Will Ethiopia’s new sovereign wealth fund bring back investors?

By Fred Harter
Posted on Thursday, 3 March 2022 12:50

A general view shows the cityscape of Ethiopia's capital Addis Ababa
A general view shows the cityscape of Ethiopia's capital Addis Ababa, January 29, 2017. REUTERS/Tiksa Negeri

Ethiopia has launched a new sovereign wealth fund in a bid to attract billions in foreign direct investment and boost its cash strapped economy. Will investors come back to what was once one of the world's fastest growing economy?

The fund, Ethiopia Investment Holdings (EIH), will seek investment for state-owned enterprises and assets worth $150bn as Abiy Ahmed’s government pushes ahead with its programme of privatisation, despite the on-going conflict in the north.

It will manage assets across several sectors, including telecoms, mining, banking and logistics, areas that have long been dominated by the state, Mamo Mihretu, the fund’s founding CEO, tells The Africa Report.

[Ethiopia] has a young population, a growing middle class and there is still interest from investors.

“We have a very ambitious development plan and to finance it we have to significantly scale up investment flow into the country,” says Mamo, who previously served as Abiy’s senior economic advisor and chief trade negotiator.

“EIH is seeking to mitigate investment risk and be a legitimate commercial and professional partner for investors seeking to access the structural and demographic potential of the African continent.”

‘Clear about its goals’

Ethiopia has historically opted for a state-driven model of development, with the government controlling key sectors of the economy and owning large land-holdings. Since he came to power in 2018, a key part of Abiy’s reform agenda has been to open up state-controlled sectors to private investment.

“The Ethiopian government has been very clear about its goals over the last few years: to create more opportunity for the private sector to participate in the economy and to open the economy up for more robust private capital flows,” says Mamo.

EIH’s legal framework was finalised in February. Officials hope that Ethio Telecoms and the state carrier, Ethiopian Airlines, will eventually come under its remit.

World’s fastest growing economy

In the decade to 2020, Ethiopia was one of the world’s fastest growing economies, with growth rates of around 10%. However, the economy has been battered by the war with the Tigray region, which has exacerbated a foreign exchange crunch and contributed to fuel inflation. As a result, in 2021, the World Bank estimated growth of just 2.4%.

Last year, the Tigray fighters unsuccessfully tried to cut the road linking Addis Ababa to Djibouti’s port, a move that would have strangled the economy. A businessman with stakes in construction and hospitality says: “I am 100% worried about my businesses. You can’t find foreign currency anywhere.”

[…] the government now has additional challenges because they have to pay for the cost of rebuilding after the war.

In May, a long-awaited telecoms auction flopped, with the government selling only one of two licences on offer. The first licence was sold for $850m to a consortium led by Kenya’s top provider, Safaricom.  The sale of the second one was postponed after a bid was rejected as too low.

Meanwhile, all parties to the conflict have been accused of human rights abuses, including massacres, rape and torture, denting the country’s appeal to investors.

“When Abiy became Prime Minister, a key objective was to turn away from a state-led economic growth model to a private sector-led one,” says Patrick Heinisch, an emerging markets economist at Helaba Bank in Germany. “This has been interrupted by the conflict with Tigray, and the government now has additional challenges because they have to pay for the cost of rebuilding after the war.”

“I believe the primary objective of Ethiopia [of] aggressively pursuing privatisation is no longer to enhance competition and increase the private sector-led model. It is simply to bring cash into the economy,” says Heinisch.

Investors to return?

However, now that fighting has subsided in the Tigray and Amhara regions, officials are confident the investors will return to Ethiopia.

Victoria Barbary from the International Forum of Sovereign Wealth Funds says the launch of Ethiopia’s fund fits a global pattern where developing economies have sought to aggregate government assets under one entity and improve their management to lure to foreign investors.

“This model has become really attractive for institutions seeking to invest into more challenging economies because they provide a government guarantee and act as a reliable partner with local knowledge,” says Barbary. “They have become a popular way of funnelling more foreign direct investment and developing private sector capital markets.”

There is large potential in Ethiopia.

Mamo, the head of EHI, cites sovereign wealth funds in Indonesia, Malaysia and Turkey as models for Ethiopia. “They take a similar form to ours,” he said. “Ethiopia is land with boundless opportunities for growth and investment for both foreign and local investors. The government wants to help unlock those opportunities and that starts with its own assets. It wants to blend its local assets with best-in-class international partners and investors.”

Ethiopia with its youthful population of 110 million – Africa’s second largest – and its large untapped markets has long held appeal for investors.

“There is large potential in Ethiopia,” said Heinisch. “It has a young population, a growing middle class and there is still interest from investors. There is so much in terms of infrastructure and technology, in potential for growth and investment, and this fund can benefit from this.”

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