Monday, January 12, 2015

FOREX Africa: Is 2015 Ethiopian Birr’s Time To Shine?

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
From Band Aid to Investor Darling
Early last month Ethiopia marked a remarkable milestone in its history. Thirty years ago the country was in the grip of a deadly, mostly man-made famine caused by civil war and government mismanagement.

As the Marxist regime fought for control of the countryside in a war that it was ultimately going to lose, media reports from the stricken country showed hordes of refuges and children with stricken bellies scratching out a bare existence in overwhelmed aid camps.  Such was the country’s plight that it became the subject of the original Band Aid song Do They Know It’s Christmas?
How things have changed.  On December 4th Ethiopia’s inaugural Eurobond issue raised $1.0 billion from investors, paying in the process the relatively low yield of 6.625.
By way of comparison, Ethiopia is paying what copper-rich Zambia is paying for its notes and less than a full percentage point higher than what neighboring Kenya, which has a much larger economy, is paying for the $2.0 billion in debt it issued earlier in 2014.
Indeed, as the venerable Financial Times pointed out at the time of the sale, the remarkably low rate was similar to what developed countries were paying as recently as 2000.
This success for Ethiopia is sourced from two places.  First, Ethiopia has been the fastest growing economy in Africa for the past ten years, averaging according to the IMF’s numbers an average rate of growth of 10.9 percent over the past decade.
This is quite a record and means Ethiopia has now been growing faster than China, which last saw growth in excess of 10 percent way back in 2010, for several years now.
Of course, much of this is due to Ethiopia starting from such a low starting point – it is one of the poorest countries in Africa and poorer countries tend to grow very quickly when growth begins – but it is also due to conditions generally getting better within Ethiopia itself.
Still, Ethiopia’s success isn’t entirely self-made.
As with Africa’s other commodity producers, it has benefited greatly from demand growth elsewhere—especially the Middle East and China, which have increasingly snapped up Ethiopian coffee, vegetables, cattle and sheep as they have grown richer.
Luckily, this increase in demand for Ethiopia’s products has coincided with better, more stable government so its economy, compared to the war torn days of the 1980s, is better able to react to the market and take advantage therein.
What’s even more fortunate, this growth in trade hasn’t been based on oil, either, but on agriculture, which employs a lot more people, spreads wealth around more evenly, and, most important, has a fairly steady demand and price given the growing number of mouths to feed worldwide.
An oil windfall in reverse
This lack of oil in the Ethiopian growth equation is especially important now that the price of that commodity has collapsed.  That’s because it will immediately help Ethiopia’s economic growth rather directly.
According to the latest data available, Ethiopia spends about $2.2 billion importing refined petroleum for its fuel needs, or about 19.25 percent of its total import bill.  With oil about 40 percent less costly and assuming it imports the same amount as it has in previous years, that number should shrink to about $1.32 billion if prices stay this low going forward:  a hefty savings considering the country just borrowed $122 million more than that on the bond market.
When looking at the Ethiopian economy as a whole, then, oil’s price collapse effectively just paid for nearly all of what the country borrowed—and that windfall will be spent on investment and additional consumption in the coming year, boosting growth further.
What’s more, what applies to Ethiopia applies to most of its trading partners, too, meaning they will also have all that additional spending power to buy what Ethiopia is selling.  That means more cut flowers going to Europe, more coffee to China, and so on.
It’ll even be cheaper to ship since the cost of transportation will, again, decrease because of the massive decline in oil.
So, looking ahead to 2015, barring any disasters—and Ethiopia was quick to remind investors that it was still subject to terrible things happening to it—the coming year should be a good one.
Not only will it have $1.0 billion in additional capital to spend on roads, bridges and all the other vitally important infrastructure it needs, but will also have nearly that much again in additional consumption power to spend on whatever else it needs, too.  That’s a huge gain, meaning that if these predictions are borne out the birr could do well indeed.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider and Mint Press News.