Ethiopia’s business environment and untapped opportunities: Investor shares insights
By Berhane Demissie, co-founder and managing partner of Ethiopian private equity firm Cepheus Growth Capital.
Certain sectors were more impacted than others due to Covid-19, with the most affected being hospitality, tourism and some manufacturing sub-sectors. Agriculture, which is the largest contributor to the Ethiopian economy and construction (second largest), both faced minimal impacts from the pandemic. Given the small share of Covid-affected sub-sectors in the overall economy, Ethiopia registered 6% growth in the year ending June 2020, not much lower than the trend growth of 9% growth seen in recent years.
Also worth noting is that the Ethiopian economy still has limited links with the global economy. The economy is not dependent on exports, which account for just 2.8% of GDP, and thus the effects from the sharp drop in global demand were not so significant. Nevertheless, exporters of certain products such as textile and leather products were impacted by the pandemic. [Read: Ethiopian architect-turned-manufacturer produces leather bags for export market] Despite its recent growth, manufacturing currently makes up only about 4% of the economy.
The government’s GDP growth forecast for 2020/21 fiscal year is 8.5% while the IMF is forecasting growth to be almost a flat. We think growth is likely to be between 5 to 6% for this year.
We haven’t had any official lockdown in Ethiopia, so companies never stopped operating since the pandemic started. The priority has therefore been to try to manage what happens within your company. This entailed providing information to employees on how to prevent Covid-19 and meet the WHO standard messages, as well as providing sanitisers and masks to employees.
When it comes to portfolio companies, manufacturers were impacted when China was under lockdown due to supply chain disruptions. In addition, companies were impacted due to travel restrictions for incoming managers and technical experts, which delayed production timetables in some cases. Those have been my personal experiences.
We’re seeing a lot of changes and improvement in investment laws and the opening up of different sectors, creating significant opportunities for the private sector. The financial sector is also seeing some liberalisation (though banks are still closed to foreign investment) and opportunities in the logistics, media and digital space are opening up.
The upcoming privatisation of telecoms will open up the technology space and opportunity for technology-based solutions. I think that the telecoms infrastructure is really the backbone of any of tech-related business to succeed.
We’re of course at that early stage and we need to get the right regulations and supportive operating environment for these companies to significantly scale-up.
For our portfolio companies, we try to encourage technology-based systems in management and operations to support the productivity and efficiency of the businesses. We’re also interested in the potential for conducting a growing share of sales via digital/electronic channels. One of the investments we made was in a consumer goods company. Technology will help us getting our products to the end users.
Supporting regional integration
I’m a strong believer in regional integration and I see the opportunities of greater market access, input supplies for local industries, and movements in human capital between markets. I think the African Continental Free Trade Agreement will have a huge impact, but just because the agreement has come into play it’s not going to be easy for companies to take advantage of it quickly. A lot of work needs to be done at the company level to really take advantage of the opportunities.
It is crucial to really think about the needs of each country within the trade zone. For example, Ethiopia sends raw coffee to Europe and then Europe roasts it and then sends it back to Africa. So if I was a coffee farmer, I would study and make sure I understood which countries are importing from Europe and why they’re importing it. What are their tastes? What corporate and industry governance standards are they looking for to have comfort in the product that they are buying?
Just because there’s a free trade agreement, doesn’t mean someone is going to buy your product. The reputation of your product is key. They want to have the confidence in your product, in what you’re processing and presenting to the market. So there’s a lot of work that needs to be done in the public and private sectors to take advantage of this opportunity.
Clarity in the commercial code
When people enter into legal contracts in this country, especially supply or service contracts, contracts are not usually detailed enough for even the courts to decide clearly what was agreed or intended, while pre-agreed mechanisms for dispute settlement are also rarely spelt out. This has complicated the resolution of business disputes in the past.
Looking ahead, Ethiopia has now completed the draft of a new commercial code, which is to be ratified by Parliament. The new commercial code is expected to bring in a lot of clarity on many areas of business activity and address some of the concerns people had before, so this should really help improve the legal environment going forward.
This article is an excerpt from The Africa List’s ‘Business Barometer 2020’.