Saudi Arabia

0.0

8.8

Japan

0.1

6.1

Italy

0.0

7.2

India

0.1

5.0

Switzerland

0.0

6.5

United States

0.1

4.6

United States

0.0

4.0

United Kingdom

0.1

4.3

Belgium

0.0

3.8

Germany

0.0

3.6

Israel

0.0

3.8

France

0.0

2.8

France

0.0

3.3

Sweden

0.0

2.7

Source: IMF, Direction of Trade

Highlights
Ethiopia remains a promising destination for foreign investment, despite challenges associated with it being an underdeveloped country. Since coming to
power in 1991, the Ethiopian People's Revolutionary Democratic Front (EPRDF) administration has taken a number of positive steps to address some of the
main concerns cited by investors, such as reforming the tax and legal environments, protecting investments from forceful takeover, easing the repatriation of
dividends, and signing deals to avoid double taxation and improve the business climate. However, there is still a lack of policy consistency in both areas amid
allegations of routine political interference in the workings of the judiciary. Among the areas prohibited from foreign direct investment (FDI) are media,
transport, and retail, as well as key sectors such as banking, telecoms, and power generation. The private sector also remains excluded from the latter two,
due to the government's preference for state-led development policies, which risk limiting Ethiopia's growth potential, while restricting competition and
innovation in these sectors. Notwithstanding such challenges, the authorities continue to put a great deal of resources into upgrading the country's transport
and communications infrastructure to facilitate more rapid economic growth, while boosting its power output in response to the growing demand and in
anticipation of future domestic and regional needs. Elsewhere, Ethiopia's security environment continues to be an area of concern, with the government

2014IHS.

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currently fighting off low-level insurgency threats from a number of nationalist and secessionist movements at home, as well as from radical Islamists in
neighbouring Somalia, due to its military involvement in Somalia. Its long-running border conflict with Eritrea remains as a threat to Ethiopias stability while
government restriction of political freedom have limited the political space in which opposition parties, civil-society groups, and the independent media can
operate. The government also faces growing accusations of religious intolerance, with the country's Muslim population charging that the authorities are trying to
interfere in the way they practise their faith.

2014IHS.

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