In Ethiopia, Africa's Sleeping Giant Awakens

The recent news that Ethiopia would begin to privatize a number of its state-owned enterprises has sent shockwaves throughout the international investment community. The country has long implemented a Chinese-inspired model of state-led growth (further spurred over the past two decades by massive investment from Beijing itself), making Ethiopia the fastest growing economy in Africa.  But in recent years, the government has had to confront a massive debt and increasing civil unrest. The situation became so dire that in February, Prime Minister Hailemariam Desalegn resigned, only to be replaced by the relatively unknown Dr. Abiy Ahmed. Since taking office in April, the region’s youngest leader has made a series of sweeping changes - aside from the move to privatize, he has announced an end to an 18 year stalemate with neighboring Eritrea, released political prisoners, ended the country’s state of emergency, and embarked on a whistle-stop tour across East Africa and beyond. While he will undoubtedly meet resistance as he seeks to set his agenda, investors should not underestimate the man now leading the country - the path to reform will not be quick or easy, but Prime Minister Abiy has sent a clear signal that Africa’s sleeping giant is waking.


The breakneck speed at which changes are being announced in Ethiopia make it easy to forget what a different situation Africa’s second most populous country was facing just a few months ago. Civil unrest and repression were rampant, and the government’s top-down approach to the economy had diminished the flow of foreign currency reserves.  On top of that, the country has had to deal with power and internet outages, mass protests, demonstrations, and strikes. In Prime Minister Abiy’s inaugural address, he called for a united Ethiopia, apologized for the killing of protesters, and welcomed dissent and an end to corruption - unprecedented in Ethiopia’s modern history. Since then, he has announced a series of foreign policy & pro-business stances that if properly implemented, could radically alter the country.


A New Leader Looks Outward

The young prime minister will undoubtedly face resistance from the political elites who have benefited the most from decades of economic control. Beyond navigating the tensions that such rapid change brings, there have also been no specific proposals put forward that indicate how these reforms will be implemented. Dr. Abiy’s commitment to reform, however, should not be understated. Already he has replaced Ethiopia’s military chiefs and a host of old-guard government officials most attached to the state-capture that has come to plague the country’s state-run industries. He has also been impressively strategic in his foreign policy approach. He has struck a deal with Dubai’s port authority to enter into a JV over Sudan’s new Berbera Port, and just last weekend he paid a visit to Cairo, reopening stalled talks on the Renaissance Dam (which will draw from the Nile and had met resistance from Egypt over the dam’s impact on its own water supply).


It is also important to understand the popularity Dr. Abiy enjoys across the ethno-political spectrum. His rise to power was due to an alliance between his own Oromo Peoples' Democratic Organization (OPDO) and the Amhara National Democratic Movement  (ANDM). This alliance, together with the Tigrayan People’s Liberation Front (TPLF) and the Southern Ethiopian People's Democratic Movement (SEPDM), forms the Ethiopian People's Revolutionary Democratic Front (EPRDF), the coalition that has ruled the country for three decades. The TPLF, long the dominant member of that coalition, has increasingly diminished in influence as a result of the ODPO and ANDM alliance - signalling that Dr. Abiy will be able to hold onto support not just from the general public, but from the political elite as well.


A Mandate for Change, but How?

While the decision to partially or fully privatize certain sectors shocked observers, it is not without precedent. The government has long welcomed foreign investment into textile factories; Heineken and Diageo own two formerly state-run breweries; and the national tobacco enterprise was sold to a Japanese firm in December. These investments were facilitated by a 1998 proclamation, which any further partial share investments will follow. Last week’s announcement, however, drew the most buzz because it included Ethiopian Airlines - the region’s largest carrier - and Ethio telecom as enterprises that would allow investment. To be clear, the administration has maintained that the government will retain a controlling interest in these sectors - along with that of energy and logistics. Majority or full privatization will be reserved for other sectors, including railway, sugar factories, hotels & tourism, and industrial and manufacturing parks.


To facilitate minority stakes in the aviation, energy, and telecom industries, the existing proclamation will either have to be amended, or a new one issued - and the timeline for that remains unclear. The ruling coalition is next scheduled to meet in August, though the urgency with which the Abiy government has announced these reforms make it likely that an emergency meeting could be held before then. We expect the proposals to liberalize the energy and telecom sector to pass more easily, whereas the Airlines may be met with more resistance. The airline is the largest revenue generator for the state, and a point of pride for many Ethiopians. The announcement that it would be open to even partial privatization has been met with condemnation not just from regime hard-liners, but the general public alike.


It is still too early to tell the path that these reforms will take, or what exactly the end goal is. To be sure, the country will continue to utilize a largely developmentalist approach to achieve growth.  But the government’s past emphasis on manufacturing has allowed it to remain more resilient to commodity shocks than its more resource dependent neighbors, and its massive infrastructure projects, while far from perfect, help give the country a leg-up as an attractive destination for investors. For example, the recently completed Ethiopia-Djibouti Light Rail - the region’s first cross-border railway system - links the landlocked country to Djibouti’s port, and cuts the travel time from three days to 12 hours; the Renaissance Dam, once completed, will be the largest power generator in the region.  These factors, coupled with the door starting to open to foreign investment, have the potential to radically alter the country’s trajectory. Perhaps most important, though, is that the very public nature of these announcements indicate that Prime Minister Abiy is less concerned with how reforms will be implemented, and is placing more weight instead on the signal that it sends to investors - that the market is open to change, and the rules of the game have changed along with it.

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