VZCZCXRO7484
RR RUEHROV
DE RUEHDS #3483 3440759
ZNR UUUUU ZZH
R 100759Z DEC 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 8783
INFO RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS ADDIS ABABA 003483
SIPDIS
SIPDIS
DEPT for EEB
E.O. 12958: N/A
TAGS: ECON EFIN EINV ET
SUBJECT: PROMINENT FORECLOSURES MAY SIGNAL FUTURE PROBLEMS
1. SUMMARY: The impending bank foreclosures on two prominent Addis
Ababa commercial buildings may be an early sign of trouble in
Ethiopia's booming construction and building business. The Governor
of the National Bank of Ethiopia (NBE - Ethiopia's Central Bank)
recently denied that there is a construction bubble, however the
sustainability of the rapid growth in commercial construction is
questionable. Additionally, these foreclosures mark an aggressive
turn in portfolio management for two of Ethiopia's largest banks.
END SUMMARY
-----------------------------
A TALE OF TWO BUILDINGS
-----------------------------
2. Dembel City Center - The twelve story Dembel City Center is
perhaps the most visible building in Addis Ababa. Situated on Bole
Road, the main shopping street of the capital, it houses 114 shops
and offices as well as several banks. Dembel was completed in 2001
and is regarded as the most upscale shopping center in the country.
The government-owned Development Bank of Ethiopia (DBE) on November
12 informed the building's developer Yemiru Nega that it plans to
repossess Dembel in order to recover 221.4 million birr
(approximately 24 million USD) in outstanding loans. While Yemiru
has been in a debt-recovery scheme for the past six months to clear
25.3 million birr (nearly 3 million USD) in arrears, bank officials
stated in media reports that he has ceased to make payments and
foreclosure is necessary. (NOTE: Sources indicate that Yemiru is
the uncle of Minister of Trade and Industry Girma Birru. END
NOTE.)
3. Mina Building - The Mina building was completed in 1999 and
houses the Japan International Cooperation Agency and other tenants.
The government-owned Commercial Bank of Ethiopia announced that it
plans to auction the building in an attempt to recover over 115
million birr (about 12.75 million USD) in loans made to the
building's owner Tis Abay PLC. The building was used for collateral
for loans for other business activities of Tis Abay. These
businesses suffered significant losses while Tis Abay's owners were
jailed for five years on corruption charges. While the owners were
acquitted of all charges, Tis Abay has been unable to recover from
the losses incurred.
------------------------------------
OVERHEATED COMMERCIAL CONSTRUCTION?
------------------------------------
4. A tour around Addis Ababa and other cities in Ethiopia reveals a
huge number of buildings under construction, at least partially
fueled by sustained negative real interest rates in Ethiopia in
recent years. Many of these are planned as multi-use buildings
similar to Dembel and Mina, with a combination of shops on the first
few floors and office space above. In visits to offices in several
of Addis Ababa's newer complexes, EconOff has observed extremely low
occupancy rates. For example, on a visit to a contact in the
Friendship City Center, another upscale mixed-use building on Bole
Road, there were no other offices occupied on the contact's floor.
5. Despite rising costs of building materials and overall inflation,
construction continues seemingly unabated, with developers of new
buildings counting on rent revenues to pay for their costly
buildings. . In a meeting with the NBE Governor in early November,
Ambassador queried Governor Tekle Wolde Atenafu on the soundness of
the construction sector. The Governor shared that he was not
concerned about the sector because only about 5% of total
outstanding loans in the Ethiopian banking system are for
construction, while the bulk of loans are for working capital and
term loans for trade and industry.
COMMENT
-------
6. While Ethiopia's largely government-owned banks have suffered
from a high rate of non-performing loans resulting in a credit
crunch for borrowers, the moves by two large, state-owned banks to
foreclose on prominent buildings is a new and aggressive tactic.
While it may simply be a case of better portfolio management and an
end to favorable treatment of high-profile enterprises, the
foreclosures may also signal an additional need for bank liquidity
and a downturn in the commercial real estate sector. Post will
continue to monitor this growing, but potentially volatile,
component of Ethiopia's economy. END COMMENT
YAMAMOTO