Ethiopia tests limits of state-backed investment

Three banks rejected Tekeste Berhan Habtu for a loan to help build his 11-storey office block. Undeterred, the 59-year-old Ethiopian businessman ploughed in cash from his own software and logistics businesses. “I went to the banks but they ration people,” says Mr Tekeste, whose $1.6m real estate venture is nearing completion after three years of work. His experience is indicative of constraints on the private sector in a country that has been one of Africa’s fastest growing economies, but whose government has chosen to eschew the neo-liberal western orthodoxies adopted by other African countries in favor of a more tightly controlled development model. “The whole concept is similar to South Korea, Taiwan,” says prime minister Hailemariam Desalegn. But while the World Bank says Africa’s second most populous country after Nigeria has averaged growth of 10.6 per cent in the seven years to 2011, double the continental average, signs are growing that Ethiopia’s public investment-led boom is running up against its limits. The IMF predicts the economy will grow at 6.5 per cent this year, far short of the government’s 11.3 per cent target. World Bank studies note that Ethiopia’s exports, savings and investments are growing much slower than the Far East countries of the 1970s it seeks to emulate. The government has tentatively unlocked some sectors to foreign investors to boost export earnings in the face of an $8bn trade deficit, but low savings, on top of state-imposed requirements to buy loss-making government bonds, reduce banks’ capacity to lend and 25 sectors – including telecoms and banking – are still closed to outside investment. Structures built of cement such as Mr Tekeste’s, festooned in wooden scaffolding, are going up across Addis Ababa, capital of a country criss-crossed with smooth new roads, the latter a sign of recent large-scale public investment. However, the many half-built edifices in the city also testify to how tough it can be to get private investments off the ground. A five-year public works programme – that will spend equivalent to 15 per cent of the country’s $33bn annual GDP this year – is underway. The government is seeking to build roads, railways and dams as part of a transformation plan started by Meles Zenawi, former prime minister, in 2010. But heavy government spending on imports and infrastructure sucks up liquidity, making it difficult for the weak private sector to raise loans. Foreign exchange reserves have fallen to less than two months’ worth of imports, and importers complain they have to wait four months for banks to release hard currency to them, while investors fear delays in repatriating profits. State restrictions on private credit exacerbate the situation. Each time a bank lends money to the private sector, it is required to lend an additional 27 per cent of the value of that loan to the government for its own development plans, draining banks of their capital. “It puts a large burden on private banks in Ethiopia and it prevents [them] increasing banking services,” says Jan Mikkelsen, IMF country head, of the 27 per cent requirement. “[Banks] are losing money on this transaction . . . so it’s quite onerous,” he says of the yields on government bonds, which are outpaced by inflation. Foreign investors are peering in, hoping that the government will have a change of heart and loosen up. Walmart is trying to negotiate entry into the retail sector; regional and pan-African banks are ready to enter the country’s closed banking sector; and, for telephone operators, Ethiopia represents one of the last great opportunities – both investors (and the government) say licencing could net $3bn. Meanwhile, savvy private equity groups are taking advantage of the gaps in financing. “The fact that the banking system is often unable to provide sufficient capital . . . is a meaningful opportunity for us – we end up becoming in some cases the only alternative,” says Gabriel Schulze, a US investor who has raised more than $50m for his Ethiopia fund, the first in the country. The return of a well-educated diaspora – with greater access to protected sectors including retail – is also supporting growth. Ababu Minda, president of Ethiopia’s diaspora association, says tens of thousands have come back, lured by a 2002 incentives package including tax waivers. Rakeb Abebe, a 30-year-old Wall Street banker, came back two years ago. Now she runs a coffee trading house, exports sesame and maize, imports chemical fertilizers, employs eight people and is determined to grow. “I want to go into roasting and employ another 20 people,” she says over a macchiato. “I saw the kind of potential I haven’t seen in the US.” Source:The Financial Times