Monday, December 29, 2014

What is a Frontier Market ?

  • frontier market is a type of developed country which is more developed than the least developed countries, but too small to be generally considered an emerging market
  • The term is an economic term which was coined by International Finance Corporation’s Farida Khambata in 1992. 
  • The term is commonly used to describe the equity markets of the smaller and less accessible, but still "investable", countries of the developing world. 
  • The frontier, or pre-emerging equity markets are typically pursued by investors seeking high, long-run return potential as well as low correlations with other markets.
  • Some frontier market countries were emerging markets in the past, but have regressed to frontier status.
"We promise to give an investment license to a global company within 24 hours.” This bold promise was made at an unusual road show was held across three cities in India earlier in December. The road show was held by a country keen to attract investment from Indian companies. This country is among the top ten fastest growing economies of the world and is on track for achieving millennium development goals in health and education. The country also boasts of being a gateway for a combined market of 400 million consumers. 

Roadshows are common in India, but this one was by Ethiopia and highly unusual as African countries have rarely made such promises to Indian companies. The apex chambers of commerce in India have supported several initiatives to bring African markets closer to Indian Inc. But this road show was perhaps the first of its kind driven by a single African country. 

  • Ethiopia is growing rapidly towards middle income status. 
  • It has the ability and ambition of seeking global investment with pride and confidence. 
  • Ethiopia floated a global bond to raise more than $1 billion of external capital. 
  • The bond issue was oversubscribed two times when it closed in the first week of December. 
  • The country is being recognized by global investors as a high growth frontier market. 
  • Only 30 years ago, the Band Aid concert had been held to raise aid for the country. Today it stands tall among emerging and frontier economies. 

Among all countries that have issued international bonds, Ethiopia is the poorest with the lowest per capital income. But this status may not stay for long. 
  • The funds raised will be used for railway, power and agriculture projects. 
  • Ethiopian GDP grew at 8.25 per cent this year according to International Monetary Fund. 
  • Prime Minister Hailemariam Desalegn says that Ethiopia welcomes global investment not mere aid. 
  • Ethiopia needs over $50 billion investment over next five years. 
  • Out of this about $15 billion will come in from global investors. 
  • Ethiopia received FDI worth almost $1 billion in 2014, maintaining consistent growth in inflows. 

Things India can learn from Ethiopia and oppurtunities for India ?

India has been present in Ethiopia for years but needs to increase its investment in the country. More than 600 Indian companies operate in Ethiopia but now the country is demanding focused attention from specific segments. 
  • In many ways Ethiopia appears to be ahead of India is providing an enabling environment for industry. 
  • Apart from giving an investment license in 24 hours, Ethiopian government is almost corruption free and offers single window approvals. 
  • A few Indian companies that already operate in Ethiopia proudly proclaimed that it was easier to do deal with government departments in Addis Ababa than in New Delhi. 
  • This is borne out by the World Bank’s ease of doing business report where Ethiopia ranks higher than India on some parameters. 

There are challenges of logistics and inadequate infrastructure. But these are challenges that Indians can overcome faster than other investors. 
  • India and Ethiopia are only a single flight away. The daily flights from Mumbai and New Delhi ensure that connectivity does not pose a problem as it does for many other countries. There is a historical connect too. 
  • As Abyssinians, Ethiopians came to India’s western region as early as 4th century. 
  • From being slaves, they grew into much admired and sought after warriors in regional kingdoms. 
  • Soon they rose in the ranks to become chieftains and even rulers of principalities in Gujarat and Maharashtra and merging with local communities. 

Many decades ago Indian teachers were sent to Ethiopia by the government to teach in schools. Many generations of Ethiopians have grown with deep regard and appreciation for India. 

Unlike India and unlike the entire African continent, Ethiopia was never colonized. It remained free of imperial powers. But like India, it nurtures vibrant culture, cuisine and commerce. In these times of globalisation, it is natural that these two emerging economies will strengthen their trade and investment links.


And what are the exact opportunities?

  • In the case of refined petroleum, India caters to only 1% of Ethiopia’s demand, and in the absence of supply woes, policy hurdles and latent demand, our exports of this product can be raised by over 95 times.

  • There was recently much talk about how India missed out on strong wheat prices caused by crisis in Ukraine, drought in some US wheat-producing regions, season delays in Canada (due to a longer-than-normal cold season) and lower Australian produce due to the El Nino. It could have been missing out on much action in Ethiopia too! India is a country that already has excess of this crop in its coffers. India’s current wheat crop, is currently being harvested, and expectations are that the total output will reach the highest ever for a single season – 96 million tonne. Add that to the 38 million tonne that is already stored away by the government, and there is no reason to believe why exporters from India should miss the opportunity of increasing their wheat supply to Ethiopia by anywhere up to 33 times. (At present, India caters to only under 3% of Ethiopia’s import demand for the cereal crop.)

  • The world hasn’t missed a blink in discussing how the great Indian auto road show is now losing steam. Especially in the passenger cars and commercial vehicles categories. What are we blaming? The EU crisis? Slowdown in the Americas? Elections in Australia? Stop blaming the PIGS, and start counting how many buses and cars domestic and multinational auto companies from India fell short of when it came to supplying automobiles. In 2012, India supplied 1.44% of cars, 3.68% of buses, and a paltry 0.74% of delivery trucks imported by Ethiopia. Is there scope to make more money from exports to Ethiopia? [Are you waiting for an answer?]

  • Isn’t it surprising that India (which has so many domestic cellphone producers) exports only 0.07% of telephones imported by Ethiopia. With a strong manufacturing base, where it exports about $1.5 billion worth of aircraft parts to the world, it doesn’t pay attention to the $90 million plus demand in Ethiopia. Packaged and unpackaged medicaments and medical instruments, large construction vehicles, stone processing machines, and even gas turbines (of which India supplies nothing – some opportunity there!) – count the products and their count keeps on rising, there are reasons aplenty for Indian exporters to bet bigger on the Ethiopian market in the days to come.

  • For exporters looking at longer term and a bigger picture, investing in Ethiopia could also be an option. For Ethiopia to be able to integrate and assimilate foreign investment into its economy, the levels of technology and capital intensiveness should be appropriate for a developing economy. India’s long experience in developing appropriate technology and in the promotion of small industries could be used by Ethiopia, keeping the above objective in mind. Opportunities for foreign investment in Ethiopia abound in the areas of mineral extraction, agro based industries and light manufacturing. Indian businesses can invest either individually or as a consortium in areas like infrastructure development and mineral extraction. Smaller units can be set up to tap opportunities in areas like leather & leather manufactures and food processing.

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