Ethiopia Country Risk Report Q2 2016

Ethiopia Country Risk Report Q2 2016

Core Views Ethiopia will remain one of the fastest-growing economies in Africa over 2016 and 2017 as the state drives large-scale investment. We expect the government's continued investment into improving infrastructure and the agricultural sector will provide opportunities for the population to become increasingly engaged in the economy. We expect monetary policy in Ethiopia to remain loose over the year ahead as the National Bank of Ethiopia increases money available for lending to the government. We do not expect the bank to devalue the currency given the risk associated with pass-through effects to inflation. The Ethiopian government will drive up capital expenditure in the next two years in line with its ambitious budget announced in 2015. Ethiopia's budget deficit will rise to a peak of 3.1% of GDP in 2016 and 2017 as the government pushes forward with the second phase of its Growth and Transformation Plan. We expect Ethiopia's current account balance to remain firmly in deficit over the next two years as imports of capital goods strongly outweigh exports from the country. Official aid in the wake of the drought will provide substantial foreign exchange as support for the country's sizeable current account deficit. Political risk in Ethiopia will remain heightened as the government pushes the predominantly agrarian economy towards industrialisation. Furthermore, we expect tensions to rise between the government and its citizens as the government exerts excessive pressure on the public to make way for the expansion of the capital, Addis Ababa.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
State-Led Growth Will Drive Economy
Ethiopia will remain one of the fastest-growing economies in Africa over 2016 and 2017 as the state drives large-scale investment. We
expect the government's continued investment into improving infrastructure and the agricultural sector will provide opportunities for the
population to become increasingly engaged in the economy.
GDP By Expenditure Outlook
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
State Investment Will Keep Monetary Policy Loose
We expect monetary policy in Ethiopia to remain loose over the year ahead as the National Bank of Ethiopia increases money available
for lending to the government. We do not expect the National Bank of Ethiopia to devalue the currency given the risk associated with
pass-through effects to inflation.
Monetary Policy Framework
Fiscal Policy And Public Debt Outlook
Expansionary Policy Will Drive Capital Expenditure
We expect the Ethiopian government to drive up capital expenditure in line with its ambitious budget announced in 2015. Ethiopia's
budget deficit will rise to a peak of 3.1% of GDP in 2016 and 2017 as the government pushes forward with the second phase of its
Growth and Transformation Plan.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES 2014
External Trade And Investment Outlook
Capital Goods Imports Will Drive Deficit Deeper
We expect Ethiopia's current account balance to remain firmly in deficit over the next two years as imports of capital goods strongly
outweigh exports from the country. Official aid in the wake of the 2015 drought will provide substantial foreign exchange as support for
the country's sizeable current account deficit.
Outlook On External Position
TABLE: TOP FIVE GOODS EXPORTS IN 2014
TABLE: TOP FIVE IMPORTS IN 2014
Currency Forecast
Development Drive Will Deter Devaluation
We expect the Ethiopian birr to continue on its gradual depreciatory trend over 2016, in line with the National Bank of Ethiopia's
managed floating rate exchange rate system. We forecast the currency to depreciate by 4.7% and to average ETB21.75/USD
over 2016. We do not believe the central bank will devalue the currency given the risk associated with pass-through effects to
inflation.
TABLE: BMI CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Ethiopian Economy To 2025
Strong Growth Ahead, But Limits To State Model
Ethiopian growth will remain robust over the next decade, albeit well below 2005-2014 levels, with infrastructure investment and private
consumption at the core. Imbalances arising from the state-dominated nature of the economy will be responsible for the more modest
long-term growth rate.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Continued Expansion To Spur Unrest
We expect political risk in Ethiopia to remain heightened as the government pushes the predominantly agrarian economy towards
industrialisation. Furthermore, we expect tensions to rise between the government and its citizens as the government exerts excessive
pressure on the public to make way for the expansion of the capital, Addis Ababa.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
More Armed Conflict Likely This Decade
Ethiopia's much-vaunted democratisation programme is being used as a facade for increased control by the ruling Ethiopian People's
Revolutionary Democratic Front. This increasingly crude concentration of power ultimately risks exacerbating resentment to the point
that largely fragmented groups could coalesce into a coherent armed threat to the regime.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EXPORT AND IMPORT DOCUMENTS
TABLE: SSA – TRADE PROCEDURES AND GOVERNANCE
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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