Economy

Ethiopia’s prime minister Abiy Ahmed said this month that his government would negotiate with fighters in the northern Tigray region to end a war that has not only unleashed human rights abuses and killed thousands of people but has also derailed one of Africa’s most promising economies.Until civil war broke out in November 2020, Ethiopia — Africa’s second-most populous country with 114mn people — had been regarded by development economists as a success story, albeit one engineered by an authoritarian government. In the 15 years to 2019, driven by investment in agriculture, industry and infrastructure, the economy grew on average 7 per cent annually per capita, according to World Bank data, one of the fastest rates in the world. Although it was still relatively poor, with a nominal per capita gross domestic product of roughly $950 in 2020, years of growth had put it on the cusp of lower middle-income status.“There’s no doubt that Ethiopia made tremendous gains through the development-state approach,” said Kingsley Amoako, former executive-secretary of the UN Economic Commission for Africa, referring to the country’s Asian-inspired state-led model.Ethiopia’s unfinished economic miracle appeared all but dead as war caused what officials estimated to be “billions of dollars” in lost growth and destroyed roads, factories and airports. The conflict also shattered a fragile political truce through which, for nearly 30 years under the tight control of a coalition led by the Tigray People’s Liberation Front, the country’s main ethnic groups sought to set aside their differences in the interests of national development. A fighter loyal to the Tigray People’s Liberation Front © Ben Curtis/APThe economy received a further jolt when, after war broke out in 2020, foreign donors withdrew billions of dollars in financial support. Last year, Washington tightened sanctions further, ending Ethiopia’s tariff-free access to the US market and threatening thousands of jobs in a burgeoning textile industry. Now, though, the prospect of peace talks has raised hopes — however tentative — that Ethiopia’s economic momentum can be restored. “We’re just going to slow down, before we start coming up again,” said Tewodros Mekonnen, an Addis Ababa-based economist. If the conflict could be permanently resolved, he said, the economy could recover.A permanent ceasefire could unlock more than $4bn in frozen funding, according to officials, and ease a crippling shortage of foreign exchange that plagued the economy even before the war began. “Without peace, there is no economy,” said Abie Sano, president of the state-owned Commercial Bank of Ethiopia, the country’s largest lender.Still, given the intensity of the war and the impact of coronavirus, Ethiopia performed better than many expected. Last year, the mainly agricultural economy grew 6.3 per cent, according to the IMF, below the level of previous years but much higher than the continental average. Although some have questioned the reliability of that data, Stefan Dercon, a professor of economic policy at Oxford university and an expert on Ethiopia, said that GDP measured the flow of income and would not immediately register the impact of destroyed assets. Spending on the war itself could actually boost economic activity in the short term, he added. Farmers harvest crops of sorghum in a field near the village of Ayasu Gebriel © Eduardo Soteras/AFP/Getty Images“Despite appearances, the conflict remained relatively localised,” Dercon said. “So big parts of the country were as stable or unstable as they were in previous decades when you had fast growth.” Ahmed Shide, Ethiopia’s finance minister, told the Financial Times that the economy was grappling with “multiple challenges and shocks, both internal and external”. But, he said, it continued to benefit from strong fundamentals, the good performance of Ethiopian Airlines, Africa’s largest carrier, and the liberalisation of the telecoms sector. “The economy is resilient despite multiple shocks,” said Shide. Even so, this year will be harder. The IMF expects economic growth to slow to just 3.8 per cent, partly as a result of the war in Ukraine and a severe drought in parts of the country. Inflation is forecast to hit 35 per cent, stoked by local and global supply chain problems.For the economy to recover, Sano said it was essential for the government to press ahead with liberalisation. Before the war in Tigray, Ethiopia had started the process of selling off new telecom licences. Last year, it accepted an $850mn bid from a British-backed consortium led by Safaricom, a Kenyan operator. The government envisages a partial sell-off of state assets, including a second telecoms licence and a stake in Ethio Telecom, the state provider, as well as parts of logistics operations such as Ethiopian Shipping Lines. “We need capital and in order to have capital, we need reforms,” Sano said. Under the late Meles Zenawi, a former Tigrayan guerrilla fighter and national leader until his death in 2012, the state dominated the economy. “We had impressive growth, but when you dissect it was very clearly public-sector driven, which was not sustainable,” said Tewodros. “We have to balance some of our public investments by bringing in the private sector.”Although Ethiopia funded much of its spending through domestic savings, it also borrowed from foreign lenders, including China. Last year, Addis sought debt relief under a G20 framework to help countries battered by the Covid-19 pandemic.The government recently launched what it hopes to be a $150bn sovereign fund and is planning to open the country’s first stock market next year. “We want to build progressive capitalism that will harness the power of the market, as well as the sustainable role of the state,” Ahmed said.Violence in several regions continues and the constitutional questions that stoked the war in Tigray have not been resolved. It will be hard, analysts say, for Abiy to forge lasting peace with Tigray, which is still under partial blockade, or to persuade the TPLF to accept market reforms that will slowly unpick the state-led model it pioneered. “Abiy came for revenge not for reform,” said Kindeya Gebrehiwot, a former president of Mekelle University and a senior member of the TPLF. “Development needs serious thought, planning and bringing everyone on board,” he said. “All the initiatives he has taken are damaging national harmony.”

Mamo Mihretu, a top economic adviser to Abiy, said the government’s market reforms remained on track. “Successive shocks have not diminished our resolve to build an economic model that can resolve legacy challenges,” he said.Dercon at Oxford said it was too early to write off Ethiopia’s economy. “It’s not that the economic miracle is gone, but the economic model is gone,” he said, referring to state-led development. “Will it go back to growth of 7-10 per cent? I don’t know,” he said. “But to give up and say it won’t grow at all, I don’t think so.” More

The eurozone is well placed to ride out recent market volatility and its economy will grow this year and next, the eurogroup president said, denying that the currency union faces a crisis akin to that which struck a decade ago.Paschal Donohoe, who is Ireland’s finance minister as well as chief of the pan-eurozone group of finance ministers, said current circumstances were “completely different from the kind of crisis environment we were in” when the bloc was gripped by a spiralling sovereign debt sell-off in the early 2010s. Donohoe said the euro area now had “stronger architecture” and “deeper foundations for our common currency”. Since the region’s last debt crisis, the EU has bolstered its bank regulation with the creation of a pan-European supervisor and crisis-fighting infrastructure through a common resolution mechanism when lenders fail. The European Central Bank has new tools to buy government bonds, while lawmakers created a recovery fund backed by common debt during the coronavirus pandemic. “We are all confident about our ability to navigate through the changes that are taking place,” he said.Surging inflation and fraying confidence, stemming in part from energy supply disruptions caused by Russia’s full-scale invasion of Ukraine in February, have sparked fears that the eurozone is heading into a sharp downturn. As the ECB joins other policymakers in lifting interest rates, those fears have intensified. Italian and Spanish bond yields hit their highest levels for eight years last week as market jitters intensified.Donohoe’s remarks came as ECB president Christine Lagarde prepares to face questions from MEPs at the European parliament on Monday over its recent contrasting messages. Lagarde had sounded tough on inflation after the central bank’s governing council met in Amsterdam on June 9, when it decided to end eight years of negative interest rates and massive bond purchases. But last Wednesday, the ECB announced at an emergency meeting that it was speeding up work on a new “anti-fragmentation instrument” to prevent borrowing costs from surging disproportionately in weaker countries such as Italy. German finance minister Christian Lindner suggested last week that the ECB had overreacted to the sell-off in bond markets. Lindner claimed the euro area was “stable and robust” and there was “no need for any concern” about some countries’ borrowing costs rising faster than others. Although member states would have to commit themselves to credible plans for reducing public borrowing and managing inflationary pressures — the pace of price growth has topped 8 per cent — Donohoe insisted that a strong labour market pointed to economic expansion.Donohoe highlighted employment growth as well as support from the EU’s €800bn NextGenerationEU programme, which he said would sustain the region’s economic expansion even if growth expectations have been cut.Hiring, he added, was set to be a “very powerful source of momentum”, as was the implementation of post-Covid-19 recovery plans. The eurozone economy is set to grow 2.8 per cent this year and 2.1 per cent next year, according to forecasts this month from the ECB. But the central bank also said a downside scenario involving Russia cutting off all energy supplies to Europe would lead the bloc’s economy to shrink 1.7 per cent next year. The likelihood of such a scenario has risen after Moscow drastically reduced gas flows to Germany and Italy. European capitals are attempting to strike a delicate balance between helping inflation-struck households while reducing public debt. The eurogroup is shifting from recommending that member states take a mildly supportive fiscal stance to a neutral policy, with more targeted support.Governments’ borrowing soared during the pandemic as tax receipts fell sharply and spending on healthcare and economic measures ballooned.“The starting positions for member states in terms of their debt and deficit levels is now very, very different to where we were before Covid hit us,” said Donohoe. “We will continue to need to have plans that reduce borrowing in a careful way. The plans to do it will have to be credible. They will have to reflect the fact that we are in an inflationary environment.”Excessive levels of borrowing can themselves “contribute to the inflationary pressures we are currently trying to reduce”, the Irish finance minister added. “This is going to be a fine balance.” 

Some politicians have argued that the EU should undertake more joint borrowing to help support the energy transition and other priorities. But Donohoe insisted that member states wanted to focus on implementing existing plans. “The scale of what we have agreed is so big that it would need some time for us to be able to show that has been fully executed,” he said. Asked whether there needed to be economic conditions attached to any targeted bond-buying by the ECB, Donohoe declined to comment, saying the central bank would “do their work independently”. “We do accept there are changes in market conditions, which is understandable as monetary policy changes to reflect a changing economy,” he said. Yet there was “unity of purpose in ensuring that we have the plans and steps in place to maintain the resilience of the euro and the euro area”.Additional reporting by Martin Arnold in Frankfurt More

The one-year loan prime rate (LPR) was kept at 3.70%, and the five-year LPR was unchanged at 4.45%.About 90% of traders and analysts in a Reuters survey last week expected China to both rates unchanged, as global central bank tightening limits room for policy manoeuvre to arrest an economic slowdown.Most new and outstanding loans in China are based on the one-year LPR. The five-year rate influences the pricing of mortgages. More

COLOMBO/LONDON (Reuters) – An International Monetary Fund (IMF) team arrives in Sri Lanka on Monday for talks on a bailout programme, but time is short for a country just days from running out of fuel and likely months from getting any relief money.Sri Lanka is battling its worst financial crisis since independence in 1948, as decades of economic mismanagement and recent policy errors coupled with a hit from COVID-19 to tourism and remittances, shrivelling foreign reserves to record lows.The island nation of 22 million people suspended payment on $12 billion debt in April. The United Nations has warned soaring inflation, a plunging currency and chronic shortages of fuel, food and medicine could spiral into a humanitarian crisis.The IMF team, visiting Colombo through June 30, will continue recent talks on what would be Sri Lanka’s 17th rescue programme, the IMF said on Sunday.”We reaffirm our commitment to support Sri Lanka at this difficult time, in line with the IMF’s policies,” the global lender said in a statement.Colombo hopes the IMF visit, overlapping with debt restructuring talks, will yield a quick staff-level agreement and a fast track for IMF board disbursements. But that typically takes months, while Sri Lanka risks more shortages and political unrest.”Even if a staff-level agreement is reached, final programme approval will be contingent upon assurances that official creditors, including China, are willing to provide adequate debt relief,” said Patrick Curran, senior economist at U.S. investment research firm Tellimer.”All considered, the restructuring is likely to be a protracted process.”But the crisis is already overwhelming for average Sri Lankans, like autorickshaw driver Mohammed Rahuman, 64, who was recently standing in line for gasoline for more than 16 hours.”They say petrol will come but nothing yet,” he told Reuters. “Things are very difficult. I cannot earn any money, I cannot go home and I cannot sleep.” Snaking lines kilometres long have formed outside most fuel pumps since last week. Schools in urban areas have closed and public workers have been asked to work from home for two weeks.Bondholders expect the IMF visit to give clarity on how much debt Sri Lanka can repay and what haircuts investors may have to take.”This IMF visit is very important – the country will need every help and support it can get,” said Lutz Roehmeyer, portfolio manager at Berlin-based bondholder Capitulum Asset Management. “For many international bondholders, this will be a key requirement to ensure they come to the table and talk about a debt restructuring in the first place.” Prime Minister Ranil Wickremesinghe said this month an IMF programme is crucial to access bridge financing from sources such as the World Bank and Asian Development Bank.Representatives from Sri Lanka’s financial and legal advisors, Lazard (NYSE:LAZ) and Clifford Chance, are in Colombo. More

Rightmove said asking prices for homes put on sale between May 15 and June 11 were 0.3% higher than a month earlier, down from a 2.1% rise in its May data.Compared with a year earlier, asking prices are up 9.7%, less than the 10.2% increase recorded for May.”The exceptional pace of the market is easing a little, as demand gradually normalises and price rises begin to slow, which is very much to be expected given the many record-breaking numbers over the past two years,” Rightmove director Tim Bannister said.Rightmove expects price increases to slow further over this year, to give a 5% annual rise.Earlier this month Bank of England Deputy Governor Jon Cunliffe said the property market appeared to be slowing, reflecting broader weakness as the public faced the highest consumer price inflation in 40 years.The BoE has raised rates five times since December to 1.25%, and financial markets expect them to hit 3% by the year’s end. House prices surged in Britain and many other Western countries after the initial onset of the COVID-19 pandemic, as many richer households had spare disposable income and sought more spacious housing for working from home.Other house price measures from Nationwide Building Society and Halifax have also cooled from recent peaks, though year-on-year price gains remain high.Rightmove said the number of prospective buyers per home on offer was still more than double its level before the pandemic – and 6% higher than a year ago – but had dropped by 8% over the past month.In a sign of the bottlenecks affecting many parts of Britain’s economy, Rightmove said the legal conveyancing process for buying a home now took an average of five months, 50% longer than in 2019. More

Good morning.The German government said yesterday it would pass emergency laws to reopen mothballed coal plants for electricity generation and auction gas supplies to industry to incentivise businesses to curb consumption. The move illustrated the depth of concern in Berlin over possible gas shortages in the winter months as Russian cuts to gas exports threaten shortfalls in Europe’s largest economy.“This is bitter but in this situation essential to lower the use of gas,” said German economic minister Robert Habeck, a member of the Green party. The plan is at odds with Germany’s climate policy, which aims to phase out coal by 2030 as it is much more carbon-intensive than gas.Russia cut capacity on the main gas export pipeline to Germany last week by 60 per cent, sending ripples across the continent as western officials became convinced that Moscow is weaponising its gas exports in response to EU sanctions following the full-scale invasion of Ukraine. Italy, which has also seen gas supplies from Russia fall, is expected to announce emergency measures in the coming days if supplies are not restored. Habeck said Berlin was working on a new law to temporarily bring back up to 10 gigawatts of idle coal-fired power plants for up to two years; that would increase Germany’s dependence on coal for electricity generation by up to a third. “The situation is serious,” said Habeck. “It is obviously Putin’s strategy to upset us, to drive prices upwards, and to divide us . . . We won’t allow this to happen.” Thanks for reading FirstFT Asia, and we hope you have a great week. Here’s the rest of the day’s news. — SophiaFive more stories in the news1. US lawmakers push for more money to counter China in Indo-Pacific The US House of Representatives will introduce the “Indo-Pacific Engagement Act” to spur the White House to funnel more money to the Indo-Pacific region. Lawmakers are aiming to narrow the gap between the rhetoric about Asia being the priority region and funding levels.2. Crypto industry braced for fallout after weekend meltdown Bitcoin fell as low as $17,628 on Saturday before rebounding. This has contributed to an escalating credit crunch in the digital asset industry that threatens to engulf many of its major actors.3. EU and India to restart trade talks after decade-long gap In an effort to woo New Delhi away from its historic ties with Russia, the EU will begin talks with India at the end of June for agreements on trade, investment protection and other specific regional products. The targeted timeline is for the deal to be signed by the end of 2023.4. Japan’s largest discount store Daiso besieged by sinking yen Seiji Yano, the president of Daiso Industries, has vowed to defend the chain’s price tag of ¥100 ($0.75) per item despite an existential threat to the business from global inflation and the plunging yen. In his first-ever interview with the media, he said that the store was reviewing its product mix to ensure its survival.Go deeper: The Bank of Japan kept its main policy rate at minus 0.1 per cent last week, putting it at odds with other central banks that have raised interest rates to tame inflation.5. China launches new aircraft carrier China has launched its most advanced aircraft carrier to date as Beijing races to catch up with US military capabilities and make good on its threats to retake Taiwan by force if necessary. The vessel, named Fujian after the coastal province opposite Taiwan, had been under construction at Shanghai’s Jiangnan shipyard since 2018.The day aheadWorld Air Transport Summit The International Air Transport Association continues their summit in Doha, Qatar today, and will release the IATA Annual Report.Juneteenth The United States observes a federal holiday today to commemorate the end of the legal enslavement of Black Americans.Economic data Germany releases its May producer price index (PPI) figures today, and the UK will release trade figures, Rightmove monthly house price index plus Office for National Statistics data on house affordability.India Australian defence minister Richard Marles visits India, continuing newly elected prime minister Anthony Albanese’s focus on tightening relations with the subcontinent as a counter to China.What else we’re readingChinese tourists struggle to clear Covid travel hurdles As the rest of the country remains wary, Beijing and Shanghai residents have emerged from stringent lockdowns. Tourists tentatively beginning to move about the country are encountering a patchwork of local quarantine regulations that, in some cases, require seven-day quarantines before travellers can begin their holidays.Related: Chinese consumers are forecast to spend $5.2bn on camping equipment this year, as urbanites trek into the wild for escapist adventures.Why pay rises for your company’s ‘flight risks’ can backfire Bosses are doing their best to throw money and promotions at would-be resigners to convince them to stay, but the Great Resignation has complicated this practice of counter-offering.Ransomware gangs target Japan as a feeding ground The US and Europe have long been the principal targets of ransomware attackers. But now one of Japan’s strongest natural defences — its language — is quickly evaporating with the help of AI translation software that aids criminals in crafting traps that appear more plausible and legitimate.

© Maria Hergueta

How to escape innovation’s Great Stagnation With inflation soaring and research productivity dropping, ideas have been getting more expensive to find. Spending more on R&D won’t solve the productivity problem — the urgent issue is to improve the scientific process. The answer may lie in accelerating remote collaboration.Men must step up at home to boost birth rates When we talk about how to address falling birth rates, the conversation usually centres on young women. But a more fruitful policy target may in fact be men. With career versus family no longer such a trade-off for women, “having it all” is only possible with increased paternal childcare, writes John Burn-Murdoch.TravelThe pandemic accelerated the trend toward mini campervans. While smaller RVs lose out on kitchens and toilets, they’re easier to drive, park, and manuever — opening up a whole new world of adventure.

© Lyndon French | Patti Waldmeir with the Mercedes-Benz Metris More

PARIS (Reuters) – Jupiter has lost his thunder. Emmanuel Macron, whose first presidential mandate was marked by a top-down government style he compared to that of the almighty Roman god, will have to learn the art of consensus-building in the second.Deprived of an absolute majority by voters on Sunday, the French president can no longer count on parliament as a mere rubber-stamping house. Instead, he will be forced to negotiate with demanding allies and new partners with a vendetta.Projections showed that Macron’s “Ensemble!” coalition bloc had missed an absolute majority by between 40 to 60 lawmakers, a much bigger shortfall than expected and a crushing outcome for the president.That means he will probably have to seek support from the conservative Les Republicains (LR) party, which will relish its kingmaker role and will want to exact a heavy price from Macron for legislative support — including perhaps a change in prime minister. “This culture of compromise is one we will have to adopt but we must do so around clear values, ideas and political projects for France,” said Finance Minister Bruno Le Maire, himself a former conservative, in an apparent attempt to reach out to his former political family.However, in a country which post-war leader Charles de Gaulle famously said was ungovernable given its 246 types of cheese, it will be hard for Macron but also potential partners to learn the northern European art of consensus-building and coalition work.Senior Les Republicains officials seemed to reject a broad coalition deal on Sunday night and would remain in opposition, but will be “constructive” — hinting at possible deals on a bill-by-bill basis. “I fear we’ll be more in an Italian-style political situation where it will be hard to govern than in a German situation with its consensus-building,” Christopher Dembik, an analyst at SaxoBank, told Reuters.”It’s not necessarily a tragedy, in my view. It may be an opportunity to reinvigorate French democracy and return to the real meaning of parliament,” he said. Macron was frequently criticised during his first mandate for ramming through parliament pro-business reforms that were drafted by his aides at the Elysee palace without consulting lawmakers or outside stakeholders.Rivals regularly accused the president of being out of touch and arrogant. One government source said that was probably what voters had sought to sanction. “It’s a message about the lack of grassroots and the arrogance we have sometimes shown,” the source said.During the campaign, Macron sought to counter this accusation by promising a “new method” of government, offering to create a new body outside parliament that would be filled with figures from civil society and with whom he would consult on future reforms.In the end, French voters, it seems, were unconvinced.FILIBUSTERINGMacron is likely to face filibustering from both sides of the chamber. The left-wing Nupes alliance, which has turned an already-combative contingent of lawmakers into parliament’s biggest opposition force, will be relentless in its obstruction.Parliament rules stipulate that an opposition lawmaker must head the powerful finance committee, which can demand access to confidential tax information from the government and can block budget bills temporarily. That would be a particularly painful way to hold Macron’s feet to the fire. On the other side of the aisle, Marine Le Pen’s far-right Rassemblement National is also likely to make the most of its newly-acquired right as a parliamentary group of lawmakers to launch parliamentary investigations and challenge bills before the constitutional court, senior RN officials have said. These investigations can force government ministers or even presidential aides to testify publicly in parliament.These parties will also replenish their coffers with taxpayer money that is distributed to political parties on the basis of their election results — raising the spectre of strong challenges from them in the next presidential election in 2027.Of course, compromising doesn’t necessarily mean paralysis.Macron’s new centre-right partners will find it hard not to back his most conservative-oriented reform plans, such as pushing back the retirement age to 65 or making welfare benefits conditional on training or community work.Some legislation may be laboriously passed. But how long Macron accepts to share power remains to be seen. The president has the power to call a snap parliamentary election anytime, and political sources expect a new crack of thunder from Jupiter at some point. “I expect a dissolution of parliament in a year or so,” a centre-right lawmaker whose party may try to get a deal with Macron’s party told Reuters. More