“ETHIOPIA REMAINS INSULATED FROM THE GLOBAL FINANCIAL SYSTEM HENCE DIRECT IMPACT ON THE SECTOR IS LIMITED”

Ermias Amelga is board chairman of Access Capital Services S.C. He returned to Ethiopia in 1996 after 8 years of undergraduate and graduate academic training and a 12-year successful stint in investment banking in the U.S. He has been a leading member of the initiative to establish the Addis Ababa Stock Exchange and is also best known for launching the pioneer bottled water company, Highland Spring Mineral Water. Since 2006, he has focused on the services sector and has established Access Capital Service S.C., Zemen Bank S.C., Access Real Estate S.C., Access Resorts S.C. and Access Leasing S.C. (under formation). Given his business experience in the U.S, Ermias Amelga spoke to Hayal Alemayehu of The Reporter on the current debt crisis in both the U.S and Europe and its possible implications for the Ethiopian economy . Excerpts:

Would you first tell us if the 2008 global financial crisis and the current debt crises are interrelated or exhibit any similarity in their nature?

The crisis three years ago arose as a result of major imbalance between the domestic real economy and the related financial system in the U.S. It was a crisis primarily related to the housing sector. As housing is a big part of the U.S. economy, it ended up impacting the whole economy. Basically, what happened was too much leverage granted to home buyers enabled those, who otherwise couldn’t afford, to take up huge housing mortgages. Before the crisis erupted, home buyers were expected to bear 20 percent of the total value of the houses they intend to purchase, which demonstrates the financial standing of those individuals to acquire the remainder in the form of long term loan. But when you decide to lower the downpayment to 10, 5 or zero percent as was the case in the U.S., it cannot adequately be established what the real earnings or savings capacity of the mortgager is and hence its ability to service the loan. In addition, the financial institutions went even further to introduce negative amortization loans, which meant the loan amount was going up. They were not even charging you interest in the first few years. The credit system was fictitious, so to speak. Yet, a lot of money went into the housing sector. And a lot of people who couldn’t afford to buy houses were buying them. So when the loans started to mature many people had no choice but to default. As the default rates started to amount over time, they took more and more banks down with them. Consequently, the banks started to give less and less loans, ultimately less and less people buying houses. Nevertheless, the real-estate companies were still building houses. All of a sudden you have this situation where you have excess supply houses as the banks were still then lending in huge proportions to these companies.

Because of the existence of excess liquidity in the system, a lot of the buyers were actually speculative buyers. A lot of buyers were buying more than one house because it was a nice and easy way to make money as prices were going up every year and more money had been pumped into the sector. As soon as that picture started changing, a lot of those speculative buyers pulled out of the housing market. The demand shrank very quickly and value of the houses started to plummet. The buyers had very little money invested in the houses, so they just stopped making payments and started walking away from the houses, which they were not living in anyway. As more and more people default on their loans and more and more banks declare losses, the economy in turn went into financial crisis. So, this is a rough picture of the crisis in 2008/09.

So was that how the U.S. spending frenzy froze? But what about the story behind the current crisis?

Yes. Seventy percent of the U.S. economy is consumption, driven by customer spending. And a lot of that consumption at the time was based on inflated home prices. Financial system’s nose-diving and associated bubble in the housing market were later passed on to the real economy; a lot of jobs were lost in the housing, construction, retail and related sectors including the automobile industry. So, the main culprit in the 2008 crisis was basically consumers living beyond their means because there was a very loose banking system that allowed them to borrow beyond their means. And it was at an individual or family level.

In the case of the current crisis as well more or less a similar story can be narrated but this time around the culprit-in-chief is the government. For many years people have been saying that the U.S. is living beyond its means. The country was running big budget deficits for years as the government itself was doing the same thing as the individuals and families I mentioned above. The difference between what the government raised as revenue and what it spent grew into trillions of dollars. The country was importing a lot more than it was exporting. All the same, we haven’t still seen the real impact of the frenzy on the U.S. economy so far except a psychological one; spending and borrowing are still somewhat at the same level. On the other hand, it is not that the U.S. economy is not capable of paying its debt either; it is rather the political willingness to do so that is being observed.

What about the crisis unfolding in the euro zone?

It is of the same sort. Be it Greece, Spain, Portugal, Italy, all is a case of budget deficit with varying degrees. If you live beyond your means, and as long as your economy keeps growing and remains strong, you might stay there and even settle your debt. With regard to the U.S., no-one is really questioning the capacity to pay back its debt, yet. But with Greece, it has become apparent now that it is not just a temporary liquidity problem. But there might actually be an issue of insolvency; they went too far than they can manage. They have a real crisis to bail out. The other European countries are not there yet. The difference in the case of Europe is that the central bank had to step in to stop things from escalating and deteriorating by replacing market lenders and providing loans with lowest interest rates.

So what would be the extent of the damage to Ethiopia, if there is any? And comparing the two episodes, which one hurts Ethiopia the most?

The previous financial crisis steered up a wide range of economic recession in the developed world economies. Consumption went down, which means a lot of people lost their jobs, especially, service sector jobs. Unemployment went up and people’s incomes were actually affected. Remittance is one of the major channels through which Ethiopia could indirectly be affected by global financial crisis. When you look at Ethiopia, we get a lot of remittances coming from the U.S. Looking back to the previous financial crisis, I think remittances coming to Ethiopia from the U.S. had not been affected that much. People were still sending money to their relatives even in difficult times.

It is very tough to say whether the U.S. economy will go into a secondary double depreciation. The present debt crisis has not so far led the U.S. economy into recession and, as such, it will be difficult to say how it will affect Ethiopia’s economy. And we don’t really export much to the U.S. and, as such, it will be difficult to forecast whether the ongoing crisis in the U.S. affect our export. In fact, when you look at our major export, it is none other than coffee. There should be a major recession in the U.S. or Germany or Japan for people to decide to stop drinking coffee; I don’t see that happening. Gold has become one of out major export items and its global price is increasing to our advantage.

As we are kind of insulated from the global financial system, I don’t think that the present situation will affect our financial sector directly.

As Ethiopia’s economy or budget is significantly reliant on donor countries, don’t you foresee that aid coming in the form of development assistance to Ethiopia will be affected because of the current situations?

Well, the EU as a whole is our major development partner. And if you look at our major development partners in Europe, including Britain and Germany, none of them are being directly impacted by the situation that it is unlikely that the crisis in some of the European countries will affect the development assistance we receive from our major development partners. I think it is also unlikely that the aid we receive from the U.S. in the form of food or military assistance will be hampered.

What about inflation, or, rather, imported inflation. Wouldn’t the present debt crisis in the development world exacerbate the current inflation in the country?

Well, if you have a recession, it will be killing inflation. Recessions are deflationary by nature. Therefore the impact will be the opposite. Prices at such time, including oil prices, will go down, as demand goes down, aside from food. The demand for food is ever-growing and food prices are, in fact, going up.

Investment and tourism are the other prime areas which could be seriously affected by the financial turmoil in the western world. What do you say about that?

When you see the picture globally, investment might be declining in the western world, especially in the U.S. and Europe. In fact, stock markets are falling and real estate and banking sectors are performing low, especially because recession is being expected to come again. But things look better in Africa, which could serve as an alternative destination for investors. And Ethiopia is becoming one of the better places to invest in Africa. So while investment might decline globally there could be places where it might, on the contrary, go up, probably in places like Ethiopia.

As for tourism, there will be a decline. But our tourism is mainly in the form of conference tourism, and that will not be declining. Countries like Kenya where there is a lot of tourism activities might be hurt. But the revenue we currently generate from the tourism sector is relatively minimal that the decline in the industry will not affect us that much

But many argue that whatever has happened in some countries will directly or indirectly affect other countries, as the world has long become a globalized village?

Well, the point is correct. But it depends. It is a question of the degree of the impact. I believe that the degree of the impact on Ethiopia’s economy is minimal or quite insignificant. There is a lot of [financial] turmoil going on in the West but I think we are quite disconnected. I went through the different points. We are really not part of the international system. So turbulence in that system cannot affect us directly. It affects us indirectly. And one has to identify the channels through which the turbulence in the western world affects our economy. And the channels are the ones I mentioned before. [reporter]