Investing Amid Global Turmoil
Written by Melaku Sahlu - Principal, Emergent Global   
Friday, 17 October 2008

marketindices Investing in established markets these days is definitely not for the faint of heart.  Even as governments around the world raced to address the credit crunch that triggered record market drops across all the major indices, the underlying weakness of the global economy started coming to the fore prompting yet another round of sell offs.  There are near universal fears of a global slowdown with the only debate seeming to be how deep it will go and how long it will last.  


If you have been considering an investment in Ethiopia, the current circumstances may be worrying to you given the volatility and uncertainty of the global economy in general.  So how might the global crisis affect Ethiopia in general and your investment plans in particular?


Some Level of Insulation

Over the past few years there has been much debate over the restrictions regarding foreign involvement in Ethiopia's finance sector.   Indeed speculators have come to believe that the government would soon move to opening up this sector as part of the WTO accession process and perhaps more generally as a general progression of the sector's growing maturity.  Well it turns out that this policy may be at least partially responsible for shielding Ethiopia's economy from much of the effects of the global credit crunch and the resulting insolvency of many leading financial institutions.  Add to this the extreme tightness of Ethiopia's credit markets in which domestic banks will rarely lend any significant amount without equivalent collateral (sometimes even up to 130%) and you have a highly de-leveraged economy where cold hard assets are the name of the game.   Now this is certainly something that many observers (author included) have been skeptical of in the past but at this point in time, it seems to have been a blessing in disguise.  


This is not to say that Ethiopia will remain completely unaffected.  There have recently been reports that real estate prices in Addis are going down due to the fact that many foreign based buyers (Ethiopian Diaspora) purchased properties leveraging mortgage equity or other leveraged instruments in their domiciles to pay for their investments.  The current credit crisis has subsequently forced them to repay those debts sooner and it seems some of them have been liquidating their assets in Ethiopia to do so.  Most of the impact to Ethiopia's economy will come in similar form - pullbacks from foreign investors and perhaps some softening of demand for Ethiopian exports.  It should be noted that the latter may be less susceptible to dropping demand since much of Ethiopia's export sector supplies commodities.  But even given the above, there could be other impacts that may be viewed as more favorable. 


Silver Lining 

There may be more good news for the Ethiopian economy than simply being shielded from the worst excesses of the global meltdown.  The silver lining for Ethiopia is that the economic slowdown has resulted in a steep drop of oil prices from their record highs just a few months ago.  In fact, prices are just about half what they were from their peak of $147 a barrel in July.  No doubt this causes great relief within the government after having caused it severe shortages in foreign currency reserves which must be easing up by now.  One of the most concerning issues about Ethiopia's economy of late has been the high rate of inflation driven in significant measure by the increasing prices of commodities and oil.  Despite the fact that the Ethiopian government has subsidized oil until just recently, the inflationary effects of the price run ups certainly cannot be disguised magically and the current pullbacks offer at least the promise of reduced inflationary trends.  Ditto any real and sustained pullback in real estate prices which have been unreasonably high in Ethiopia (especially in Addis) driven primarily by Diaspora purchases at elevated prices in an industry that has had a lot of trouble keeping up with demand.


Everybody Has to Eat

If you have been looking at investments in Ethiopia, you should not necessarily be alarmed at what the prevailing climate may imply for them.  Instead, take a careful analytical look at what it is that you're looking to accomplish and then assess them within the context of Ethiopia's particular circumstances which as noted above may not only be able to weather the storm better than most but which may also even offer certain advantages.  For example, if you have been looking at investments in the Agricultural sector, you should also consider the fact that global food prices remain near all time highs and that Ethiopia offers plenty of opportunities to capitalize at the moment.