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Ethiopian industry: still banking on China (Financial Times)

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China’s slowing economy and the turmoil on its stock and foreign exchange markets have reverberated around the world and constitute one of the biggest threats to growth in other emerging markets in 2016.

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But in Ethiopia, one of the many beneficiaries of Chinese trade and investment, officials remain unfazed.

Tedros Adhanom Ghebreyesus, Ethiopia’s foreign minister, says he is confident that Chinese investors still consider Ethiopia a “target country” for manufacturing operations overseas, as wages rise across Asia.

“I expect even more foreign direct investment flow from China. There is a strong interest to migrate manufacturing to Ethiopia,” Mr Ghebreyesus told the Financial Times.

Wages in Ethiopia are about a quarter of those in China’s and half of Vietnam’s. Ethiopia also benefits from duty-free access to the US market for many goods through the US Africa Growth and Opportunity Act.

In October, the IMF cut its 2016 growth forecast for Africa to 3.75 per cent on the back of weak commodities prices and China’s falling growth figures.

Ethiopia’s forecasts, by contrast, are holding at above 8 per cent through 2015 and into 2016.

Across Africa, the relationship with China — which surpassed the US to become the region’s top trade partner in 2009 — has been one of the drivers of an economic boom over the past decade.

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Ethiopia’s semi-authoritarian government has made turning the country into a hub for light manufacturing a key priority. That strategy is bearing fruit: industrial output grew by 21.2 per cent between 2013 and 2014, and now accounts for some 14 per cent of GDP.

The Ethiopian government has set itself a target of $1bn in textile exports by 2016. Attracting Chinese companies will be key. Between 2003 and Q3 2015, 11 of the 15 projects China has invested in Ethiopia have been in manufacturing, according to fDi Markets, a data service from the Financial Times.

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Major retailers have taken note. Swedish clothing powerhouse H&M announced in August that it would begin sourcing products from Ethiopian factories, following similar initiatives by the likes of Tesco and Walmart.

The Ethiopian government is putting money behind its bid for industrialisation and plans to continue to do so at pace, despite headwinds in the global economy, according to the minister.

“We are beginning a programme of massive infrastructure construction and special economic zone building so that we have the parts in place to attract these investments,” Mr Ghebreyesus says. “We have strong commitment from the Chinese government, and from Chinese companies.”

Industrialisation has proven difficult across much of the region, so African policymakers are watching the Ethiopian example with interest.

In 2014, officials at the Ethiopian Industrial Development Zones Corporation said it would put a $250m World Bank loan into expanding the Bole Lemi special economic zone (SEZ) outside Addis, the capital, as well as building an entirely new “industrial hub” at Kilinito some 30km south. At least another three SEZs are planned for other parts of the country in the coming few years, including one in Dire Dawa in the south-east.

The question is whether China’s manufacturers will be making the jump across at the pace Ethiopia anticipated in years past. China’s FDI into greenfields projects in Africa fell sharply in the first half of 2015, according to fDi Markets.

According to Mr Ghebreyesus, any dip in China’s investment flows into the region will be temporary. “It will not last. The curve will go back up,” he says. “The difference will depend on SEZ construction.”

Results from the December Caixin survey mark the fifth month in a row that China’s manufacturing purchasing managers’ index has remained below the 50-point mark that separates economic expansion from contraction.

According to analysts, however, Ethiopian officials’ optimism is not misplaced. As China’s demand for commodities slows, “Ethiopia should be more resilient than other commodity-exporting countries”, says Sarah Baynton-Glen, Africa economist at Standard Chartered.

Bucking trends across much of Africa for commodities-led growth, Ethiopia has emerged as one of the world’s fastest-growing economies on the back of strong growth in the services, agriculture and industrial sectors.

Investment is only a small part of the relationship. “A large part of involvement by China in Ethiopia is through project contracts — largely infrastructure projects — which we do not think are likely to drop off as a result of slower Chinese growth,” says Ms Baynton-Glen.

For the time being at least, plans for Ethiopia’s industrial transformation appear set to remain on track.



Created date

09 Jan 2016
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