Ethiopia: FX liquidity challenges persist
GDP growth: reforms needed
We increase our 2017/18 and 2018/19 GDP growth estimates to 8.5% y/y and 9.0% y/y respectively. GDP growth expanded by 10.9% y/y in 2016/17, way above our expectation of 7.3% y/y, as the industrial sector rebounded sharply, counterbalancing the impacts of the drought on agricultural production and political anxiety on business confidence. Despite the NBE’s restrictive monetary policy, increased public investments should support future GDP growth. While growth is threatened by a lack of FX liquidity, the new prime minister should ease tribal-based anti-government protests.
Balance of payments: export growth could take longer to recover
We expect the C/A deficit to narrow to 8.5% of GDP in 2018 and thereafter decline to 7.4% of GDP at the end of 2019. A reduced import burden associated with lower drought-related imports and a constraining fiscal policy stance, resulted in net imports declining by 5.9% y/y in 2016/17. Indeed, this trend should continue over the coming year. Despite the decline in net imports, export earnings have also been relatively subdued over the past 3-y. A lack of FX could disrupt the supply chain, hindering exports. While the C/A deficit could narrow gradually over the coming years, it will probably remain above 7.0% of GDP at the end of 2019. Despite this relatively large deficit, the government is likely to continue financing it through FDI, which would also include privatisation receipts. We see FX reserves rising marginally, to USD3.2bn (equivalent to 2.4 months of import cover) as at December 2018.
Monetary policy: sticky inflation
The MPC should keep its tighter monetary policy stance over the coming year. Headline inflation remained elevated but eased to 13.7% y/y in April 2018, from 15.6% y/y in February 2018, due mainly to a decline in the growth of the food sub-index which subsided to 16.1% y/y from 20.9% y/y during the period. We see headline inflation in low double digits until Q4:18, with the most notable risk to our outlook still perhaps hinging on food inflation developments. Non-food inflation increased to 10.8% y/y in April 2018, from 8.4% y/y in January, probably on second-round effects of the ETB devaluation in October 2017.
FX outlook: not expecting another sharp devaluation
We see the USD/ETB trading at around 29.1 levels by the end of 2018. Following the 15% snap devaluation of the ETB in October 2017 by the NBE, the local unit has been broadly stable. While the devaluation was intended to foster export competitiveness and diversification, FX rationing and capital controls work against this. If the authorities continue to monetise the fiscal deficit, upside pressure on USD/ETB could arise, but we don’t expect devaluation of a similar magnitude to that of October 2017.