Liberalising the economy isn’t enough to deal with Ethiopia’s foreign currency crunch

Liberalising the economy isn’t enough to deal with Ethiopia’s foreign currency crunch

Ethiopia’s liberalisation offensive, opening up the state controlled Ethio telecom and Ethiopian Airlines to private investors, has taken many by surprise. Caught between a watershed political transition and a foreign currency crunch, opinion remains divided as to whether the move primarily signals a policy shift to relatively fast-pedalled liberalisation under the new administration, or is intended to serve as a way out of the stranglehold of foreign currency scarcity.

It is easy to see where hopes that it will play the latter role are hinging on.

A consortium led by Italian firm Enel Green Power (EGP) is expected to invest about $120 million in the construction of a 100 Mw solar plant in Metehara, Central Ethiopia, having been awarded the contract in October 2017. Due for completion in 2019, the project is expected to sell power to the state-owned electricity producer, Ethiopian Electric Power, within the framework of a two-decade long Power Purchase Agreement. Understandably, such private sector participation is viewed as a pivotal amplification channel for the inflow of hard currency into the economy.

Ethiopia’s foreign currency woes, however, run deeper than the narrow optic of liberalisation would suggest. In October 2017 the National Bank of Ethiopia (the country’s central bank) not only hiked interest rates, but, more importantly, devalued the Birr by 15.5 per cent to exchange at 27.3 units to the dollar. This shock policy adjustment came at a time when, by and large, the monetary environment was becoming a lot more accommodative of dovish signals in sub-Saharan Africa, with central banks beginning to unwind the tightening cycle that had prevailed for the better part of 2014 – 2016. If there was a canary in the coalmine with regard to the headwinds the economy was confronting, run-away inflation and a foreign currency crunch, that was it.

Full article available at the London School of Economics Business Review website where it was first published.

StratLink Africa Ltd Disclaimer Notice

The material prepared by StratLink Africa Ltd ("StratLink ") is our opinion. StratLink believes that it fairly and accurately represents the subject matter reported upon. This report does not include a personal recommendation and does not constitute an offer, or the solicitation of an offer for the sale or purchase of any financial product, service, investment or security mentioned herein. The text, images, and other materials contained or displayed on any StratLink product, service, report, e-mail, or website are proprietary to StratLink and constitute valuable intellectual property. This report is issued only for the information of, and may only be distributed to professional investors, or major institutional investors (as defined in Rule 15a-6 of the US Securities Exchange Act of 1934), and dealers in securities. This publication is confidential and for the information of the addressee only and may not be reproduced in whole or in part, nor copies circulated to any party, without the prior written consent of StratLink. StratLink accepts no liability for any loss resulting from the use of the material presented in this report. This disclaimer of liability may be prohibited, or limited, by specific statutes, laws, or regulations. StratLink affiliates, shareholders, directors, officers, partners, and consultants shall have no liability, contingent or otherwise, for any claims or damages arising in connection with any errors, omissions, or inaccuracies. This report is not to be relied upon in substitution for the exercise of independent judgment.

The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Whilst every care has been taken in preparing this presentation, Stratlink does not give any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information in this report

StratLink may have issued, and may in the future issue, reports that are inconsistent with, and which reach different conclusions than, the information presented in this report. Reports may reflect different assumptions, views, analytical methods, and analysts who prepared them, and no part of the analysts compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this report. All views, opinions, and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results and should not be taken as an indication or guarantee of future performance. No warranty, express or implied, is made regarding such performance. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. All representations, information, opinions, and estimates contained in this report reflect a judgment of the analyst, effective as of its original date of publication by StratLink, and are subject to change without notice. The price, value of, and income from any of the securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities. Investors in securities and other instruments, the values of which are influenced by currency volatility, must assume this risk. StratLink personnel, or other professionals, may provide oral or written commentary or trading strategies to our clients that reflect opinions that are their own and are contrary to the opinions expressed in StratLink’s research. StratLink is under no obligation to ensure that such other reports are brought to the attention of any recipient of any report. StratLink and its respective affiliates, officers, directors, partners, and consultants, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. To the extent applicable and permitted by law or regulation, StratLink believes that the direct author of this report has no position in, fiduciary interest proscribed, nor has been compensated by the subject(s) of this report, or other entities for the content, other than through direct compensation by StratLink.