Ethiopia: The African tiger
Comment of the Day

October 14 2013

Commentary by Eoin Treacy

Ethiopia: The African tiger

This note by Dr. Claire Schaffnit-Chatterjee for Deutsche Bank may be of interest to subscribers. Here is a section:
Today’s Ethiopia is a far cry from the pictures of famine in the 1980s and 1990s which are still in some people’s minds, but social development is still a problem. At around USD 1,260 at purchasing power parity (USD 600 in nominal terms), its GDP per capita is still one of the lowest in the world. Living standards are steadily improving, though. Ethiopia has experienced a dramatic reduction in its poverty rate, with it falling from 56% in 2000 to 31% in 2010 – compared with an SSA average of 49%. The undernourishment rate is still fairly high – at 40% vs a 27% average – but is steadily decreasing: it was 68% in the early 1990s and 55% in the late 1990s. Nearly all urban children complete first grade but fewer than 80% of rural children do, and over half of the students are not reaching the base primary school level. The government is taking steps to address skill deficits among the youth.

An economy still based on agriculture, which has high untapped potential

Ethiopia’s wealth of unusually fertile soils has shaped its history. Arable, densely populated highlands allowed kingdoms to thrive and dominate weaker peoples. Unusual in Africa, Ethiopia was already a strong centralised state before Europeans colonised that continent in the 19th century. Abyssinia (as it was known at the time) was only occupied by Italy from 1936 to 1941. The country’s economy is based on agriculture, accounting for nearly 50% of GDP and 85% of employment. Although recent efforts by the government and donors have improved agriculture’s resilience, it is still largely rain-fed, thus vulnerable to weather shocks, and drought is a perennial threat. The agricultural sector is also suffering from low use of quality seeds and fertilisers. However, its potential is very high, given that Ethiopia enjoys fertile soils, a tropical climate and water availability.

Eoin Treacy's view The trend of improving governance in much of Sub-Saharan Africa continues, suggesting the process of raising millions of people out of poverty and into the middle classes that has been so successful in Asia is just as possible in Africa. This progression is essential for high population countries such as Ethiopia if they are to avoid the crises that have been such drags on their development previously.

One of the most visible manifestations of Ethiopia’s development plans has been in the coffee market. The country has embarked on a drive to raise the profile of its single origin varieties in an effort to drive revenue growth and differentiate its products in what is a highly competitive global market. Ethiopia coffee is now marketed as an individual product in Starbucks which suggests that the policy is meeting with success.

Starbucks remains a relative strength leader and while becoming increasingly overextended relative to the 200-day MA, a break in the progression of higher reaction lows would be required to suggest mean reversion is underway.

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