FOREX CRUNCH IMPERILS REPATRIATION OF PROFITS?

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001015

SIPDIS
SENSITIVE

DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD
USTR FOR PATRICK COLEMAN, CECILIA KLEIN
DEPT OF COMMERCE WASHDC FOR ITA BECKY ERKUL
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD ET
SUBJECT: FOREX CRUNCH IMPERILS REPATRIATION OF PROFITS?

REF: A) ADDIS ABABA 675
B) 2008 ADDIS ABABA 02569

ADDIS ABAB 00001015 001.2 OF 002


SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT
FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (SBU) As Ethiopia continues to suffer from a severe forex
shortage, a growing number of foreign companies have begun to echo
concerns about not being able to repatriate profits outside of
Ethiopia. No American firms have yet reported being prohibited from
repatriating profits abroad, but most major U.S. firms in Ethiopia
reinvest their profits in-country rather than repatriating them.
Still, several British firms have reportedly been barred from taking
profits outside of the country. Although the level of concern
remains mixed among foreign owned businesses, the Government of
Ethiopia (GoE) argues that it is complying fully with its legal
decree allowing foreign businesses to repatriate profits, but
acknowledges that the central bank's own rationing of forex to
private banks effectively limits the ability of the latter to issue
forex to companies for any reason. In addition, concerns seem to be
compounded as the macroeconomic situation worsens and the GoE
continues to cut credit lines to domestic borrowers as part of an
aggressive inflation dampening strategy. To date, new private
investors have become increasingly reluctant to deploy significant
amounts of capital or further invest in Ethiopia as a result of the
risk of not being able to repatriate dividends, particularly on
short horizon projects. END SUMMARY.

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PROFIT REPATRIATION CONCERNS MIXED
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2. (SBU) The ability of businesses and investors to repatriate
profits has become the latest concern tied to Ethiopia's acute forex
crisis. However, foreign investors' attitudes concerning their
ability to successfully repatriate profits in the short-term remain
mixed. Notably, the British Ambassador to Ethiopia told Pol/Econ
Counselor that many British companies and investors have complained
recently about their inability to secure forex to repatriate profits
from the National Bank of Ethiopia (NBE). In addition, a prominent
American private equity investor in Ethiopia told EconOff that his
firm continues to maintain a very cautious capital deployment
strategy in Ethiopia due to concerns of the forex shortage
preventing him from taking profits home. The investor explained
that the opportunities are many in Ethiopia, but the risk of not
being able to redeem profits from short-term ventures continues to
retard the rate and amounts of his company's potential capital
investments. In addition to the forex crunch, the overall downward
slide of the Ethiopian economy, as evidenced by the sharp declines
in coffee exports, has increased worries among many new private
investors. Validating the sentiment of cautious new private
investors, the foreign direct investment (FDI) inflow statistics in
Ethiopia do not paint a rosy picture. For example, only USD 17.7
million in FDI was deployed for investments in 2007/08. This
operational capital represents a small fraction of the total stock
of USD 4.9 billion that has been approved for investment since 1993,
but largely sits idle.


3. (SBU) In spite of the concerns raised by British firms and some
new investors, large American or American-affiliated companies such
as Coca Cola Sabco and Ernst and Young maintain that they do not
intend now to begin to repatriate their invested capital and future
dividends in light of the forex crunch. However, the CEO of the
South Africa-based, Coca Cola Sabco, Fanus Nothnagel, previously
admitted to EconOff that the future of Coca Cola Sabco's long-haul
strategy remains uncertain as they continue to operate on an ad hoc
emergency forex lifeline from the Commercial Bank of Ethiopia (CBE).
Also, in light of Coca Cola's brief March production shutdown due
to lack of forex, Solomon Shiferaw, Coca Cola Sabco's in-country
marketing and sales manager explained to EconOff that the company is
less than confident about pursuing a strategy of profit repatriation
while they could barely secure minimal funds to operate their
production facilities (Ref A). Shiferaw went on to explain that the
company continues to see its monthly licensing bills to Coca Cola

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headquarters in Atlanta mount as they have not been able to acquire
forex. Although they allocate funds in local currency to service
debts owed to their headquarters, the funds continue to lose value
due to the depreciation of the local currency. Zemedeneh Negatu,
chief of party at Ernst and Young Ethiopia expressed a similar
steadfastness to maintaining his company's business interests in
Ethiopia and explained to EconOff that his company has reinvested
100 percent of its profits back into Ethiopia. He said that they
have never tried repatriation and believes that the current forex
crisis will be short-lived.

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GOE SAYS REPATRIATION NOT A PROBLEM
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4. (SBU) The GoE continues to stand by its 2002 Investment
Proclamation, which states that 100 percent of profits can be
repatriated by all foreign investors. A representative at the NBE's
Foreign Exchange and Reserve Management Department told EconOff that
there has not been an official change of policy with regard to the
repatriation clause in Ethiopia's Investment Proclamation. In fact,
the NBE continues to be required by law to release forex resulting
from profits as long as all the required documents, including
audited financial statements, are presented to the NBE by investors.
The NBE would then write a letter to the beneficiary's bank for
payment in forex. The NBE representative explained, however, that
due to the current foreign exchange crunch commercial banks may end
up delaying payments, but as a matter of law cannot deny investors
seeking the repatriation of profits. It is not clear how long the
delay of payments could be in light of the long lines mounting at
most banks and ultimately the GoE's priority rationing of forex to
exporters.

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COMMENT
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5. (SBU) It is evident that the forex crisis has put Ethiopia in not
only a precarious economic situation, but moreover has made it
intensely difficult for the country's banks to fulfill commitments
to private sector investors to repatriate their profits. As the NBE
continues to heavily ration forex reserves and maintains strict
controls on the financial sector, the GoE runs the risk of
alienating much-needed private investors who largely remain on the
sidelines with significant capital to deploy in-country. Although
the forex crunch has elicited disparate investment strategies and
responses among firms already operating in-country (some positive
and others negative about investment prospects),the real economy in
Ethiopia continues its downward slide. It is important to note,
however, to the GoE's credit, that inflation figures have begun to
abate of late as general annual inflation dropped to 23.7 percent in
March from 32.9 percent in February and 64.2 percent in July 2008.
Unfortunately, the long-term economic consequences of the GoE's
inflation dampening strategy of cutting credit and rationing forex
will no doubt continue to choke long-term FDI and overall business
activities. Post will continue to monitor the developments with
Ethiopia's forex situation and will push the GoE to consider more
liberal and innovative approaches to allow the economy to not only
function, but grow. END COMMENT.

YAMAMOTO