VZCZCXRO3742
PP RUEHROV
DE RUEHDS #0675/01 0781136
ZNR UUUUU ZZH
P 191136Z MAR 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 4158
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
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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 
 
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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 
---------------------------------------- 
 
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. 
 
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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. 
 
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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. 
 
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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