This is a growth story. Within it are the flickers of hope and prosperity for what is ostensibly the poorest country on Earth. And so it is also a Christmas card to those investors who follow emerging markets and to those who keep their minds open to developing opportunities.
In the bustling streets, coffee shops and clubs of Addis Ababa, Ethiopia, a palpable change in sentiment is in the air. The country is experiencing a growth renaissance, employment is on the rise and there is an evolving sense of optimism. And it all centers on water, Ethiopian dam construction projects and future food security. The good news in Ethiopia can be summed up in just the following few words. Clean energy, industrial development, irrigation and plenty of cold hard cash. In other words, the Chinese have arrived.
And they want what Ethiopia can offer them. Power, and lots of it.
Now I will bet that the very last word that popped into your head when you first read the word Ethiopia at the start of this article was “power”. You would not be alone. This is the land of famine after all. The devastated country of 85 million people where failed crops have cost several million lives over the past decades, where an absence of irrigation, fertilizer and modern farm practices have been a curse that have stunted that countries development for as long as any of us have ever known.
But in an ironic twist, Ethiopia sits atop huge deposits of potash, has made discoveries of natural gas and is now in the early stages of building its own fertilizer facilities. Not only that, Ethiopia is amongst the wettest of countries in Africa. Now, everyone knows that the Nile River is the longest in the world but did you know almost 85% of its flow originates in the Ethiopian highlands? One of the key steps in preventing future failed crops will be to start getting some of that surplus water to where it is needed most badly. But that will require pipe, steelmaking, cement production and plenty of money.
Oh, did I mention the Chinese, the dam projects and all that cash yet?
And so, this is what is electrifying Ethiopia and is a harbinger of the end to its dependence on charcoal and kerosene as cooking fuels, an end to its dependence on foreign food aid supports and the beginnings of a very surprising growth story. There is hope now that the deep red soils will not continue to be washed away each rainy season as agricultural practices are improved, electrification supplants deforestation for fuel and tree planting has a real hope of taking hold on lands where only the most meagre of crops were being planted in the past.
And with the advent of power comes fresh investment out of Asia leading to the development of new industries and thousands of new jobs. A better marriage could not have been made by the angels in heaven themselves. Voracious needs, particularly in China, have come face to face with Ethiopia’s tremendous hydroelectric potential, low wages and resource wealth.
These developments have also lead to some of the world’s highest inflation rates too though. This story is not all sunshine and roses people. Like many other poor countries the cost of living is incredibly low. Wages may be rising but there has been a concurrent rise in costs keeping many in the rural areas impoverished. For some, life has only become more of a struggle. The Ethiopian Central Bank, in a surprise announcement last month, devalued the currency by 16.7% in a single day. That was the fourth devaluation in less than two years.
That revaluation was brought in as a means for the country to retain a competitive export advantage and as a means to manage its currency which floats against the US dollar. The falling dollar in effect precipitated the action by the Ethiopian Central Bank. There is no stealth devaluation there at all. The authorities have acted decisively as the country has never been in a good position to compete with heavily subsidized agricultural products of Western nations.
Compounding worries there is the recent commodity boom and the sharp price increases in cotton, coffee, cocoa, wheat, canola and of course cooking fuel (kerosene) amongst others. The problem Ethiopians face is that commodities, while locally sourced, are not locally priced as they are subject to global competition and speculative forces and those prices as we know are set in the futures markets.
So despite being an agricultural country and net food exporter, Ethiopians are facing the same market dynamics and price hikes that we are about to experience in the West (this story is indirectly about us too, so pay attention). And because their country is primarily an agricultural exporter, the new prices hit the streets almost as fast as they change on the boards in New York and London. Ethiopia with its economy heavily biased to agricultural goods is perhaps being hit the hardest as much of the resource boom to date has impacted the so-called soft commodities, primarily food. It is no joke that Ethiopians are now unable to afford buying some of the produce of their own country. Following this last price spike, coffee is almost out of the question for many.
Since the summer, the cost of a kilo of Coffee has climbed from about 2.20 US to over four dollars, almost a 100% price spike. Affording coffee on an income averaging a dollar daily is not just prohibitive; it is a sacrifice and a luxury. This irony is not lost on the people living right in the midst of the country where coffee was originally discovered and where it is still one of the primary exports abroad.
So Ethiopians have been pretty worried lately. They are stoic though and rarely complain despite the fact that the price of flour is also up over 70%, cooking oil by 50% and onions of all things have increased by an incredible 250% on the heels of a crop failure. And you thought we had inflation worries coming down the pike over here! Ethiopia’s Central Statistical Agency (NYSE:CSA) meanwhile reports for 2010 that tobacco has risen 34%, clothing 25% and rent, fuel and power have collectively risen by over 16%. Yikes!
All of this of course is on outgrowth of shifting investment dynamics taking place worldwide at this time, where paper investments are seen as risky, bonds pay nothing and holding cash is a sure way to go broke over the long run as currency devaluations have become endemic. There has been a shift, particularly amongst hedge funds, away from certain equities and debt instruments and into hard assets, gold and resources.
Further compounding this growing trend is the widespread belief that Quantitative Easing is leading to dollar devaluation and therefore resource investments are very appealing as a long term hedge against potential losses. Stimulus leakage itself and the outcomes of investment changes that flow from this policy are now the impetus behind both a developing African growth story and some tremendous inflation pressures. These are the sources behind some of the stresses the people there are now facing.
An unfortunate outcome of this major trend change is therefore expressing itself in the form of some very serious price increases and negatively impacting those not just in Ethiopia but in all the poorest countries in the world. It must be kept in mind that in many countries across Africa and parts of Asia food and transportation are the largest components of their monthly expenses. The inflationary impacts of price increases in the double digits are therefore a serious hardship in a way that very few in North America can fully comprehend.
Today, Ethiopia is one of the largest coffee exporters in the world and not so surprisingly government revenues have surged on the back of the commodity price increases there and also from a host of other export products. Increased incomes from both private and corporate sources including the VAT tax have shot up a staggering 150% in only the last three months according to Nazret.com sources, and the Government is now on track to fully exceed its wildest revenue estimates.
In the simplest terms possible you might imagine that the price increases for food are therefore coming out of the pockets of the average person on the street and then miraculously reappearing on Government ledgers. Of course it is not that simple though and the differences between export revenues and increased consumption costs could hardly balance equitably. But this is not a bad news story and while Ethiopians are paying the price at the till on the one hand the country is experiencing tremendous growth on the other.
Why? Resource’s of course, with water and hydroelectric potential as the cornerstone of the country’s growing regional influence. Ethiopia has them in spades and China, amongst others wants in on that action. So they have shown up with what the country badly needs. Cold hard cash, engineering expertise and generous assistance with infrastructure improvements. Heck, they even send in their own people and equipment to get the jobs done. No hurry of course. Pay the bill later.
In the midst of this boom though, trouble is brewing and it is naturally political. A recently published article by The Economist quotes Prime Minister Meles Zenawi saying the Chinese were “generous and dependable” while backhanding the West and calling them neoliberals. This is not likely leaving a very good taste in Washington’s mouth where the efforts of many, many years of support and contributions to Ethiopian development aid are suddenly not yielding the expected returns. Nor are there smiling faces as it becomes apparent that China is recycling its US dollar balance of trade bounty into efforts that are appearing to be undermining US influence in the Horn of Africa.
It is no secret that Ethiopia has long been considered a key strategic ally in the region. That relationship may be at risk. With China now stepping in with investment money versus aid dollars they are winning the hearts and minds of the population who want jobs, not handouts.
In any event, Mr Zenawi has his own concerns and they are a real worry for his government. Many millions of young people in his country are heading into the workforce over the next decade. He needs to get them busy and fast. A quick look at Ethiopia’s population pyramid and you will know in an instant why the government is shoulder-checking for signs of future trouble and looking for new regional friends with deeper pockets and plenty of needs of their own. So what has developed with Asia is a marriage more than a friendship but it is certain to test Washington’s patience and resolve in the coming years as regional influence is now at stake.
Now one of the surprise upsides to this current commodities boom is that it has actually been beneficial to Ethiopia in many ways despite the extra financial burden it has place on the people.
The country has a suspected treasure trove of resources that are only now being explored but existing discoveries of Gold, Potash, Natural gas and many others are already well know. Exploration for diamonds is now underway in Welega Province by a junior miner out of Australia, holes are being drilled for the first time in the broad search for mineral deposits elsewhere and BHP Billiton is on the scene assessing the local Potash reserves. “China Mining United Fund” is said to be taking a serious look at the Allana potash deposits in the Rift Valley and there is a strong likelihood a partnership will be inked there in due course.
There has been a significant infusion of foreign capital inflows across the country over the last few years and it is now accelerating as new partnerships with Asian investor’s ramp up and jobs are being created. Capital is flowing in from India, Malaysia, Singapore, China, Australia, Canada and many other sources. As I have mentioned already, it is not so surprising that there has also been inflation to match the rapid growth and this has made life difficult for anyone trying to earn a living there (which is pretty much everyone).
The most recent inflation numbers released show that the annual rate is running ahead of 11% even before the commodities craze is priced into the equation. This is on top of last year’s 9% and a 2008 inflation rate that clocked in at a blistering 45%. And in a crazy upside down world, people there hold US dollars as an inflation hedge! This actually makes perfect sense really. Everything is relative isn’t it? And when both Gold and Silver are well beyond the financial means of virtually everyone then a store of Greenbacks is as good as gold itself.
Especially if your own currency is shrinking by the day.
According to the CIA fact-book, Ethiopian GDP growth was ringing in at 8.7% for 2009 while industrial growth exceeded 10% placing Ethiopia 5th amongst nations on the growth scale. Exports were a paltry 1.6 billion dollars versus 7 billion in imports which is small potatoes by any standard but don’t let that dissuade you from the growth potential that now exists. Much progress obviously still needs to be made. US contributions to programs and aid when added to remittances from the Ethiopian Diaspora overseas, IMF forgiveness of some indebtedness and Chinese direct investment have helped make up some of the difference on the national ledger.
As mentioned, the Chinese amongst others are taking a very serious interest in the region. You may be surprised to hear that there is a construction boom going on there now. According to the Economist’s “The World in 2011” publication they have noted that Ethiopia and Eritrea of all places will be amongst the top three fastest growing economies of any country on earth this coming year. Growth there is anticipated to exceed 10% annually. Surprise! And you thought it would be China didn’t you?
Nazret.com, the Ethiopian news portal has reported this past week that Chinese investments in excess of 780 million dollars have been made in a wide variety of projects and activities including cement factories that have directly created 76,000 new jobs in the country. This is money in excess of development funds of nearly two billion already allocated by the Chinese Government for an ongoing infrastructure build-out. In the big picture, those millions might sound like spare-change to you but this is clearly very significant relative to Ethiopian export incomes and cannot be understated.
Just imagine for a moment that one single country invested in the US in an amount equal to half of all its export trade and you will then have some perspective on what is taking place over there. Now you get it.
In the background, there are 13 new universities being constructed or contemplated with the assistance of the German Government (GTZ) and related agencies that are designed to accommodate up to 148,000 new students. It’s a big initiative. According to Wiki, almost half the Ethiopian population is below the age of 14 while the median age is 16.8 and those over 65 account for just 2% of the population. That is one hell of a demographic picture. The US median age by comparison is 37 years while those over 65 account for closer to 12%.
Furthermore, health initiatives from a multitude of sources including the US Government, the Gates foundation, Canadian International Development Agency (CIDA) and a host of European NGO’s along with the efforts of hundreds of charitable agencies means the country is stronger and healthier than ever. Aids rates incidentally are amongst the lowest in Africa at 2% and dropping due to education and health initiatives.
The very low wages have also provided an opportunity and an outlet for some of Asia’s over-heating economies and as a result those countries are now actively outsourcing production themselves. And that is a big surprise to most people who only think of Asia itself as one monstrous insular factory for the world that does not share.
Rarely is it considered that production costs, particularly in China, have spiked due to the current high costs of real estate and growing incomes there and that they themselves are now seeking lower cost jurisdictions from which to maintain low-cost production. Much of Africa beyond Ethiopia is also now benefitting from these recent developments.
So Ethiopia is going into textiles in a very big way and factories have been springing up across the country. The Government of Meles Zenawi has openly welcomed the new investments and resource rights are being sold to interested parties as exploration for minerals ramps up. The government is stable and has been for many years now and the country is for the most part at peace. It is hard to find a friendlier, warmer place to visit actually.
But there is so much more to this developing story. China’s growing demand for construction materials has seen them investing in no less than eight cement facilities recently, both to supply voracious demand in Asia’s booming cities but also to provide the inputs needed for Ethiopia’s new dams construction projects.
Oh yes, the dams again. And here we have a very contentious issue developing that could boil over in the future. There are significant concerns being expressed by Egypt, a country that sees virtually no rain of its own and whose entire civilization depends on the flow of the Nile for its very survival as a nation. Worries that Ethiopia may hold back too much of the Nile flow have brought old threats of war back into the light as Egyptians come to grips with the consequences of the dam projects and concerns that countries life blood may be on the verge of drying up. A flashpoint exists over the issue of equitable water sharing and past agreements will need to be revisited.
For the moment, the details following the release of the new water data have amounted to no more than a war of words but that is no comfort in some quarters. Compounding problems, the US currently supports both Egypt and Ethiopia politically and financially. Brokering a new water deal is seen as a high priority for the region. Momentum is on Ethiopia’s side for now, particularly in light of China’s new interest and it is likely the disputes will need to be settled with the direct cooperation of both Washington and Beijing.
To date, five large Dams have been built across Ethiopia and many more are proposed including a new one on the Blue Nile financed by Sino-Hydro, the same folks who built the Three Gorges project. The new Gibe III project on the Omo river meanwhile will be the highest dam in Africa at 245 meters and is projected to generate 1870 MW of new power. According to The Guardian, Ethiopia now has the potential to generate more than 45,000 Megawatts of power in aggregate. And that is a very big story in North Africa. All the more so because there are 9 other countries downstream that all share in the water wealth that flows from Ethiopia’s highlands and upon which millions in the Nile Basin depend for irrigation, drinking water and transportation.
So the Chinese have brilliantly seized on the obvious hydroelectric potential of the region and it is true that barring conflicts it is well within Ethiopia’s destiny to become an African energy superpower within the next decade. Clean energy too. Plans are already being drawn up to export power to Sudan, Kenya and other neighbours on the basis of multi mega-watt capacity coming on-stream over the next few years.
But the real power is destined for domestic industrial needs and to meet Chinese demands for inputs to its own economy. Ethiopia as it turns out is strategically positioned for energy intensive factories and related facilities including cement production, bricks and steel. It should come as no surprise then that Chinese based steel-making enterprises have become one of the big partners recently in this evolving investment scene. And it certainly does not hurt that incomes in Ethiopia are the lowest in the world. Getting all the new facilities up and running is a cakewalk when it comes to cash.
Ethiopia is certainly not all a parched dry wasteland as many might have imagined. Although almost totally devoid of trees from end to end, much of it is wet and green, particularly in the highlands, and this is why hydroelectric is such an obvious solution to the growing power needs there and the industrialization that is currently underway.
The rains unfortunately are not always predictable and this has been at the root of some past disasters and famines as irrigation has not been sufficiently developed to date to ensure steady agricultural productivity. That is all about to change though.
You seriously cannot believe how fast this poor country is developing and much of it can be attributed nearly exclusively to growth dynamics out of Asia. The Chinese in particular as already mentioned have moved into the country in a very big way and are busy building roads, dams, irrigation systems and bridges across the country. Things are changing for the better. And fast.
So in a surprise twist, what is arguably the poorest country on earth is actually one of the world’s biggest investment and growth stories of the year. Don’t believe me? Go and see it for yourself. Ethiopian Airlines is well known as the best carrier on the continent sporting the newest fleet of Boeing 737’s and 777-200’s and one of the safest flight records anywhere.
This past two years alone Ethiopian Airlines have acquired or placed on order 35 new Aircraft including 10 state-of-the-art Dreamliner 787’s to add to their growing fleet. An expansion of Addis Ababa’s Bole International airport which is considered Africa’s primary air hub and hosts almost 4 million passengers annually is ongoing to accommodate the growing traffic and congestion. (And you thought all those people were starving over there, right? So what’s up with all the Dreamliners then?)
The on-board food is terrific incidentally.
Back in Addis meanwhile folks are both optimistic and stressed. Their wages are on the rise but are not keeping up with the loss of buying power caused by the recent Birr devaluations nor keeping pace with the fast rising costs of virtually all their daily needs.
It can only be hoped that the recent developments eventually lead to a higher standard of living for the country and that it can build its way out of the grips of poverty that have been its hallmark for most of the past century. Industrialization, resources and key partnerships are the ticket to a better future for Ethiopia and are the fuel behind its recent growth story.
And it is not too late to get involved for those with speculative capital and minds open to a wide variety of surprising opportunities. The country is open to investment and a small amount of money can go a very along way indeed and yield potentially explosive results. And that sounds like advertising doesn’t it? Well it is not. One fact alone is that fewer than 1.5 in 100 people in Ethiopia have a cell phone today according to a recent (ITU), International Telecommunications Union report. That is the lowest concentration in all Africa and amongst the lowest anywhere on earth. There is naturally a huge pent up demand for technology of all kinds, a youthful population and a growing belief that change has arrived. The advent of optimism combined with that youth, new consumer demands and rising incomes is of interest to every serious investor.
There are obvious difficulties for anyone trying to invest in this market of course. The country does not yet have its own stock exchange, credit and debit transactions are virtually unknown across the country, few individuals have bank accounts and the banking sector itself is still working through its developmental stage. Some might see opportunity in that though. The real potential is open for the most intrepid investors who simply go in person to get something started. And you could not be closer to the ground floor in any other country. Nobody said investing there would be easy. For most, for the foreseeable future, it just makes more sense to invest in Asian companies that are already active there or more directly in the juniors and small caps that are currently searching for minerals.
Like much of Africa, Ethiopia has energy to burn and a desire to break from the bonds of the past. Demographics tell us there is tremendous potential there and a lot of future customers. Asian direct investment tells us that development is being fast-tracked and this is a country you will want to follow if emerging markets are your cup of tea. And last, Ethiopians themselves are telling us they want to be an integral part of the global community. This is truly a growth story.
If you remain doubtful that Ethiopia has potential I just want you to watch this short video of a concert in Addis Ababa. It is a little rough and almost certainly made with a cell phone but if this does not convince you the country has energy, then nothing ever will. Beyonce is there up front and she leads a show backed by Teddy Afro, one of Ethiopia’s most famous musicians. Have a listen and look at Ethiopia 2010.
This 5 minute clip should tell you everything I cannot say in words alone. Hopefully this will open your eyes to one of the very biggest developing stories in the world today. It is about the new Africa, the world’s last big frontier and a Wild West of investment opportunities. The potential is tremendous and those people sure look hungry all right. But in a way you probably never expected.
So forget the sad imagery of the past. These people are hungry for their piece of the action.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.