The Business of Risks

It has been almost eight years since investment became my preoccupation. I spend endless hours reading, tinkering, analysing and discussing about its various forms with many different people – from experts in the policy circle to investors with pocket full of money. Certainly, investment is an exciting economic activity. And, unlike other economic parameters that stand on their own, it has a unique linkage with multiple factors.

My first public sector job was to appraise the viability of public sector projects in which to commit public investment. As an appraisal expert, I had to succinctly evaluate the viability of the investment using multiple evaluation criteria. Letting the powerful politicians know the viability of the investment before they sign the papers for financing was the major task I was involved in.

As much as the task was interesting, it was a huge responsibility for a fresh graduate with little knowledge on the mechanics of policymaking. But, in a way, it was also an opportunity. It helped me to learn the basic traits of investment.

Discussions about investments are essentially based around risk assessment. The risks involved could either be upside or downside in their nature. An upside risk is a risk that could discount the thoughtfulness of a present decision by pushing returns up, and hence bringing higher forgone benefits. A downside risk, on the other hand, entails a factor that reduces the return on investment.

Thus, an investment analysis is all about the study of pertinent risks. The sources, magnitude, direction, sensitivity, probability and costs of risks will be analysed through such an approach. Thus, inherently, an investment analyst is a person that has higher sensitivity to risk.

All my years of analysing various types of investments – public or private, foreign or local, institutional or individual – have shown me that the Ethiopian business environment is rife with costly risks. As much as the cost of the risks is very high, it favours only investors with huge buffers of capital. By and large, the sphere favours public, foreign and institutional investors against their respective counterparts.

Regardless of the nature of the investment, though, there are two popular questions often raised by investors: Where are the risks coming from? Where would they be going in the foreseeable future?

I have been asked about these questions several times over the past eight years. And my answers have varied depending on who is asking, what sector they are looking to be involved in and what their timeframe is.

As it stands, the major risks in the Ethiopian economy arise from structural economic fissures and political uncertainty. If prioritising is essential, however, I think the economic risk weighs more than the political one.

The Ethiopian economy has been growing fast over the past 10 years. The growth trajectory that started to take off in 2003/04 has continued to pick up pace ever since. One can largely attribute all the major changes seen in the economy of the nation to the 10.5pc average annual gross domestic product (GDP) growth the economy has witnessed in these years.

Since 2009, however, this growth has faced serious problems. On the one hand, agricultural intensification reached its limit. Fragmenting plot size, soil degradation, weak input supply and technological stagnation contribute to the festering of growth in productivity per hectare. Extensification is also at a crossroads, as most of the uncultivated land is located in the uninhabited lowlands of the nation.

Had the economy been sufficiently diversified, this structural problem would not have been threatening. But it is not the case. Whereas the industrial sector is just learning to stand on its own feet, the service sector is heavily reliant on the performance of the agricultural sector. Hence, a marginal decline in total agricultural production in the country could still impose a huge burden on the performance of the wider economy.

Another structural risk is the imbalance in the tradable and non-tradable sectors of the economy. As much as the economy is witnessing an expansion in the tradable sectors, its dynamics in the non-tradable sectors are no better than idleness. There is little policy recognition on how much this imbalance is influencing the growth of the economy in general.

Adding to the compendium of risks on the economic front is the deliberate policy bias in favour of public investment. Asides from burdening the investment regime with demand for resources, the expanding investment portfolio of the state seems to bring about the duplication of efforts, superimposition of structures and, hence, widespread inefficiency. This is competing with and crowding out private investment.

On the political front, the nation witnesses uncertainty. This emanates from a national election to be undertaken by the end of the next year under a political sphere that hosts a hegemonic ruling party, a fractured opposition, weak civil society and deep social divisions. Adding to this uncertainty is the weakness of political institutions and their stumpy credibility.

What can an investor do about these risks, though?

Technically speaking, an investor can avoid, manage or absorb risks. No different could the case be with the local risk matrix. Putting in place effective strategies for indentifying and handling local risks is important for investors to succeed in the country.


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