Moody s B1 / S&P B / Fitch B 1 Economy: Agriculture 37%, Industry 21%, Services 42% Economic Indicators F 2018F

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1 Ethiopia Summary Moody s B1 / S&P B / Fitch B 1 Economy: Agriculture 37%, Industry 21%, Services 42% Ethiopia is one of the poorest countries in the world but has experienced one of the highest growth rates, averaging just under 10% over the past decade. The economy has benefited from a development state model, which has improved social conditions and infrastructure. Ethiopia s key challenge will be sustaining strong economic growth without incurring economic imbalances. The public sector plays a key role in the economy, which puts pressure on the public balance sheet. Stateowned enterprises (SOEs) are major borrowers, making the banking sector vulnerable. The external sector is weak given the high current account deficit and low levels of foreign reserves. On the political side, the ruling Ethiopian People s Revolutionary Party comfortably won the 2015 parliamentary elections. However, violent protests beginning in late 2016 led an estimated 600 deaths and 21,000 arrests, causing the government to declare a state of emergency through August The government has reshuffled the cabinet to include Oromo members in response to the protests. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of Imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Haver Analytics, IMF 573

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency B+ Local Currency B+ B B B B Moody's S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Ethiopia 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 574

3 Ethiopia Strengths Strong Economic Growth Ethiopia s economy has grown rapidly in recent years, averaging just under 10% over the past decade, which is among the top five globally. 2 In the next five years, the International Monetary Fund expects the economy to grow at average rate of 7.8%, among the top 10 in the world. 3 Expansionary fiscal policy is an engine of economic growth, especially as several public companies are completing major investment projects in the energy sector, as Ethiopia is aiming to become an energy exporting country. One of the most important projects in the pipeline is the construction of the largest hydropower plant on the Blue Nile River, which will increase electricity output fivefold by The Grand Ethiopia Renaissance Dam is a US$5 billion project that is 60% complete and will be Africa s largest hydroelectric power plant. 5 In addition to infrastructure, the service and agriculture sectors have also been important growth engine. Economic Growth Potential Not only is the country growing, it has untapped growth potential. Although Ethiopia s economy is small by global standards, it is one of the largest economies in sub-saharan Africa, totaling US$87.3 billion in It has a very young population with an average age of 18, which may be an important source of growth. 7 The young population and relatively low income levels may attract foreign firms looking for cheap labor. As part of its economic diversification strategy, Ethiopia plans to become Africa s light manufacturing hub and is constructing industrial parks facilities, such as the newly inaugurated Hawassa Industrial Park that will eventually create 60,000 jobs and US$1 billion in export revenues. 8 Other areas of opportunity to grow exports includes the very successful horiticulture sector 9 and energy once the dam is completed. Banking System The banking system is relatively healthy, although not very diversified, according to the IMF. The banking system is dominated by three banks that total close to 80% of banking assets. The Commercial Bank of Ethiopia (CBE), the public bank, is by far the most important, amounting to 70% of the system s assets. 10 The capital adequacy ratio of the banking system amounts to 15% compared to the minimum requirement of 8%, while non-performing loans represent 2.8% of total loans 11. Liquidity has declined but remains slightly above the 15% minimum requirement at 16.1% 12. Through the CBE, the banking system provides a substantial amount of credit to public enterprises. 13 Political Stability Ethiopia is Africa s oldest independent country, and since the overthrow of the communist regime in 1991, political stability has consolidated. However, democracy is rather weak as the country has been governed by one party, the Ethiopian People s Revolutionary Party (EPRDF), since Meles Zenawi was the prime minister from 1995 until his death in 2012; he was replaced by Hailemariam Desalegn, who is still in power. During most of Prime Minister Zenawi s term, economic performance was solid and social conditions improved, including ending famine in Ethiopia. 14 However, on the political side, he was known for intimidating the opposition. 15 Democratic elections tend to fall short of international standards, and although international observers criticized the previous election, no sanctions have been adopted. 16 The last parliamentary elections took place in May 2015, and the EPRDF won by a huge margin. It, and its allies, won 546 seats out of the 547 seats in Congress, thus maintaining political stability for the country until the next election cycle. 575

4 Lazard Emerging Markets Debt Weaknesses Social Tensions The Oromos, Ethiopia s largest ethnic group accounting for almost 35% population, have been staging protest rallies against systematic persecution and discrimination since April Oromos are traditionally farmers, and a development plan that intended to expand Addis Ababa territorial limits into towns and villages inhabited by Oromos was perceived as an annexation that triggered massive national protests 17 resulting in thousands arrested and an estimated 400 deaths. This led the Amhara, the second-largest ethnic group accounting for 27% of the population, and traditionally a rival to the Oromos, to also protest against the government in July 2016, as both ethnic groups feel they are economically and politically marginalized by a government that is dominated by ethnic Tigray, who account for only 6% of the population. 18 Ultimately, these protests evolved into a broader rally over politics and human rights that resulted in the government declaring a state of emergency for six months in October 2016, the first time in 25 years. 19 Amid increasing social tensions, in November 2016, the prime minister reshuffled his entire cabinet to include Oromian ministers, but tension remains. 20 The state of emergency was finally lifted in August 2017, and it is estimated that more than 600 people were killed and 21,000 arrested. 21 Limited Economic Diversification The Ethiopian economy is not very diversified, with the agriculture sector playing a key role in the economy. Agriculture accounts for roughly 37% of GDP and more than three-fourths of the labor force. 22 Coffee is by far the most important export, amounting to about onethird of total exports. 23 Meanwhile, agricultural products amount to close to three-quarters of total exports. 24 The government is aiming to diversify away from the agricultural sector and to expand the industrial sector with the goal of increasing the share of the industrial sector from 12.9% of GDP to 18.8% of GDP. 25 The government is spending a large share of its budget in the capital expenditure necessary to diversify away from agriculture, and has also developed a 10-year National Sustainable Tourism Master Plan to foster tourism. 26 Government Balance Sheet The public-sector balance sheet is weak when public enterprises are included. The general government deficit totaled an estimated 2.5% of GDP in 2018, and is expected to remain at similar levels in the medium term. A less than 3% deficit seems low, but this does not include the public enterprises, which are expanding considerably. Including the public enterprises, total financing needs of the public sector are close to 7.4% of GDP. Government debt has also increased considerably, increasing from 40% of GDP in 2010 to 59% in 2017, although a significant portion was used to finance large-scale infrastructure investments. Public Enterprises The public sector continues to play an important role in the economy as public companies control key industries such as in the electricity, telecommunications, and financial sectors. Opening up some key industries may help increase competition and put less pressure on the government balance sheet. 27 The government has also created a new Ministry for Public Enterprises, which will strengthen the commercial profitability of SOEs and improve governance. 28 However, there is also a risk that any potential problems with the public enterprises could lead to significant problems in the banking system. Banks have a high exposure to public enterprises, as they are the major borrowers in the economy, accounting for slightly more than 50% of the banking sector s domestic credit

5 Ethiopia Financing Limitations and Low Savings Rate Ethiopia has a very low savings rate, which is common among poor countries. The banking system is relatively small, with domestic credit totaling around 15% of GDP. 30 The domestic debt market is not very developed, even when compared with some other African countries such as Ghana, Kenya, and Nigeria. Like other African countries, the central government is dependent on multilateral lending. The central bank is also another important financing source of the central government. Meanwhile, public enterprises consume a large portion of banking system resources, crowding out the private sector. Ethiopia has an initiative to develop a secondary market for central bank and government bonds to increase liquidity in the system. External Sector Ethiopia runs large external imbalances reflected in the high current account deficit; the rising external debt; low foreign reserves; and an overvalued exchange rate. The high current account deficit reflects both the country s low savings and lack of competitiveness despite an increase in exports. Like most African countries, Ethiopia imports many of the products it consumes domestically. The country s ongoing investment projects have also resulted in higher intermediate capital imports. Meanwhile, the bulk of the financing comes from concessional lending and from foreign direct investment (FDI). At the same time, the level of foreign reserves remains very low, equivalent to two months of imports, which falls below the three-month threshold considered to be adequate. The exchange rate was overvalued by an estimated 10 15%, 31 and Ethiopia recently allowed the currency to depreciate by 15% which should help facilitate external adjustments. Geography As a landlocked country, Ethiopia s location is not ideal. This substantially increases transportation costs, especially since infrastructure is limited. About 90% of Ethiopia s trade goes through Djibouti, which is located about 700 kilometers from the capital. 32 This results in significant costs. For example, the cost to import a container is US$2,660 in Ethiopia compared to US$670 in Vietnam. 33 On the positive side, the government is replacing the railway connecting Addis Ababa and Djibouti, which should reduce costs by half 34 and is part of a plan to open up Ethiopia for more export business. The Ethio-Djibouti rail is expected to be operational by end Unstable Region Ethiopia is located in a relatively unstable area as it shares borders with Sudan, South Sudan, and Somalia, three countries that are facing civil war or have faced a recent armed conflict. The armed conflicts in neighboring countries negatively affect economic growth via trade, while increasing social costs as a result of refugees from these countries. 36 While Ethiopia s relationship with Eritrea has improved since the end of the war in 2000, tension remains as a result of disputed border regions. 37 Transparency of Economic Data A key constraint of Ethiopia is transparency and the quality of economic indicators, even by sub-saharan Africa standards. The best source of information is the IMF, and additional details of Ethiopia s economic data are not readily available. The quality of the data is also limited; for example, the national accounts are not very reliable, according to the IMF. 38 The government does not provide the details of the public balance sheet, especially the public enterprises and the financial system, which makes it very difficult to analyze the strength of the public and financial sectors. In addition, the informal sector is relatively large, totaling 577

6 Lazard Emerging Markets Debt 38.6% of GDP, but this is in line with the 38% ratio for all low-income countries. The large informal sector is one of the reasons that tax collection is very low at only 11% of GDP. 39 Income Level Although social indicators are relatively good by Sub-Saharan standards, Ethiopia is still one of the poorest countries in the world despite recent improvements. Ethiopia s GDP per capita totals an estimated US$927, among the lowest in the world. 40 The government spends a substantial amount on social programs, with poverty-related expenditure totaling 12% of GDP. 41 According to an IMF report, Ethiopia has the second largest social protection program in Africa. 42 This has helped to reduce poverty levels faster than other African countries; poverty levels have declined from above 60% in 1982 to close to 30% in 2011, while in the rest of Sub-Saharan Africa, poverty has only declined from 60% in 1996 to 48% through Ethiopia also ranks higher than other low-income countries on the Human Development Index, 44 and its income distribution is more evenly distributed than in other African countries. 45 The government s ultimate goal is to become a middle-income country by

7 Ethiopia Country Background Size Capital Population 1,104,300 KM 2 (28th) Addis Ababa Million Religion Ethiopian Orthodox 43.5%, Muslim 33.9%, Protestant 18.5% Median Age 17.9 Years Literacy Rate 49.1% Independence Political System Government Leadership Next Election 2019 Legislative Branch Federal Parliamentary Republic President Mulatu Teshome Wirtu; Prime Minister Hailemariam Desalegn Bicameral Parliament Economy Agriculture 37.2%, Industry 21.3%, Services 41.5% Labor Force Agriculture 72.7%, Industry 7.4%, Services 19.9% Merchandise Exports Export Partners Currency As of November 2017 Source: CIA Coffee, Oilseeds, Vegetables, Gold, Flowers, Live Animals, Raw Leather Products, Meat Products US 9.7%, Saudi Arabia 9.6%, Germany 8.5%, Switzerland 7.5%, China 5.1%, UAE 4.9%, Pakistan 4.4% Birr (ETB) 579

8 Lazard Emerging Markets Debt Country Timeline 1896 Italian forces defeated by the Ethiopians at Adwa; treaty of Wuchale annulled; Italy recognises Ethiopia's independence but retains control over Eritrea Somalia invades Ethiopia's Ogaden region Somali forces defeated with massive help from the Soviet Union and Cuba Ethiopian People's Revolutionary Democratic Front captures Addis Ababa, forcing Mengistu to flee the country; Eritrea establishes its own provisional government pending a referendum on independence Eritrea becomes independent following referendum Ethiopian- Eritrean border clashes turn into a full-scale war Disputed multi-party elections lead to violent protests over months Ethiopia formally withdraws forces from Somalia. Chinese firms secure deal to build several hydro-power dams and wind farms Ethiopia accuses Eritrea of sending agents across the border to plant bombs and warns it will take all necessary measures to halt Eritrean "aggression." Drought. Millions of Ethiopians and refugees from Somalia need emergency aid. The American military begins flying drone aircraft from a base in Ethiopia, as part of its fight against Islamist militants in Somalia Ruling Ethiopian People's Revolutionary Democratic Front (EPRDF) wins an overwhelming victory in general election Tens of thousands of people from Ethiopia's ethnic Amhara group take part in an anti-government demonstration in the northern city of Gondar. The African Union calls for restraint in Ethiopia after months of anti-government protests which began in the central Oromo region before spreading to Amhara in the north. Government declares a state of emergency following months of violent anti-government protests The state-approved Human Rights Commission says 670 people have been killed since antigovernment protests erupted two years ago. Source: BBC 580

9 Ethiopia Notes 1 As of December World Economic Outlook Database, International Monetary Fund, October 2016, accessed on 26 November 2016, 3 World Economic Outlook Database, International Monetary Fund, October 2016, accessed on 26 November 2016, 4 Pronina, Lyubov, Ethiopia Plans Debut Dollar-Bond Joining Ghana, Kenya, Bloomberg, 25 November 2014, accessed on 10 December 2014, accessed 9 December World Economic Outlook Database, International Monetary Fund, October 2017, accessed on 9 December The World Factbook, Central Intelligence Agency, accessed on 9 December 2014, library/publications/the-world-factbook/geos/et.html. 8 accessed 9 December accessed 9 December The Federal Democratic Republic of Ethiopia: Selected Issues, International Monetary Fund, IMF Country Report No. 13/309, October 2013, 11 Ethiopia Country Presentation Investors October Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 16/322, October 2016, 13 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 14 Ethiopia Bond Prospectus, Ethiopia s Hailemariam Desalegn sworn in as prime minister, BBC, 21 September 2014, accessed on December 10, 2014, 16 EU observers say Ethiopia election falls short, BBC, 25 May 2010, accessed on 10 December 2014, Malone, Barry, and David Clarke, Ethiopia s Meles rejects poll criticism, Reuters, 26 May 2010, accessed on 10 December 2014, us-ethiopia-election-idustre64p5iz accessed 26 November accessed 26 November html accessed 26 November accessed 26 November accessed 9 December The World Factbook, Central Intelligence Agency, accessed on 13 October 2015, library/publications/the-world-factbook/geos/et.html. 23 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 24 November 2014 Prospectus. 25 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 26 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 16/322, October 2016, 27 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 28 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 16/322, October 2016, 29 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 16/322, October 2016, 30 Ethiopia Country Presentation Investors October Assessing the Need for Foreign Currency Reserves, International Monetary Fund, 7 April 2011, accessed on 10 December 2014, Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 2014, Bond Prospectus 33 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 34 Ethiopia Bond Prospectus,

10 Lazard Emerging Markets Debt 35 accessed 9 December UNHCR country operations profile Ethiopia, United Nations High Commissioner for Refugees, accessed on 10 December 2014, As number of South Sudanese refugees grows, UN relief official urges support to Ethiopia, UN News Center, November accessed on 13 October 2015, 37 Eritreans fleeing conscription drive for Ethiopia UNHCR, BBC, 20 November 2014, accessed on 10 December 2014, 38 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 39 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 40 World Economic Outlook, October aspx. 41 Ethiopia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/303, October 42 The Federal Democratic Republic of Ethiopia: Selected Issues, International Monetary Fund, IMF Country Report No. 13/309, October 2013, 43 The Federal Democratic Republic of Ethiopia: Selected Issues, International Monetary Fund, IMF Country Report No. 13/309, October 2013, The Federal Democratic Republic of Ethiopia: Selected Issues, International Monetary Fund, IMF Country Report No. 13/309, October 2013, 582

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