Safaricom braces for impact as ongoing Ethiopia crisis persist

President William Ruto arrived in Addis Ababa, Ethiopia, for bilateral talks with Prime Minister Abiy Ahmed and the launch of Safaricom Ethiopia. [PCS]

The ongoing conflict and economic crisis in neighbouring Ethiopia have cast a dark shadow over Safaricom's prospects, analysts say.

Safaricom's plans to expand its operations in the Horn of Africa country had recently received a huge financial boost after the World Bank's private investment arm injected $257.4 million (Sh40.1 billion) into the consortium.

Under the deal, the International Finance Corporation (IFC) had said it would invest Sh21.8 billion in exchange for a minority stake of 7.25 per cent, and a further Sh13.9 billion in the form of a loan.

The IFC war chest was seen as a relief for Safaricom's Ethiopia growth plans coming soon after the parent company's earnings fell by a fifth in the year to March 31 last year, hit by the cost of starting operations in Ethiopia.

But with no end in sight to Ethiopia's economic and political conflict crisis, Safaricom's Ethiopia operations outlook has darkened.

Ethiopia became Africa's third default in as many years in December after it failed to make a $33 million "coupon" payment on its only international government bond.

Ratings agency Fitch in the same month downgraded the rating on Ethiopia's only international government bond to "default" from "near default" after Addis failed to make the coupon payment.

Africa's second most populous country announced late last December that it intended to formally go into default, having been under severe financial strain in the wake of the COVID-19 pandemic and a two-year civil war that ended in November 2022.

Addis first requested debt relief under the G20-led initiative in early 2021.

Progress was initially delayed by the civil war but, with its foreign exchange reserves depleted and inflation soaring, Ethiopia's official sector government creditors, including China agreed to a debt service suspension deal in November.

The Standard could not immediately reach Safaricom or Ethiopian authorities for this article.

Analysts say the Ethiopian Birr's depreciation against major currencies and rising inflation could erode revenue generated in Ethiopia when converted back into Kenyan shillings.

Reduced consumer spending could also hit Safaricom's fortunes, analysts add.

"Safaricom provides a consumer service that tends to be resilient to macroeconomics," said Deepak Dave of Autonomi Capital in interview.

"What is risky is whether a Government facing financial issues will impose taxes or duties that make Safaricom's capital investment in the country expensive or unviable."

The economic crisis in Ethiopia could lead to decreased consumer spending on mobile services, impacting Safaricom's customer base, analysts say.

At the same time the conflict and instability could disrupt Safaricom's supply chains and make it harder to maintain infrastructure and technology in Ethiopia.

In Ethiopia’s two largest regions, Oromia and Amhara, the government is facing increasingly deadly conflict with armed groups.

Violence erupted in Amhara after the government announced plans to absorb special forces in all regions of Ethiopia into the federal security apparatus, a move seen by Amhara elite as undermining their security at a moment when Tigray People’s Liberation Front (TPLF’s) demobilization remained incomplete, according to Brittany Gleixner-Hayat Brittany Gleixner-Hayat, a visiting scholar in Carnegie’s Democracy, Conflict, and Governance programme.

"Ethiopia’s struggling economy will require substantial reform to unlock an IMF deal that could help with stability," she points out while adding that the Ethiopian government’s central concerns are maintaining territorial integrity and regime stability, enticing foreign investment to revive its homegrown economic reform, and expanding its regional and global role.

"In response to its internal security threats, the (Ethiopian) government has proven unable to adequately respond to violent movements that are rooted in historic grievance, marginalization, and fundamental disagreements over the distribution of power and the structure of the state," she added.

However, Safaricom's operations in Kenya continue to be robust, providing a buffer against challenges in Ethiopia, analysts point out.

Safaricom is increasingly diversifying its revenue streams beyond mobile voice and data, offering services like fixed broadband, fintech, and healthcare.

Safaricom part-owned by South Africa’s Vodacom and Britain’s Vodafone, is under pressure to create new revenue streams as its voice business matures.

It has consequently been eyeing to diversify its income from voice, short message services, cash transfers and payments.

Despite the current challenges, Ethiopia remains a potentially lucrative market with a large and growing population, add analysts.

While the situation in Ethiopia presents significant challenges for Safaricom, the company's diversified portfolio and strong core business should help it weather the storm," analysts point out.

Safaricom launched its Ethiopia network in 2022 and has already signed up over two million active users.

The telco is betting that the populous Horn of Africa nation will power its growth after about five years of investment.

Ethiopia's nascent telecoms sector is considered one of the most lucrative in the economy as the once inward-looking country opens up to foreign investment for the first time.

Safaricom would be seeking to replicate its M-Pesa success by allowing Ethiopians to sidestep an inefficient banking system and send money or make payments at the touch of a phone button.

As such, money services such as M-Pesa are billed to have the potential to transform Ethiopia's economy.

The Safaricom consortium won the Ethiopia license in May 2021 with a bid of $850 million (Sh132 billion at current exchange rates) for an initial period of 15 years.