Emerging

Disrupted momentum

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Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
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ETHIOPIA  
DISRUPTED MOMENTUM  
Ethiopia is expected to report its lowest growth rate since 2003. Although the population has been relatively spared  
by the brunt of the Covid-19 pandemic, the cyclical economic environment has deteriorated sharply. The country  
has been hard hit by both a domestic shock and a decline in external revenues, which is squeezing its structurally  
low foreign reserves. Support from multilateral creditors will limit liquidity risk in the short term, but the current  
situation largely underscores the need for reforms. At the same time, political risk is rising with the emergence of  
socio-political tensions that pose significant challenges for Ethiopia’s political and economic stability.  
ECONOMIC MOMENTUM IS CUT SHORT  
FORECASTS  
The Covid-19 crisis interrupted Ethiopia’s growth momentum, which  
had averaged about 10% a year over the period 2004-2019. Driven by  
large-scale, debt-financed public investments, the country’s growth  
model had already reached its limits and contributed to major  
imbalances. The current shock highlights these vulnerabilities and the  
need to accelerate reforms that aim to increase its reliance on foreign  
direct investment (FDI) through economic liberalisation. Although  
growth is expected to remain positive in 2020, it will sink to the lowest  
level ever witnessed since 2003.  
2019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
9.0  
15.8  
-2.5  
56.9  
-5.1  
31.1  
3.4  
1.9  
20.2  
-3.5  
56.6  
-5.2  
32.2  
3.1  
0.0  
11.5  
-3.1  
55.8  
-4.6  
34.4  
4.7  
8.9  
8.0  
Inflation (CPI, year average, %)  
Central gov. balance / GDP (%)  
Central gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
-1.1  
56.9  
-3.4  
35.8  
6.8  
The economic crisis is manifest in both the domestic and external  
shocks. Agriculture, which accounts for 80% of export revenues and  
nearly 40% of GDP, was especially hard hit by the sharp decline in  
harvests due to a massive locust invasion, military conflicts in the  
northern region and declining demand. The drop-off in external  
demand and the disruption of global supply chains also had major  
repercussions on exports of services.  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDETB (year end)  
2.4  
2.1  
2.7  
3.3  
32.0  
33.9  
35.1  
37.0  
e: ESTIMATE & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
At the same time, annual inflation soared to 20% in 2020. Fiscal and  
monetary measures to stimulate the economy helped drive up prices,  
but these measures are expected to wind down in the months ahead.  
In 2021, the economy is expected to continue slowing, with the latest  
forecasts calling for zero growth. Price inflation is expected to ease, but  
will remain high, with 2021 inflation estimated at 11.5%. The central  
bank should continue to make massive injections into the economy by  
participating in the financing of the public deficit.  
UNPRECEDENTED ECONOMIC SLOWDOWN AND RISING INFLATION  
y/y, %  
20  
Inflation, CPI  
Real GDP growth  
1
5
0
5
0
RESURGENCE OF POLITICAL AND MILITARY CONFLICTS  
1
The downturn in economic prospects has been accompanied by a major  
deterioration in the political environment. The re-emergence of ethnic  
conflicts is a clear reminder of the country’s fragile political situation.  
With the adoption of a new constitution in 2010 and the peace treaty  
signed with Eritrea in December 2018, the social-political environment  
entered a period of stabilisation. Abiy Ahmed’s arrival as prime minister  
in April 2018 also made it possible to make some progress in terms of  
governance.  
2014  
CHART 1  
2015  
2016  
2017  
2018  
2019  
2020  
SOURCE: IMF, CENTRAL STATISTICAL AGENCY OF ETHIOPIA, BNP PARIBAS  
The social-political environment has deteriorated in recent months,  
however, due to growing discontent with the government. The arrest Tensions crystallised with the postponement of the general election,  
of prominent opposition leaders, the introduction of a law forbidding originally scheduled for August, and the extension of electoral terms.  
opposition members from serving as public officials, and heightened The deterioration in the political situation in the Tigre region in the  
executive powers in the midst of a state of emergency sparked fierce northern part of the country is particularly concerning. The local  
criticisms. This frustration was expressed in popular protests and authorities (Tigray People’s Liberation Front, TPLF) decided to defy the  
uprisings as well as in tensions within the government, and was postponement of the general election by holding elections in September.  
only exacerbated by economic hardships, health restrictions and the This move exacerbated the hostilities between the regional and federal  
postponement of general elections.  
authorities, resulting in the deployment of the military and armed  
conflict. These clashes risk sparking conflicts throughout the country  
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Eco Emerging // 1 quarter 2021  
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as ethnic demands emerge in other regions. The conflicts will not only  
have local consequences, but could have regional repercussions as  
well, since Ethiopia plays a major role in the region’s security.  
SHALLOW LIQUIDITY DUE TO THE FOREX REGIME  
These tensions also add to the diplomatic disaccord with Sudan and  
Egypt concerning the finalisation of the Grand Ethiopian Renaissance  
Dam (GERD). Egypt and Sudan accuse Addis-Ababa of threatening  
their water supply, which is already irregular due to adverse weather  
conditions. Negotiations are still pending concerning the filling of the  
dam, which is likely to push back the project’s completion, scheduled  
for 2023.  
These factors are currently eroding any optimism about progress  
towards a real economic transition. The current environment is likely  
to hamper key reforms. Further tensions also risk delaying certain  
investments and privatisation projects by scaring off non-resident  
investors.  
USD Mns  
Foreign currency reserves  
External public debt service  
Exchange rate (RHS)  
USD/ETB  
45  
4
0
5
4000  
3000  
2000  
1000  
0
3
30  
25  
20  
15  
10  
5
0
EXTERNAL FINANCES COME UNDER GREATER PRESSURE  
2015  
2016  
2017  
2018  
2019e  
2020f  
2021f  
The postponement of foreign investment would be particularly harmful  
for the Ethiopian economy. The country suffers from a structural  
shortage of foreign currency, which is its main source of vulnerability.  
Its weak and volatile export base is largely handicapped by an  
overvalued exchange rate, and has been accompanied by growing  
import demand in recent years. This has reduced the amount of foreign  
currency revenues and increased liquidity risk.  
CHART 2  
SOURCE: NATIONAL BANK OF ETHIOPIA, IMF, BNP PARIBAS  
Fortunately, debt-restructuring agreements recently signed with China  
and the Debt Service Suspension Initiative (DSSI) with the Paris Club  
of creditors will help alleviate financial pressures in the short term.  
Emergency liquidity lines provided by the IMF and the World Bank are  
also a non-negligible source of funding. Yet given the large share of  
debt held by unofficial creditors and bondholders, sovereign risk in  
foreign currency is still very high: external debt accounts for more than  
half of total public debt (59%) and external debt servicing accounted for  
nearly 65% of foreign reserves in 2020. External public debt payments  
should increase in the years ahead with the refinancing of the USD 1  
billion Eurobond maturing in 2024.  
The IMF programme concluded in late 2019 is the key to shoring up the  
country’s solvency and launching the structural reforms necessary to  
ensure the economy’s attractiveness and debt sustainability. Adjusting  
the exchange rate is still one of the key short-term measures. Yet this  
reform would imply a short-term deterioration in the trade deficit,  
Current levels are too low for the authorities to make adjustments  
to counter the shock. With the crisis, the current account deficit is  
expected to hold at about 5% of GDP. Despite the decline in imports of  
goods and services and improvements in the terms of trade (thanks  
notably to lower oil prices), exports are expected to cover only 18% of  
imports in 2020. Exports of services are expected to contract sharply  
(
down an estimated 24% in 2020) given the sharp decline in tourism  
revenues, its main component.  
The capital account is also expected to deteriorate in 2020 due to risk  
aversion and the lack of non-resident capital inflows. Net FDI has  
declined and covered only 40% of the current account deficit in 2020  
(
vs an average of more than 60% in 2015-2019).  
The external financing need is estimated at USD 6.2 billion in 2020. The greater risk of inflation and a heavier debt burden. Although the  
Debt Service Suspension Initiative (DSSI) is not included in this figure country has some financial support, it is still walking on a tight rope.  
and will partially reduce this amount as well as next year’s financial  
requirements. Still, foreign reserves are also very low, estimated at  
Completed on 11 January 2021  
2
months of imports. This leaves the authorities with very little  
manoeuvring room to deal with a massive liquidity shortage.  
Perrine GUERIN  
perrine.guerin@bnpparibas.com  
Despite efforts launched to develop the export base in the short term,  
imports are expected to increase more rapidly than exports and to  
widen the trade deficit.  
The total stock of external debt is estimated at 30% of GDP in 2020 (60%  
of which is held by the central government). Although the level is still  
limited, the cost should continue to rise. The external debt servicing  
charge could swell to a third of exports, which would signal a state  
of alert. The currency’s fixed exchange rate limits any adjustments to  
counter the shock.  
Persistent current account deficits, low foreign reserves and the  
increase in external debt repayments therefore fuel external solvency  
risks.  
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