FOREIGN EXCHANGE SHORTAGE HALTS COCA COLA PRODUCTION

UNCLAS SECTION 01 OF 03 ADDIS ABABA 000675

SIPDIS
SENSITIVE

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

E.O. 12958: N/A
TAGS: BEXP ECON EFIN ETRD EINV ET
SUBJECT: FOREIGN EXCHANGE SHORTAGE HALTS COCA COLA PRODUCTION

REF: A) 2008 ADDIS ABABA 02569
B) ADDIS ABABA 557
C) 2008 ADDIS ABABA 2800
D) 2008 ADDIS ABABA 753

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

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SUMMARY
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1. (SBU) Coca Cola's (Coke) primary distributor in Ethiopia, Coca
Cola Sabco, stopped production at their bottling facility, outside
of Addis Ababa on March 12, 2009, as a result of Ethiopia's foreign
exchange (forex) crisis. Coca Cola Sabco's decision to stop
production in Ethiopia follows eight months of difficulty in
securing adequate forex to pay for key imported ingredients and raw
materials needed for production (Ref A). According to Coca Cola
Sabco's Chief Executive Officer (CEO),Fanus Nothnagel, this shut
down adds Ethiopia to a very exclusive list of countries, including
Somalia, where Coke products are not being sold and reflects the
first time for Coke not to be able to operate in a country where
they have a bottling facility. The closure also marks the first
time since the forex crisis gripped Ethiopia that a large scale
company selling American products has been forced to cease business.
The consequences of this abrupt closure have put in peril the
livelihoods of an estimated 250,000 individuals and independent
distributors along the beverage supply chain and Coke's long-term
plans to invest upwards of USD 100 million in Ethiopia for two new
mega bottling facilities.


2. (SBU) It is uncertain at this stage if the government of Ethiopia
(GoE) has fully grasped the impact that this news may have on
Ethiopia's long-term economic prospects and ability to attract
foreign direct investment (FDI). It is certain, however, that the
GoE has not been forthcoming on its long-term strategy in dealing
with the forex crisis and its plan to maintain a conducive business
environment for American and other foreign companies. The GoE has
instead moved to further restrict the flow of forex since the middle
of 2008 to target primarily export sectors. As a signal of the
GoE's increasing resistance to opening its markets, in February
2009, the government reaffirmed its commitment to keep its heavily
regulated banking sector closed off to external investors (Ref B).
The GoE's stance on its banking sector effectively tables any
further discussion in the short-term regarding finding alternatives
for domestic importers and businesses to access critical foreign
financing. END SUMMARY.

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BACKGROUND
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3. (U) With forex reserves officially hovering around six weeks of
import coverage, the GoE has been forced to ration its limited
reserves in a largely unscientific and opaque manner, with importers
like Coca Cola Sabco clamoring at the National Bank of Ethiopia
(NBE) for months at a time to secure limited hard currency. The
current forex level is up slightly from late 2008 in part because
the GoE received, in February 2009, USD 50 million emergency aid
from the International Monetary Fund (IMF) under the rapid access
component of its external shock facility (Ref C) and USD 250 million
from the EU. Although reserves have moved from roughly four weeks
to six weeks of import coverage, the current allocation scheme of
limited forex has still left many importers of key domestic consumer
goods without resources to maintain their businesses and keep pace
with the soaring demand for imported consumer products in Ethiopia.
With imports outstripping exports in Ethiopia by a roughly
four-to-one ratio, based largely on oil imports, Ethiopia's trade
deficit has also been driven by consumer spending on imported goods.
In 2008, Ethiopia recorded a trade deficit of USD 5.3 billion (23
percent of GDP) and stands to eclipse that figure in 2009 as export
growth lags due to the effects of the global financial crisis.

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COKE SHUTDOWN LEAVES BIG GAP IN ETHIOPIA
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4. (SBU) Coca Cola Sabco's shut down in Ethiopia leaves a big gap
along the beverage supply chain and comes as much of a surprise to
local businesses and consumers who have largely favored their
product offering over rival Pepsi Cola. According to the company's
in-country representative, Solomon Shiferaw, Coca Cola controls the
majority (over fifty-six percent) of the soft drink market share in
Ethiopia and has experienced double digit growth in the last six
years, with twenty-plus percent growth in business in 2007. Coca
Cola Sabco's CEO, Fanus Nothnagel, said that his company will resume
operations in 12 days for a short period of time as they have
received a small amount of forex, but their long-term continuity of
operations will remain tenuous unless they are able to reach an
agreement with the NBE. This news abruptly ends the almost 14 years
of uninterrupted growth in Coke production and distribution by Coca
Cola Sabco in Ethiopia.


5. (SBU) According to Coca Cola Sabco's CEO, the recent production
halt deals a blow for the company, particularly, since it has
invested so much in Ethiopia since the mid-1990s. In 2008, the
company's total capital reached USD 40 million and its annual
production capacity topped 21 million crates, which is up from five
million crates 10 years ago. Mr. Nothnagel explained that, since
commencing Ethiopia operations in 1995, Sabco has reinvested all of
its gains back into expansion of its Ethiopia business. However, in
spite of these real gains and sustained reinvestment of its
dividends, the company has had to close abruptly and further shelve
its plans to invest nearly USD 100 million to open two mega
production facilities in Debre Zeyit and Dire Dawa in order to meet
the soaring demand for Coke products in Ethiopia and the East Africa
region.


6. (SBU) Since Post initially reported on the forex crisis's impact
on Coca Cola Sabco in September 2008, the company has tried with
limited success to offset its forex crisis by sourcing up to 80
percent of its inventory needs from local sugar, bottle, crown cork
and crate manufacturers. To date, Coca Cola Sabco has incurred
untold expenses trying to ensure quality control standards of
locally sourced inputs. Also, some of their local suppliers (i.e.
crown cork suppliers) have not been able to fill orders because of
similar problems accessing forex for needed inputs. In addition,
all attempts by Coca Cola Sabco to negotiate short-term external
financing and increased access to forex from the NBE have been
largely ineffective.

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NO COKE EQUALS ECONOMIC CONSEQUECES
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7. (SBU) The news about Coke's production halt has shocked the local
economy as inflation and unemployment concerns continue to spread
throughout the country. According to Solomon Shiferaw, the company
has been forced to place all 1,200 of its local employees at its
production and manual distribution centers on temporary paid leave
pending a resolution to its forex problem. Mr. Shiferaw also noted
that more than 250,000 indirect beneficiaries of Coke's operation
along the supply chain stand to be affected by the stop in
production. These 250,000 odd local Coke mom-and-pop vendors and
agents will be forced to either register significant sales losses
while waiting for production to commence or incur added costs
associated with brokering new distribution and sales agreements with
Pepsi Cola and other local beverage producers. In addition, the
local press has reported that prices of existing Coke products have
doubled since the forex crisis has hampered production, with single
crate (24 bottles) prices topping USD 10. It is unclear how much
existing stock of Coke products remain in the market. Coca Cola
Sabco assesses that Pepsi too is showing signs of forex-induced
operations distress, but its owner Sheikh Al-Amoudi has access to
external hard currency to mitigate the impacts.

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COKE's PLIGHT FUELS FOREX BLACK MARKET
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8. (SBU) The restricted access to forex in Ethiopia and the recent
halting of business by Coca Cola Sabco has contributed to the
public's hastened movement to deal in much riskier and costly black

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market for currency trading over the last 12 months. The Coca Cola
forex dilemma has provided fuel to an already thriving black market
for forex in Ethiopia even on the heels of GoE actions to clamp down
on these illicit currency trading outfits (Ref D). As a result of
the increased demand for forex and heightened scrutiny of the black
market by Ethiopian law enforcement, the public is now subject to
ever increasing costs for changing local currency and increasing
risks for acquiring counterfeit currencies. Although all importers
are subject to NBE requirements to secure a letter of credit before
being allowed to import any goods to Ethiopia, importers have
attempted to bypass NBE regulations by paying infrastructure
contractors (i.e. Chinese road contractors) under the table in forex
acquired through the black market to facilitate the importation of
capital and consumer goods. Chinese companies were granted
authority by the GoE to import capital goods with their own
externally sourced hard currency for infrastructure projects, until
the GoE put an end to the practice in October 2008.


9. (SBU) Before the forex reserves reached critically low levels
(one month of import coverage) during the middle of 2008, the black
market for forex had previously provided the public with a window to
access hard currency at a reasonable premium (5 percent above par)
relative to NBE exchange rates without fear of severe government
punishment. However, the GoE's policies to restrict forex have only
further widened the disparity of the official NBE USD exchange rate
of 11.06 birr to 1.00 USD compared to the black market rate of 13.00
birr to 1.00 USD. A local businessman told Econ Off that the GoE's
policies on forex had effectively ended the "gray" market (even
split between black and official market) for accessing forex and
forced people to move exclusively to the black market. The GoE's
forex policies have also unwittingly perpetuated inflation as prices
for existing, but scarce consumer goods like Coke have skyrocketed.
Average annual inflation as of February 2009 remains significantly
high at 39.6 percent. Ironically, the GoE's attempt over the last
year to bring calm and structure to the forex market has lead to
bottled-up demand for foreign currency and deleterious market
effects.

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COMMENT
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10. (SBU) The virtually unprecedented news that Coca Cola stopped
production in Ethiopia has reverberated throughout the business
community and will certainly drive a loss of confidence among
potential investors. The real effects of limited forex and a
growing realization among private businesses that the GoE does not
have a clear or sustainable plan to remedy its forex shortfall could
sustain the current hyperinflation trends and further reduce FDI.
The almost one year old forex crisis has already been responsible
for an uptick in rent-seeking behavior at the local banks, as
private companies clamor to have their forex requests quickly
fulfilled. Although the GoE has attempted to depreciate the local
currency in order to counteract inflation concerns and narrow its
trade deficit, this latest news in addition to the bleak export
picture in the coffee and flower markets will undo a significant
portion of the gains enjoyed by Ethiopia over the last several
years. The Embassy will continue to urge the GoE to open the
financial sector and otherwise liberalize the economy in order to
address forex concerns and other structural imbalances. END
COMMENT

YAMAMOTO