Despite the sudden death of long-standing Prime Minister Meles Zenawi in August 2012, the smooth handover of power and his successor's endorsement of the status quo should see stability and broad policy continuity preserved through to elections in 2015.
We expect the Ethiopian economy to remain on a robust growth trajectory over the next few years - BMI forecasts real GDP growth of 6.7% in 2013 and 6.1% in 2014 - underpinned by strong investment in the energy and transport sectors and an improvement in conditions for the Ethiopian consumer.
Having reached a peak of 40.6% year-on-year (y-o-y) in August 2011, headline inflation in Ethiopia has - as we predicted - fallen steadily over the last 18 months and we expect price pressures to continue to ease in 2013 on the back of a relatively favourable outlook for food production and a moderation in global oil prices.
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We expect Ethiopia to sustain a persistent, but stable fiscal shortfall over the medium term, with the deficit hovering between 2.5% and 3.5% of GDP. The deficit will be sustained primarily by high levels of government spending on infrastructure and poverty reduction under the Growth and Transformation Plan.
Major Forecast Changes
Recently published data by the National Bank of Ethiopia in FY2011/2012 (October-September) suggest that the country's fiscal shortfall widened slightly more than we had anticipated, reaching an estimated 3.2% of GDP. In 2012/13, BMI forecasts the deficit to remain in similar shaping at 3.2% of GDP (compared with our previous projections of 2.6%).
Key Risks To Outlook
Despite the relatively smooth handover of power following Meles Zenawi's death, political risks will remain heightened. Increasing social tensions raise the prospect of an uptick in domestic unrest, while a behind-close-doors power struggle among the political elite could threaten policy-making.
As is the case for many African nations, Ethiopia is highly susceptible to the volatility of commodity markets, particularly coffee, which can either adversely or favourably affect export revenues and headline growth.
While inflation has come down significantly from the high levels witnessed in recent years inflation will continue to represent a key risk to macroeconomic stability. Food price inflation in particular will remain a concern, with unpredictable weather a constant threat.
Partial Table of Contents:
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
BMI Political Risk Ratings
Status Quo Preserved, But Outlook Muddied By PM's Death
- Despite the sudden death of long-standing Prime Minister Meles Zenawi in August 2012, the smooth handover of power and his successor's endorsement of the status quo should see stability and broad policy continuity preserved through to elections in 2015. That said, political risks will remain heightened, with increasing social tensions raising the prospect of an up tick in domestic unrest, while a behind-close-doors power struggle among the political elite could threaten policy-making.
Long-Term Political Outlook
More Armed Conflict Likely This Decade
- Ethiopia's much-vaunted democratisation programme - particularly a devolution of authority to the regions - is being used as a facade for ethnically-based 'divide and rule' policies designed to protect the interests of a small Tigrayan-run clique. This increasingly crude concentration of power ultimately risks exacerbating resentment to the point that largely fragmented groups could coalesce into a coherent armed threat to the regime.
TABLE: POLITICAL OVERVIEW
Chapter 2: Economic Outlook
BMI Economic Risk Ratings
Growth To Remain Strong, But Below Trend
- Spearheaded by heavy public investment and supported by a steady pick-up in domestic demand, we expect the Ethiopian economy to remain on a robust growth trajectory over the next few years. We are forecasting real GDP to expand at around 6.0% on average between 2013 and 2017, which although below the stellar growth rates witnessed over the last decade, remains high by regional standards.
TABLE: ECONOMIC ACTIVITY
Balance Of Payments
Structural Weakness Drives Persistent Current Account Deficit
- High import demand driven by an ambitious state-led investment agenda will see Ethiopia maintain a persistent, albeit narrowing, current account deficit over the next few years. While we expect these successive shortfalls to be adequately financed by investment inflows, dwindling foreign reserves will mean that the external accounts and the economy will remain susceptible to shocks.
TABLE: CURRENT ACCOUNT
Modest Disinflation In 2013, But Risks Abound
- We believe price pressures in Ethiopia will continue to ease in 2013, largely on the back of a relatively favourable outlook for food production and a moderation in global oil prices. That said, we expect inflation to remain elevated, with a more sustained fall to be precluded by a combination of persistently high levels of public borrowing and a weak currency.
TABLE: MONETARY POLICY
Stable Fiscal Shortfall Over The Medium-Term
- We expect Ethiopia to sustain a persistent, but stable fiscal shortfall over the medium term, with the deficit hovering between 2.5% and 3.5% of GDP. This deficit will largely be sustained by high levels of government spending on infrastructure and poverty reduction over the next few years, while efforts to boost revenue mobilisation will face challenges.
TABLE: FISCAL POLICY
Chapter 3: 10-Year Forecast
The Ethiopian Economy To 2022
Full Table of Contents is available at:
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