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    BusinessManaging Investor’s Confidence

    Managing Investor’s Confidence

    Date:

    On May 2, 2011, the commander-in-chief of the US armed forces, President Barack Obama, interrupted a regular television broadcast to appear on the TV screens. Obama’s address was highly anticipated since reports about a very important announcement by the president had already circulated minutes before his appearance on TV. With tired and somewhat relieved face, Obama informed the America public that public enemy number one—leader of the terrorist group Al Qaeda, responsible for the devastating destruction of the twin-towers of the world trade center on September 11, 2001— Osama Bin Laden was killed in a successful military operation by the US navy seals in Pakistan.

    Given the history of Bin Laden and the level of destruction he was able to cause on US soil had landed him a number one spot on the country’s most wanted list for many years. Billions of dollars have gme into a war effort to hunt Bin Laden and his terrorist cell in Afghanistan and Iraq in response to the September 11 attack and hence it was a big military success even for a man as powerful as the president of US.

    Moments after the announcement thousands took to streets in various cities to celebrate the demise of what is considered to be the most hated man in the US. People were seen singing and dancing on streets resembling a celebration of the country’s victory at major sporting event.

    Nevertheless, what was more striking about the political event surrounding the death of Bin Laden was the profound impact that it has brought upon the US economy in the days to come. For one, the next day, share prices at the New York Stock Exchange exhibited an unprecedented revival in face of the harsh sovereign debt crisis and the hangover effect of the 2008 financial meltdown.

    The chain of events brought to light the much hypothesized and sometimes observed strong linkage that existed between politics, the economy and perception of investors about the prospect of the country they decide to invest in. Even a stronger case is made for Foreign Direct Investment (FDI) that goes in searching of opportunities in emerging markets.

    The opinion of FDI companies towards an emerging economy is something that the countries care a lot about. And they should since the competition to attract quality foreign capital is getting fierce in the 21th century. Today even the stylized underdeveloped and poverty-stricken sub-Saharan region is in the race for FDI with its glittering growth prospects and natural resource endowment. Surely, Ethiopia stood out from this pack during last decade. Showing an astonishing leap in attracting new FDI capital and recording the highest number of FDI jobs in 2014 and 2015, Ethiopia leads the continent to become a top FDI attraction and destination, according to report by Ernest and Young.

    Nevertheless, in spite of the rosy prospects, Ethiopia is still new to hosting big multinational investment companies. Although the construction of world-class industry park facilities like the Hawassa Industrial Park has garnered a lot of attention for big international garment and textile players, it surely is a long way before Ethiopia becomes an established FDI destination. In fact, while the government was busy inaugurating the newly built Hawassa Park, something was lurking in the shadows; something that could seriously damage both the physical and mental investment that the government had made to lure investors into Ethiopia.

    It was a dire political upheaval in the Oromia and Amhara Regional states, two regions with considerable FDI settlement in the country. For  the most part, at the beginning, the unrest was restricted to street demonstration and occasional clashes with security forces. However, later on, most of these demonstrations started to alter their character and become more violent. Clashes with security forces became more serious and the human cost started to take a toll. In that time, isolated incidents of burning of government properties and vehicles offering long-distance transportation services were observed.

    But, things looked to have gotten serious when what appeared to be a peaceful protest in Bahir Dar turned violent and resulted in targeted destruction of investment properties, mostly flower and horticultural farms found in and around the regional capital. At the peak of the demonstration in the region as many as 19 flower farms were torched in a matter of a few days. And just when things started to calm down in the Amhara region, the protest in the Oromia region rejuvenated causing untold damages both to properties and life including investor properties. But, the turning point once again came after the unprecedented stampede which claimed the lives of more than 50 people at the celebration of a cultural festival of the Oromos known as the Irrecha.

    The three days of mourning that followed the tragic incident at Bishoftu town (Irrecha stampede) was perhaps the devastating period in Ethiopia’s recent experience with investment. In a matter of three days the total number of torched, destroyed or attacked properties climbed to 130. According to unconfirmed reports, a significant numbers of these investments properties were owned by foreign investors.

    That actually drove the Ethiopian government to declare a state of emergency for a period of six months. Now, with the state of emergency in force, the boiling political unrest and indiscriminate destruction of properties looks to have subsided. And the government was quick to set up a national task force to evaluate the damages sustained by private investors during the protest and compile a clear document which will serve as a base to implement a package of compensation and rehabilitation program.

    Be that as it may, the burning question remains to be the extent of the psychological damage that is sustained by FDI companies both invested or are looking to invest in Ethiopia. The degree of the damages to the perception of investors in terms of trust and confidence to invest in the country, if there is any, is point of interest for both policy makers and the public alike.

    Not surprisingly, almost all experts, investors and policymakers who talked to The Reporter on the issue admitted that the unrest would surely cast its shadow on the economy in one way or the other. What looks to be agreeable is the already observed impact on the flow of tourists and the activities of tourist-related business-like hotel and tour and travel businesses. As far as investors’ perception is concerned, the majority of the commentators, although they argued that it is yet to be seen, they expect to see some degree of impact at least in short-term.

    However, opinion tends to get more scattered as one goes deeper into the degree of the impact and what it means to the prospect of the nation. Costentinos Berhe (PhD), a lecturer at the Addis Ababa University Graduate School, stresses that actual impact of a political incident on investor’s confidence is not something that is straightforward. Although he understands that theoretically political unrest will have deterrent effect on investment especially FDI, he maintains that the degree of the damages has to be identified scientifically. Political risk is something that is very relevant to investment, he told The Reporter; and that is why it is factored into the investment decision-making process irrespective of or sometimes despite the macroeconomic fundamental of the country.

    True to form, political risk is a primary deterministic variable in investment decision-making especially for FDI companies. In fact, there are various econometric models which are designed capture specific aspects of political risk for investment. Researches show that political risk that is relevant for FDI does not only emanate from instability or unrest rather host government’s policymaking process and its influence on specific aspects of the business and the risk of expropriation are few of factors that investors look into.        

    “A formal research has to be conducted and data has to be made available to gauge the degree of impact on both potential investors and those invested in Ethiopia already,” Costentinos says. One thing that is for sure is that FDI companies generally want to take the long-term view about a specific investment destination when they formulate their opinion, he explains. And according to him, the political incident in Ethiopia is not yet a conclusive indication as to how investor would perceive country; rather the way the government handles the protest and the damages to properties would have the biggest impact in shaping the perception of investors.

    Tsedeke Yihune, founder of Flintstone real estate, shares Costentinos’s view in the sense that the next six months would be very important to either make or break Ethiopia as an attractive investment destination. It would be a testing moment for Ethiopia since it is an opportunity to show the rest of the world, investors included how we manage crisis as nation in general and the state machinery in particular. Tsedeke is inclined to believe that the political unrest that has happened so far would be almost meaningless to shape perception towards Ethiopia without the story that would unfold in the coming six month where the state of emergency would stay in force.

    In fact, he argues that if government uses this opportunity to solve the fundamental problems and implement the needed reforms while keeping the sanctity of human rights and political freedoms during this period, the country could end up attracting more investors than what it could have accomplished without the unrest. But, if it failed, the damages would be almost irreparable.

    P. Teckwani, a management and investment consultant who has worked in Ethiopia for 10 years, is not that worried about the events which have transpired during the past few months in Ethiopia and whether they would hurt investors’  confidence towards Ethiopia. As far as he is concerned, investors function by few simple rules most of which are directly linked to profit which he calls the “honey”. And Tackwani believes that no matter what, Ethiopia, at this moment, have the “honey” and “antes” will always be drawn to the “honey”.

    He also argues that political episodes like this one are hardly unique to Ethiopia and that investors no matter how sensitive they might appear they do take such risks into consideration. Rather the country’s track record in ensuring stability over the past two decades is a definite advantage, he says. “If at all there is any impact from the protest, it would be temporary interruption to production activities, or short term shock to some investors,” Tackwani argues. Nevertheless, it is always about the balance between the opportunity and the risk, for him; and in case of Ethiopia opportunities do outweigh the perceived risks.                 

    A macroeconomist who wants to remain anonymous have a different take on the matter. For him, the issue of political unrest and its impact on investors’ perception towards the host nation is all subjective; that is subjective to each class of investors. He is of the view that there are two broad categories of investors in the world. One group is composed of those investors who are highly driven by profit margin; policy induced rent and short term benefits. Meanwhile, the others are those seeking long term sustainable investments opportunities; these groups are highly sensitive to political stability to a certain nation at any particular time. But, since they are drawn by abnormal and short-term return, these groups are hardly deterred by instability.    

    Given the evolution of the political economy of the country in the past 15 years, with the narrowing of the political space, soaring income inequality and lack of adequate job opportunities for the youth, it was clear that such upheaval would come one day, he explains. I don’t think the investors already in Ethiopia have any illusion about that; many of these investors have a fair understanding of the risk involved in investing in Ethiopia. So, being highly drown to advantages, loop holes and rents to exploit, theses short term political episodes would hardly be an issue for them. “If we are asking whether the current unrest would damage confidence with regard to many of the already invested FDIs in Ethiopia the answer will be “No” since they have high tolerance to such risk as long as the benefits are high enough,” he argues.

    In this regard, he alludes to the risk taker investors in highly unstable countries like Democratic Republic of Congo or South Sudan and argues that the case of Ethiopia is not unique.  Nevertheless, he reckons that the standard investors who seek long term benefit and business opportunities in Ethiopia will perceive the risk emanating from the current political situation in country. One such example, according to the same macroeconomist, is investors in capital market which Ethiopia has joined by issuing a Eurobond valued at 1 billion dollars. He says that potential impact of the unrest will surely be reflected on the sovereign bond that Ethiopia has already sold in the international market. “The interest rate will in coming months soar indicting rising cost of borrowing for the country,” he says.

    In weeks after the unrest, however, Finch, one of the rating agencies which have assigned an investment grade of “B” to Ethiopia have announced that it has updated its rating and retained the “B” grade for Ethiopia. In the report, Finches says that impact of the recent political crisis could be felt via macroeconomic channels due to the severe foreign exchange shortage exacerbated by the expected decline in FDI and ODA to nation. However, Finch looks convinced that the macro economic fundamental of Ethiopia remains strong and growth prospects are good.

    As far as, Tsedeke is concerned, the unrest could also have one silver lining for both the state and investors.  For investors, the upheaval showed three main characteristics that each FDI and local investor has to watch out for if investments are to be sustainable in Ethiopia, he explained. One is the exploitation of cheap labor and the need to develop and invest on the human resources. The other is the need to curb ill conception about land resource in Ethiopia. He argues that investors are awakened by the protest that investing on land development is the sustainable way of going forward instead of scrambling to exploit it. The last, however, is the relationship of FDI investors and the state and how these investors use the state machinery to maximize their benefit.

    Tadesse Haile, state Minister of Industry, says that the government is closely watching the response of investors who are already invested in Ethiopia. He says that given the response of the government to the damages which have happened in some parts of the country is well received by most investors. “I was the contact person for my sector and I have communicated with FDI companies through the political unrest,” Tadesse says, “and although the situation came as shock for most, they were satisfied with our response.”

    In fact, Tadesse is confident that incident has not left a dent on countries credibility as investment destination since even during the protest he was receiving new request for investment.  

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