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 ADDIS ABAB 00000675 001.2 OF 003 SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT FOR INTERNET DISTRIBUTION -------------- SUMMARY -------------- ¶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 �00A;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. -------------- BACKGROUND -------------- ¶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. -------------- COKE SHUTDOWN LEAVES BIG GAP IN ETHIOPIA -------------- ADDIS ABAB 00000675 002.2 OF 003 ¶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. -------------- NO COKE EQUALS ECONOMIC CONSEQUECES -------------- ¶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. -------------- COKE's PLIGHT FUELS FOREX BLACK MARKET -------------- ¶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 ADDIS ABAB 00000675 003.2 OF 003 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. -------------- COMMENT -------------- ¶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