Cepheus Capital Research

We review the recently approved Ethiopian Government Budget for the 2023-24 fiscal year. The very restrained spending growth presented in the new budget is positive for reducing deficit and lowering inflation. But unfavorable spending patterns are be...

We review Ethiopia's latest macroeconomic conditions at the start of 2023 and the outlook for the year ahead. Reflecting the recent conflict, growth has slowed, inflation remains high, and fiscal/external positions have worsened. Looking ahead, we ch...

Exports hit $4.1bn in 2021-22, up 14% and driven by coffee, gold, and flowers; growth mostly reflected price effects. Imports reached a historic high of $18bn, with fuel, fertilizers, and food making up the top three commodities. Gross FX inflows ros...

Headline numbers: The Ethiopian Parliament approved yesterday a government budget with planned expenditure of Birr 787bn (11% of GDP) for the new 2022-23 fiscal year, to be funded by Birr 439bn of revenue collections, Birr 39bn of grants, Birr 43bn of foreign borrowing, and Birr 266bn of domestic borrowing. Expenditure is rising by 22% vs last year’s outturns, with large increases planned for transfers/subsidies (up 9.6x), defence (up 3.8x), and debt service (up 2.8x).

Ethiopia’s economy faced six distinct shocks this past quarter, including major price spikes in global markets as well as domestic shocks linked to conflict and drought. In the monetary area, the central bank’s policy response has been to slow the Birr’s monthly depreciation—seemingly to limit inflation—from an annual ‘run rate’ of 33% last year to just 4% at present, though growth in money supply (M2) remains high at 25% above year-ago levels. If prolonged, for example, the cutbacks being relied upon—in government capital expenditure, in capital goods imports, and in fx supplies to the private sector—would reduce long-term investment/exports, lower growth, and aggravate inflation.

With the conflict in Ethiopia turning out much more prolonged and devastating than many observers (including ourselves) anticipated, the Ethiopian macroeconomy has— for over a year now—found itself in a difficult war-time footing, facing immense humanitarian and security costs, as well as a heavy toll in terms of lost social and physical infrastructure. While the Government’s ability to cover its deficit from mainly domestic sources is positive, this does come at a cost to other parts of the economy—seen with the decline in growth of credit to the private sector and the sharp increase in Ethiopia’s (already high) inflation rate.

We review the digital economy landscape in Ethiopia – services offered, companies involved and activity indicators. Policy reforms are helping remove past constraints such as poor telecom connectivity and restrictive regulations. New entrants, new fu...

While most macro indicators for the first quarter of 2021 showed a recovery from COVIDrelated shocks, the economic outlook has since become clouded by ongoing impacts from the recent conflict, heightened geo-political tensions, and rising risks to external funding. Accordingly, we await the release of the 2021-22 Budget Document as well as the start of the fiscal year before fully revisiting our macro projections, and keep unchanged for now most of our current fiscal year estimates and year-ahead forecasts.

We expect Ethiopia’s macroeconomic conditions in 2021 will be shaped largely by developments in six key areas: covid, conflict, crops, credit, creditors, and currency. Crops:Is the crop harvest this year turning out to be a boom or a bust? For our baseline assumption for 2021, and given recent indications from Government and donors, we think it is more likely than not that policies will soon begin to meaningfully address large humanitarian needs in the Region, while also gradually restoring normalcy to infrastructure links, commerce, and economic activity.

Growth: We continue to project 4.1 percent growth for the current fiscal year, on the basis of a broadly unchanged crop output, 9 percent growth in industry, and 4 percent growth in services. Although there is much uncertainty on the crop outlook (which may surprise to the upside), underlying our growth forecasts for industry and services are expectations that covid impacts are fading away, that the recent conflict will not have material macro effects, and that credit growth from the banking system will continue at its current strong pace.

Background:Ethiopia’s T-Bill auctions were set up in December 2019 as the first step in the establishment of market-based debt and equity markets that eventually cover both the public and private sectors. For private banks, T-Bills make up roughly 4% of their total lending. Recent yields on the 28-day, 91-day, 182-day, and 364-day T-Bills were 5.2%, 6.7%, 6.8%, and 8.7% respectively. At the same time, the T-Bill market’s substantially negative real rates, low voluntary private sector participation, and a still-pending secondary market are areas of concern that will hopefully either recede in 2021 (with declining inflation) or be addressed via further reform.

Ethiopia’s National Planning Commission recently released the final GDP estimates for the 2019-20 fiscal year that ended in June 2020. While the headline figure—of 6.1 percent real GDP growth—has been widely reported, other aspects have received less attention. We take a closer look at the underlying data, especially recent trends in key productive sub-sectors as well as in consumer spending, government consumption, and investment. A ‘low-case’ scenario with 5 percent growth shows per capita incomes at $1,300 ($4,400 PPP) by 2030, while a ‘high-case’ scenario with sustained 10 percent growth brings GDP per capita to $2,400 (~$8,000 PPP) by 2030.

The conflict that has broken out in Ethiopia over the past few weeks appears – based on recent developments – likely to be short-lived in its duration and confined in its geographic scope. We now project inflation of 13 percent by mid-2021, and see prospects for single-digit inflation emerging only in the second half of 2021. Fiscal policy: Even with large government spending increases this year, the budget deficit is worsening only slightly (from 2.6% to 3.1% of GDP) and the debt-to-GDP ratio staying below 60 percent despite multiple shocks. A further deficit deterioration linked to the conflict seems unlikely given what are already large allocations in the budget for defence & security.

We review the 2019-20 performance of Ethiopia’s industrial parks, which now consist of 10 active sites, 189 companies, and 71,000 employees. However, their export performance is well below expectations, especially as the COVID pandemic reduced monthly exports and employment starting in April 2020. Their performance is thus a key barometer of progress in this area and towards these aims. Recent performance:Ethiopia’s ten active industrial parks (five government and five private) registered exports of $165mn in 2019-20, up 16 percent from the year before and nearly four-fold the export levels of two years earlier (Tables 1-5).

We tabulate recently released data on the composition of Ethiopia’s exports and imports, and summarize below our main observations. EU markets, rather than the US or China, are driving Ethiopia’s export growth. Exports vs other fx inflows: Total fx inflows into Ethiopia were $20bn last year, by our estimates, illustrating the still low (15%) contribution of goods exports to overall fx inflows. Imports of Capital Goods and Consumer Goods now nearly the same: Based on an end-use classification of imports, imports of capital goods and consumer goods were each near $4bn last year—and together accounted for 60 percent of total imports.

With provisional 2019-20 results for Ethiopia’s banks recently becoming available, this note reviews the sector’s latest performance, notable trends, and near-term outlook. These extensive macro-financial reforms should not pose a risk to the banking sector’s historically strong growth record, in our view, but they do imply an increasingly competitive operating environment, a moderation in average shareholder returns, and a greater differentiation in performance across banks. Average returns to shareholders (EPS) were near 32 percent, not much different from the norms of recent years.

This note reviews the recently passed Government Budget for the 2020-21 fiscal year. Notable aspects of the budget include: (1) the Government’s expectations of still-strong growth this year (8.5% for GDP, 4.5% for imports); (2) the planned 20% increase in tax revenue, supported in part by higher indirect taxes (e.g. excises); and (3) the substantial spending increases/allocations dedicated for roads, health, education, debt service, irrigation, and security. Even if the deficit were covered solely by new borrowing (with no use of privatization proceeds), we don’t expect debt ratios to deteriorate this year given strong growth in nominal GDP.

Contrary to most expectations following the onset of the COVID pandemic, Ethiopia’s macro data for the just ended fiscal year showed better-than-expected outturns in many areas, including in tax collections, bank lending, export/airline receipts, and industrial park activity. At the same time, still-high inflation, fx shortages, and reduced activity in a few COVID-affected sub-sectors remain key challenges.