Ethiopia’s Hot, Nigeria’s Not, for Investors Eyeing Africa

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Merkato Open Air Market
Pedestrians at the Merkato open air market in Addis Ababa. Photographer: Simon Dawson/Bloomberg

Africa has a hot new investment destination and it’s not Nigeria.

The buzz at the World Economic Forum on Africa, an annual summit of the continent’s rich and powerful, is all about Ethiopia, where the economy is flourishing and the government is embracing select foreign capital. Executives from General Electric Co., Dow Chemical Co., Standard Bank Group Ltd. and MasterCard Inc. attending the June 3-5 gathering in Cape Town all singled out the East African nation as a market with strong potential.

Ethiopia was Africa’s eighth-largest recipient of foreign direct investment last year, up from 14th position in 2013, a report released by accounting firm EY on June 2 showed. The number of projects in Ethiopia surged 88 percent, the most of all countries ranked, while those in Nigeria slumped 17 percent.

“It’s got a government that is managing economic development in a very deliberate, cautious manner,” Ross McLean, Dow’s president for sub-Saharan Africa, said in an interview on Thursday. “It’s the second-most populous country in Africa. It hasn’t urbanized like other African countries, but it’s going to. It’s a very exciting place.”

Ethiopia’s economy is expected to expand 8.6 percent this year and 8.5 percent in 2016, compared with 10.3 percent growth last year, the International Monetary Fund said in its World Economic Outlook released on April 14. Nigeria, which has Africa’s largest economy and is grappling with energy shortages and the fallout of an oil price slump, is forecast to grow 4.8 percent this year and 5 percent next year.

Construction Boom

Ethiopia’s capital, Addis Ababa, shows all the signs of a construction boom. Private developers are erecting scores of office blocks and luxury housing estates, while the government is clearing slums to build low-cost apartments. Radisson Hotels International Inc. and Marriott International Inc. are among global chains that have opened hotels to cater for an influx of business travelers.

A Chinese-built railway line that snakes alongside the capital’s main roads is part of a nationwide infrastructure development program that’s helping entice investors. In April, Chinese company Huajian Group began work on a $400 million shoe-manufacturing park on Addis Ababa’s southwestern outskirts, while companies including Taiwan’s George Shoe Corp. have opened plants in an industrial zone in the Bole Lemi district.

On Thursday, Dangote Group, the Nigerian company controlled by Aliko Dangote, Africa’s richest man, said it will spend $500 million expanding its cement plant in Ethiopia, adding to $600 million already invested.

Credit Rating

“We will leave no stone unturned to make this country a suitable destination for foreign investment,” Prime Minister Hailemariam Desalegn said at the opening of the plant at Mugher, about 80 kilometers (50 miles) west of Addis Ababa.

The country was assigned its first credit ratings in May. Moody’s Investors Service rates it a non-investment grade B1 with a stable outlook, while Standard & Poor’s and Fitch Ratings awarded the country a B, one grade lower.

Yields on the nation’s debut $1 billion Eurobond have climbed to 6.77 percent from 6.625 percent when they were sold on December 4.

Business Obstacles

“We’ve done quite a lot of Ethiopian business,” said David Munro, head of corporate and investment banking in Standard Bank, which has applied for a license for a representative office. “We see it as a prospective place to grow our business. There’s the possibility of significant resources and it’s within an economically significant zone, the east African trade area.”

Obstacles to doing business in Ethiopia remain. The Ethiopian Peoples’ Revolutionary Democratic Front has ruled the country for the past two decades and the state continues to dominate the financial services, telecommunications and transport industries. Foreign exchange is in short supply, because the government uses inflows to finance its infrastructure program and exports remain meager.

Razia Khan, Standard Chartered Plc’s head of Africa macroeconomic research, said Ethiopia’s economy has a “hollow” structure because it doesn’t have a big enough middle class to enhance economic growth.

Poverty Data

Only 18 percent of Ethiopia’s 94.1 million people are urbanized and the economy is worth just $48.9 billion, according to the Abidjan, Ivory Coast-based African Development Bank. About 30 percent of the population live in poverty, according to 2010 data from the World Bank, down from 46 percent in 1995.

Pan-African lender Ecobank Transnational Inc. has a representative office in Ethiopia. Equity Group Holdings Ltd., owner of Kenya’s second-biggest bank, will prioritize its Ethiopian business as part of an expansion into nine other African nations, Chief Executive Officer James Mwangi said in an interview in Cape Town.

Dow doubled its sales in Ethiopia last year and sees more growth to come.

“There are some significant challenges,” said McLean. “We manage them. We think we are in at the right time.”

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