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AMR: Ethiopia

AMR: Ethiopia

We see GDP growth of 4.1% y/y and 4.3% y/y for 2020 and 2021. We expect the C/A deficit to inch lower to 4.6% of GDP in 2020 and thereafter to 4.4% in 2021. We see USD/ETB increasing to 38.56 by year-end.

Nominal GDP
USD96 billion
Real GDP growth

Medium-term outlook– infrastructure focus  

It is still plausible that GDP growth will be dominated by investment spending over the medium term. We maintain our GDP growth forecast for 2020 at 4.1% y/y and 4.3% y/y for 2021. In FY2020/21, out of the ETB293.7 federal budget, the government budgeted around ETB160.3bn for capital expenditure, implying that the public investment in infrastructure will persist and dominate as a key driver for economic growth in the medium term. The agriculture sector will continue to contribute the most. Interestingly, in FY2018/19, the share of agriculture to GDP shrunk to 33.8%, from 34.9% in FY2017/18 and 44.6% in FY2010/11. However, we still see growth in this sector remaining subdued, after averaging 3.7% y/y in the past 2-y, from the 5.2% y/y average in the 5-y before. Perhaps the electricity and water sub-sector will post some growth too. In the Q3: 2019/20, electricity exports increased by 9.0% y/y. Electricity generation rose 6.7% y/y in that time due to higher production from hydropower sources which grew by 5.4% y/y and wind sources by 2.2% y/y.

Balance of payments – C/A to narrow slightly

The C/A deficit is still likely to narrow to 4.6% of GDP in 2020 and thereafter to 4.4% in 2021, from an estimated 4.7% of GDP in 2019. The goods and services import downward trend is likely to continue due to lower international oil prices. Oil prices have plunged attributable to subdued global demand. Brent crude prices have so far dropped by roughly more than 30% YTD at the time of writing.

Monetary policy- accommodative bias persists

We revise our average headline inflation forecast to 21.27% y/y in 2020, from16.1% y/y. We also revise our 2021 average headline inflation forecast to 14.84% y/y, from 12.2% y/y. We still expect the NBE to adopt an accommodative monetary policy stance in 2020 in response to the pandemic despite the upside pressure on inflation.

FX outlook – further USD/ETB upside

The ETB is likely to weaken in the medium term, possibly ending the year at 38.56. Both the IMF-induced devaluation and real effective fundamentals could drive this. The IMF expects the government to shift to a flexible exchange rate regime as part of the Extended Credit Facility (ECF) and Extended Financing Facility (EFF) programme. Authorities seem to agree and there are plans to transition into a more market-determined ETB.