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Economic growth, Ethiopian style
March 15, 2016, 1:45 pm

Amidst the commodities slump dominating headlines, many investors have failed to notice that Ethiopia, a non-resource country in East Africa has been one of the world's fastest-growing economies for a few years running. One of Africa's most impressive performers over the past decade, Ethiopia has averaged annual growth rate of 10.9 percent in 2004-2014, despite not being an oil producer.

Since mid-2014, when price of oil and many other solid commodities began their downward spiral, the African growth story has fundamentally shifted with the center of gravity of growth shifting from the resource-rich West to East Africa.

Investor sentiment towards western African economies, such as Nigeria and Angola, has arguably soured in recent times, but high-growth Ethiopia and other countries in East Africa are offering the growth that capital requires. And, this is not a fickle growth rate driven by an overinflated commodities market. Significant spending on infrastructure, a nascent consumer market, a stable economy, and competitive labor costs are major elements driving investment opportunities in Ethiopia.

Several first-mover opportunities exist for those looking to expand into a yet untapped investment opportunity in Eastern Africa. For instance, this is the last sizeable country in the world that has not had sweeping telecommunications liberalization.

Major changes are beginning to make this country increasingly attractive, with investors and international companies sitting up and taking note of the potential that Ethiopia offers. Recently the country implemented tax incentives for investment in high-priority sectors such as tourism, agro-processing, manufacturing, textiles, chemicals and pharmaceuticals, and mineral and metal processing. This has attracted several multinational companies, including General Electric, Diageo, SABMiller, Heineken, Blackstone Group, Orange and Starwood Hotels among others to make significant investments in Ethiopia.

In many respects, Ethiopia reminds one of China in the 1990s with massive expenditure on infrastructure and a growth mentality that is not driven by quick large-scale liberalization, but rather a more gradualist approach. This is not surprising given that Ethiopia is seeking to mimic the Chinese growth model: it is embarking on economic reform with strong centralized political control. China is also one of the biggest investors in Ethiopia, lending its economic muscle to promote state-run and private industrial zones.

These special economic zones, often financed by Chinese sovereign wealth, include a range of investment, tax and infrastructure investment incentives. In July last year China Civil Engineering Construction Corporation signed a US$246 million  deal to construct the first of these new parks, the Hawassa Industrial Park, with another four being in the planning stage.

Moreover, as the cost of production along China’s eastern coastal provinces rises significantly, the low-end but high employment-generating manufacturing companies in this area are looking to off-shore their production. Chinese companies are already the largest investors in Ethiopia’s manufacturing sector, especially in the automotive, textile and garments industries.

Ethiopia is still viewed through a lens that is shaped by its traumatic past of communism, civil war and famine. This view is now for the most part obsolete, with the country forecast to be the world's best-performing economy this year, which is a feat in itself considering the global economic slowdown, changed Africa narrative and, all too often, the instability of its neighbors. It is a true frontier economy that presents long-term opportunities for capital seeking to invest in one of Africa's newest growth prospects.

From an article first published in Business Day by Martyn Davies, the Managing Director for Emerging Markets and Africa at Deloitte Frontier Advisory, South Africa

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