Invest In Ethiopia Etf: A Guide To Opportunities And Risks

Investing in Ethiopia can be an attractive prospect due to its economic growth, demographic advantages, and infrastructure development. However, it's important to note that Ethiopia does not have a country-specific ETF. Here's an introduction to the topic of investing in Ethiopia through ETFs.

Ethiopia has been one of the fastest-growing economies in the world, with a 10% growth rate over the last decade. This growth has been driven by a shift from an agrarian economy to manufacturing and infrastructure development. The country's capital, Addis Ababa, is forecasted to be the 5th most populous city in Africa by 2025, and Ethiopia is expected to be the 6th most populous country globally by 2050. This urbanization and young population can lead to a demographic dividend, resulting in economic growth.

While there is no Ethiopia-specific ETF, investors can gain exposure to the Ethiopian economy through currency trading. The Ethiopian Birr has surged in value, and the country's economic diversification and liberalization can further strengthen its position. Additionally, investing in African ETFs or mutual funds can provide indirect exposure to Ethiopia's growth.

Before investing, it is crucial to conduct thorough research and understand the risks associated with investing in emerging markets. Investors should consult financial professionals and consider their investment goals and risk tolerance.

The Ethiopian economy has grown at a rate of 10% over the last 10 years

Investing in Ethiopia

Ethiopia has been one of the fastest-growing economies in the world over the last decade, with an average economic growth rate of 10.7% annually. This growth has been driven by the country's emphasis on infrastructure development and manufacturing, as well as its demographic advantages. The Ethiopian government has invested heavily in road and dam projects, providing reliable transport and cheap power to its inhabitants. This has led to the country becoming one of the fastest-growing in Africa.

Ethiopia's growth story is also unique because it has not been tied to the discovery and development of mineral resources like oil and gas. This bodes well for the country's political stability, as it avoids the issues faced by resource-rich nations like the Congo, Sudan, Zimbabwe, and Nigeria, which have experienced civil unrest due to the control of these resources.

The country's rapid growth has not been without its challenges, however. There are concerns about the heavy hand of the Ethiopian government, with foreigners being barred from investing in certain sectors. However, this tide seems to be shifting, and the country is poised for significant foreign investment and liberalization in the future.

Ethiopia's economic growth has also had a positive impact on its population. Between 2000 and 2015, the poverty rate fell from over 50% to 31%, life expectancy rose from 52 to 66, and infant mortality more than halved.

Looking forward, Ethiopia is expected to continue its growth trajectory, attracting foreign investment and becoming a manufacturing hub. The country's large, young population is expected to lead to a demographic dividend, with more working-age people than dependents, resulting in increased savings, investment, and productivity.

However, there are also potential risks to Ethiopia's economic growth. The country's debt has been rising, and there are concerns about the sustainability of its current path. Additionally, internal conflicts, droughts, and external factors like the Russia-Ukraine war have impacted growth and inflation rates.

How to Invest in Ethiopia

Currently, there is no country-specific ETF for Ethiopia. However, there are other ways to gain exposure to the Ethiopian economy:

• Currency Trading: Investing in the Ethiopian Birr can provide direct exposure to the country's economy. The currency has surged in relation to the yen since 2007, and with Ethiopia's economic diversification and liberalization, it could see even greater gains.
• Equities: With the difficulty of direct investment in the Ethiopian economy, purchasing equities in companies that are capitalizing on Ethiopia's growing consumer base is a wise move. For example, Heineken has breweries in the country and has reported scope for expansion due to low per-capita beer consumption.
• Mining-Related Investments: The mining sector in Ethiopia has grown significantly, with gold making up close to 100% of mining exports. Premier African Minerals' potash mining project and AIM-listed Nyota Minerals' exploration permit for nickel, base, and precious metals are potential investment opportunities.
• Mutual Funds and ETFs: While there is no Ethiopia-specific ETF, mutual funds and regional ETFs that specialize in Africa can provide exposure to the Ethiopian market. The VanEck Africa Index ETF (AFK) and the T. Rowe Price Africa and Middle East Fund (TRAMX) are examples of funds with allocations to Ethiopia's neighbouring countries.
• American Depositary Receipts (ADRs): ADRs are a way for US investors to trade African stocks on US stock markets. Examples include AngloGold Ashanti (AU), DRD Gold (DRD), and Gold Fields (GFI).
• Real Estate Investment Trusts (REITs): For those interested in African real estate, REITs provide a simple way to invest in rental properties and benefit from potential growth in this sector.

The IMF stated that Ethiopia was on the precipice of shifting from low to moderate risk of debt distress

Ethiopia's Debt Distress Risk

IMF's Statement on Ethiopia's Debt Distress Risk

The International Monetary Fund (IMF) stated that Ethiopia was on the brink of shifting from low to moderate risk of debt distress. This statement was made in the context of assessing the country's economic situation and the sustainability of its debt obligations. According to the IMF, Ethiopia's total debt percentage of about 50% of GDP was manageable but would be a concern if it continued to rise. However, Ethiopian government officials disagreed with the IMF's assessment and asserted that their expenditure on public projects and works, such as industrial zones and sugar factories, justified their debt levels.

Ethiopia's Debt Sustainability Analysis

To address the risk of debt distress, the Ethiopian authorities requested an arrangement under the Extended Credit Facility (ECF) to improve debt sustainability and achieve a moderate risk rating by the end of the proposed program. The IMF and the International Development Association (IDA) conducted a Debt Sustainability Analysis (DSA) to evaluate Ethiopia's debt position. The DSA found that Ethiopia's total public and publicly guaranteed debt as a share of GDP declined by about 9 percentage points in 2022/23, standing at 40% of GDP at the end of June 2023. External debt accounted for 45% of total public and publicly guaranteed debt, with official creditors, such as the IDA and official non-Paris Club creditors, making up a significant portion.

Ethiopia's Economic Challenges and Outlook

Ethiopia faced political, economic, and humanitarian challenges, including a two-year conflict in Tigray, which impacted the country's economic growth. The near-term outlook was challenging, with tight macroeconomic policies, FX shortages, lower agricultural output, and policy uncertainty constraining economic activity. However, the IMF projected growth of 6.1% in 2023/24 and an average of 7.3% between 2025/26 and 2033/34. Inflation was expected to remain relatively stable at high levels, with disinflation gathering pace in the medium term as the authorities adopted an interest-rate-based monetary policy framework.

Measures to Address Debt Distress

The IMF approved a four-year Extended Credit Facility (ECF) arrangement for Ethiopia, amounting to SDR 2.556 billion (about US$3.4 billion). This financing package aimed to support the authorities' Homegrown Economic Reform (HGER) Agenda to address macroeconomic imbalances, restore external debt sustainability, and promote private-sector-led growth. The program included measures such as moving to a market-determined exchange rate, combating inflation through monetary policy modernization, creating space for priority public spending, and strengthening the financial position of state-owned enterprises.

The country's tremendous growth has been fuelled by an emphasis on infrastructure and government expenditure

Ethiopia's tremendous growth has been fuelled by an emphasis on infrastructure and government expenditure. The country has achieved double-digit GDP growth over the last decade, averaging 10.7% over the last 10 years—more than double the average annual growth of countries in Sub-Saharan Africa. This growth has not been driven by natural resources but by a focus on infrastructure and manufacturing.

The Ethiopian government has placed a strong emphasis on infrastructure, investing in road and dam projects to provide reliable transport and cheap power to its inhabitants. In particular, the government has focused on improving the country's transportation infrastructure, which has long been a constraint on the economy. From 1990 to 2015, the government spent $11 billion on roads, increasing the country's road network from 19,000 km to 100,000 km. This focus on infrastructure has been instrumental in the country's socioeconomic transformation.

In addition to roads, the government has invested in railway construction, with a new 32km light rail system opening in the capital in 2015, the first of its kind in Sub-Saharan Africa. The government has also invested in renewable energy, with over 90% of the country's energy production coming from hydro and solar power.

Ethiopia's shift from recurrent to capital expenditure has been a key driver of the country's socioeconomic transformation. The government's spending on infrastructure and its focus on improving transportation and energy infrastructure have been crucial to the country's economic growth. In addition, the government has maintained a determined focus on economic diversification, with manufacturing now accounting for less than 8% of total exports.

Ethiopia's population has also played a key role in the country's growth. With a median age of 20, the country has a large, young, and relatively cheap labour force that is attractive to foreign manufacturers. The government has also invested in education, with spending on the education sector helping to create a more skilled workforce and contributing to higher labour force participation rates.

Overall, Ethiopia's tremendous growth has been driven by a combination of factors, including a focus on infrastructure, government expenditure, economic diversification, and a young and educated workforce.

The mining sector in Ethiopia has grown significantly, with government estimates of roughly 1 million employed miners

The mining sector in Ethiopia is the country's fastest-growing economic sector, with a growth rate of 115% in 2021 and 91% in 2020. This growth has translated into a five-fold increase in the sector's contribution to GDP. The sector's growth is a direct result of recent policy reforms implemented by the Ethiopian government to curb illegal mining and revamp the sector. The mining sector is considered one of the strategic pillars of Ethiopia's economic growth over the next ten years, with a projected annual growth rate of 33%.

Ethiopia has vast mineral potential, with known reserves of over 30 metallic, industrial, agro- and construction minerals. The country has deposits of coal, opal, gemstones, kaolin, iron ore, soda ash, and tantalum, but gold is the most significant mined commodity. Gold exports have seen a massive increase, from US$5 million in 2001 to US$602 million in 2012, and reached US$672 million in 2021. Gold mining is a key development sector in the country, with large ore-based gold mines such as Lega Dembi and Sakaro, which produce about 5 tons of gold per year.

Other important mining activities include the extraction of tantalum, which is used in electronic devices and has the sixth-largest mining programme in the world, and salt, which is only of internal importance with negligible amounts exported. The country also has extensive natural gas reserves, with gas fields located in the southeastern part of the country.

Ethiopia's mining sector has undergone significant reforms to attract foreign investment and encourage exploration and mining. The government offers incentives such as lower income tax, duty-free import of capital goods, favourable depreciation rates, and higher royalty payments. The Ministry of Mines (MoM) is the main point of contact for investors, providing guidance on geodata, legislation, regulations, and licensing.

The mining sector in Ethiopia has grown significantly, employing approximately 1 million miners, according to government estimates. It is an important source of foreign currency, contributing more than 19% of the total value of exports and up to 10% of foreign exchange earnings. The sector is expected to become a backbone of agriculture and a catalyst for industrial growth, job creation, and export earnings.

The easiest way to invest in Ethiopia is through ETFs or mutual funds that specialise in Africa

How to Invest in Ethiopia

ETFs and Mutual Funds

ETFs are exchange-traded, meaning they can be bought and sold like stocks. To invest in an ETF, you will need a brokerage account with access to the market. Once you have access, you can place a trade order during market hours to buy the ETF of your choice.

• AFK - Market Vectors Africa ETF: This ETF follows the Dow Jones Africa Titans 50 Index, focusing on companies located in Africa and listed on the African Stock Exchange. It targets a broad range of sectors and countries, including frontier markets, with country weighting determined by GDP size. Top holdings include Nigerian Breweries, Tullow Oil, and Attijariwafa Bank.
• EZA - iShares MSCI South Africa Index ETF: The EZA ETF tracks the MSCI South Africa Index, targeting publicly traded securities in the South African equity market. Top holdings include MTN Group, Sasol LTD, and Naspers LTD, with a focus on the financial, materials, telecommunications, and consumer discretionary sectors.
• GAF - SPDR S&P Emerging Middle East & Africa ETF: The GAF ETF targets Africa and the Middle East by correlating with the S&P Mid-East and Africa BMI Index. It includes some similar holdings to the EZA but also AngloGold, Impala Platinum, and Firstand. Top sectors represented are financials, materials, telecommunications, and consumer discretionary.
• NGE - MSCI Nigeria ETF: This ETF mirrors the MCSI All Nigeria Select 25/50 Index, with a focus on consumer staples, financials, and materials. Top holdings include Dangote Cement, Guaranty Trust Bank, Zenith Bank, and FBN Holdings.

In addition to these Africa-focused ETFs, there are also ETFs that offer exposure to emerging markets, which may include Ethiopian companies or companies operating in the region. Here are the top three ETFs with Ethiopia exposure:

• XEMD - BondBloxx ETF Trust - BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF
• EMHC - SPDR SERIES TRUST - SPDR Bloomberg Barclays Emerging Markets USD Bond ETF
• ISTB - iSHARES TRUST - iShares Core 1-5 Year USD Bond ETF

When considering any investment, it is important to conduct thorough research. Understand the risks, watch the fund's performance, and review the holdings to see if they align with your investment goals and risk tolerance.

Mutual Funds

Mutual funds are another option for investing in Ethiopia. These funds typically invest in a large basket of securities, targeting specific economic sectors or regions. There are mutual funds that focus on Africa or specific countries within the continent. Here are some examples:

• T. Rowe Price Africa and Middle East Fund (TRAMX): This fund invests in banks and companies in Africa, the Middle East, and some European companies doing business in the region. Over 25% of their portfolio is located in South Africa.
• Commonwealth Africa Fund (CAFRX): Launched in 2011, this fund invests in equity and debt securities issued by African companies in manufacturing and mining.

Other Considerations

While ETFs and mutual funds offer a more diversified approach to investing in Ethiopia, there are other options for more experienced investors. These include American depositary receipts (ADRs), which allow US investors to trade shares of foreign companies on US stock markets. Some natural resources companies with ADRs include AngloGold Ashanti (AU), DRD Gold (DRD), Gold Fields (GFI), and Harmony Gold (HMY).

Additionally, with the lack of a country-specific ETF, currency trading is another way to gain direct exposure to the Ethiopian economy. The Ethiopian Birr has surged in recent years, and the country's economic growth and diversification may lead to further gains.

Ethiopia's Investment Potential

Ethiopia has been identified as one of the fastest-growing economies in the world, with a 10% growth rate over the last decade. The country has focused on infrastructure development, particularly in road and dam projects, to support the transport of goods and provide cheap power. Ethiopia's growth has not been tied to natural resources, which bodes well for political stability.

With its rapid economic growth, young and growing population, and increasing urbanisation, Ethiopia is poised to be a significant hub for foreign investment. However, it is important to note that foreigners are currently barred from investing in banking and telecom entities, and the country has faced questions about the heavy-handedness of its government.

When considering how to invest in Ethiopia, the easiest and most diversified approach is through ETFs or mutual funds that specialise in Africa. These investment vehicles offer exposure to a range of companies and sectors, helping to mitigate the risks associated with investing in a single company or sector. Always conduct thorough research and understand the risks involved before making any investment decisions.

Frequently asked questions