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Ethiopia bets on clothes to fashion industrial future By Reuters
By Aaron Maasho
KOMBOLCHA, Ethiopia (Reuters) – Checkered shirts for American chain Gap. Slate leggings for Swedish store H&M. Twill shorts for Germany’s Tchibo. They are among a growing list of clothes being stitched together for big brands in Ethiopia.
As labor, raw material and tax costs rise in China – the world’s dominant textiles producer – the Horn of Africa country is scrambling to offer a cheaper alternative, and go up against established low-cost garment makers like Bangladesh and Vietnam.
It is still early days, and most of the clothing companies to source production in Ethiopia are testing the waters with small volumes. But the government is working hard to attract their business with tax breaks, subsidies and cheap loans. The landlocked nation is also about to open the final stretch of a 700 km (450-mile) electric railway to Djibouti’s coast.
This is part of a drive to turn a nation that is among the poorest in Africa into a manufacturing center that is no longer held hostage to fickle weather patterns which periodically devastate the agrarian economy and leave its people hungry.
There has been some progress; foreign investment in the textile industry has risen from 4.5 billion birr ($166.5 million) in 2013/14 to 36.8 billion in 2016/17, the Ethiopian Investment Commission, a government agency, told Reuters.
“This is a huge success,” Arkebe Oqubay, a prime ministerial adviser directing the industrialization drive, said during the inauguration of an industry park in the northern Ethiopian town of Kombolcha this summer. “The challenge now is to bring the world’s biggest companies into the country.”
Some have already arrived, most of them sourcing some production locally, like Gap and H&M, but a few building factories themselves.
Those to set up factories this year include U.S. fashion giant PVH, whose brands include Calvin Klein and Tommy Hilfiger; Dubai-based Velocity Apparelz Companies, which supplies Levi’s, Zara and Under Armour; and China’s Jiangsu Sunshine Group, whose customers include Giorgio Armani and Hugo Boss.
French retailer Decathlon and over 150 companies from China and India will begin sourcing production from Ethiopia soon, said the investment commission.
However, while Ethiopia is moving faster than its continental rivals, there is a long road ahead. Logistical, bureaucratic and cotton-quality problems are threatening its ambitions and there are no guarantees it will ever be able to compete with the big global players.
The gulf in textiles exports is huge; Ethiopia’s totalled about $115 million in 2015, against Vietnam’s $27 billion, Bangladesh’s $28 billion and China’s $273 billion, according to the World Bank’s latest figures.
Ethiopia’s fledgling sector can ill afford the kind of working conditions scandals that have dogged the low-cost garment industry elsewhere, and officials said they were sending representatives to Asia to learn best practices.
ROUTE TO RED SEA
Ethiopia’s road link with the port in Djibouti is outdated and congested in many parts and, together with the limited capacity and dense bureaucracy of its customs service, slows companies’ supply chains. This is undermining the benefits of being closer to European markets than most of its Asian rivals.
It takes up to 44 days from the time a clothing consignment leaves the factory to when it reaches buyers in Europe, compared to an average 28 days in Bangladesh and 21 days in China, according to a report from the Ethiopian Textile Development Institute compiled for investors this year.
This drives up costs. It costs up to $1,870 to export a 40-foot container, compared with $1,290 in Bangladesh and $679 in Vietnam, according to an internal report compiled by a major European clothes retailer and seen by Reuters.
However officials say the $4 billion electric railway between Addis Ababa and the Red Sea, to be inaugurated in the coming weeks, will reduce the transit time to the Port of Djibouti from 2-3 days to eight hours.
Bill McRaith, PVH’s chief supply chain officer based in New York, told Reuters his company saw sub-Saharan Africa as a promising new manufacturing frontier at a time of rising costs and labor shortages in established countries.
PVH arrived in Ethiopia this summer and is building a factory in Hawassa, south of Addis Ababa – an investment which McRaith said was based on a long-term expectation that Ethiopia would become one of the most competitive locations in the world to make apparel for the West.
He said PVH aimed to produce $100 million worth of clothes a year at the factory to be exported.
“Basics operating costs are very attractive but offset by transportation,” said McRaith. “The transportation infrastructure, skills training, banking sector … will all have to be improved,” he added. “But the Ethiopian government is further ahead on this than many other countries.”
Cotton quality and pricing also present a big obstacle to Ethiopia’s aspirations – one that is blunting its competitiveness and deterring foreign investment.
While it has an estimated 2.6 million hectares suitable for cotton cultivation, only 130,000 has so far been used, and textile company owners say output from them is 10 times more expensive to purchase than the average international price. They are also often substandard for exports owing to contamination and poor processing, resulting in poor fabric.
While the government has sought to entice investors into its cotton farming industry, this has been complicated by ineffective land management and complex property rights.
Velocity Apparelz Companies started production six months ago at a $50 million factory in Mekelle, northern Ethiopia. It produces 1.5 million pieces of clothing a month but aims to double that within two years, said Erica van Schaik, executive assistant to the executive chairman of Velocity.
However domestic fabric quality problems mean the company has to import their denim, van Schaik said. Good local material could reduce Velocity’s costs by up to half, freeing up cash that could be invested in Ethiopian production.
It would also cut the company’s lead time – from the beginning of production to arrival in shops – from 110 to 90 days, she said. “That would be like a day-and-night kind of difference. A game-changer.”
Investors face other challenges too: foreign currency shortages complicate trade, in addition to ever-changing regulations. The limitations of the financial system mean many foreign-owned textile firms use offshore banks to conduct their trade, depriving Ethiopia of vital hard currency.
With workers’ conditions and safety a big concern for investors, the Ethiopian Textile Development Institute said its leadership was traveling to India – another leading global garment producer – for training on best practices.
“The industry in this country is very young – we are taking our very first steps and so everything will not go seamlessly,” said communications chief Banteyihun Gessesse. “Countries such as India have vast experience in the field.”
Whether Ethiopia can overcome these hurdles remains to be seen.
In Africa itself, it faces competition in textiles manufacturing from the likes of Kenya, Mauritius and Madagascar, but has moved more aggressively to attract business.
The government will spend $1 billion building 15 industrial parks by 2020. Two opened in July, another two will be completed this year. The state bank, meanwhile, provides up to 60 percent of factory expansion costs for companies that sell 70 percent of their products overseas, as well as a 10-year tax exemption and low-interest loans.
Ethiopia can also offer companies lower power costs than most of its continental rivals, thanks to its hydroelectric dams. Electricity costs $0.06 per kilowatt-hour in Ethiopia, compared with $0.24 in Kenya, for example.
BOJ gives early sign of lift-off with warnings on the costs of easing By Reuters
By Leika Kihara
TOKYO (Reuters) – The Bank of Japan is dropping subtle, yet intentional, hints that it could edge away from crisis-mode stimulus earlier than expected, through a future hike in its yield target, according to people familiar with the central bank’s thinking.
With inflation still way below its 2 percent target, the BOJ sees no immediate need to withdraw stimulus, and regards weak price growth as its most pressing policy challenge.
But bank officials are now more vocal on the rising cost of prolonged easing, such as the hit to bank margins – a sign that their next move would be to roll back stimulus rather than expand it, the people said.
The most likely first step – albeit some time away – would be to allow long-term rates to rise more, reflecting improvements in the economy, they said.
“The change in tone doesn’t have immediate policy implications, but it’s probably intentional,” one of the people said.
“The BOJ wants to make its policy framework more sustainable,” said another. “Allowing longer-term rates to rise more would give banks some breathing space.”
The first sign of change came in Nagoya on Nov. 6, when BOJ Governor Haruhiko Kuroda – whose current term ends in April – said he was “mindful” of the risk prolonged easing could hurt banks’ appetite to lend.
Days later, board member Yukitoshi Funo said the BOJ must be vigilant to the cost of easing.
The most striking warning came from Kuroda last week, when he referred to a “reversal rate” – the level where rate cuts by a central bank hurt, not help, the economy by damaging banks and discouraging lending.
“Because the impact of the low interest rate environment on financial institutions’ soundness is cumulative, the BOJ will continue to pay attention to this risk,” Kuroda said in a Nov. 13 speech in Zurich.
European Central Bank (ECB) executive board member Benoit Coeure referred to the reversal rate in July last year in discussing when further rate cuts could become counter-productive. Five months later, the ECB decided to cut monthly asset purchases from 2017.
The BOJ also has a history of dropping early hints of a future policy shift. Roughly a year before adopting its yield curve control (YCC) policy, the BOJ published a research paper analyzing the feasibility of the idea.
“Reversal rate is a pretty shocking word to come out of the mouth of a BOJ governor. It’s unthinkable the BOJ would insert it in Kuroda’s speech without any policy intention,” said Takahide Kiuchi, who was a BOJ board member until July.
The BOJ may allow long-term rates to rise more by shifting its long-term rate target to five-year yields from 10-year yields around the first quarter of next year, Kiuchi said.
“The BOJ could put a positive spin on the move by saying it can more effectively reflate growth by keeping short-term borrowing costs low while allowing longer yields to rise.”
After three years of heavy asset buying failed to fire up inflation, the BOJ last year shifted to a policy targeting interest rates to free itself from a commitment to buy bonds at a set pace and make its policy framework more sustainable.
Under that YCC policy it guides short-term rates at minus 0.1 percent and 10-year bond yields around zero percent.
The shift in communication comes as the U.S. Federal Reserve and ECB head for an exit from ultra-loose policy, and suggests the BOJ could follow suit sooner than expected.
A majority of economists polled by Reuters before Kuroda’s latest comments expect the BOJ’s next move to be a withdrawal of stimulus – but not until later next year or beyond.
If the economy keeps improving, the central bank may consider hiking the yield target as early as April, said veteran BOJ watcher Izuru Kato, chief economist at Totan Research.
“The BOJ probably wants to fine-tune YCC with a modest hike in the yield target, and justify the move as aimed at easing the strain on Japan’s banking system,” he said.
Indeed, BOJ officials have signaled they do not necessarily need to wait until inflation hits 2 percent to raise the yield target, as long as it keeps printing money aggressively.
But stubbornly low inflation and a potential change in governor could discourage the BOJ from any early policy change.
“The BOJ would struggle to justify raising the yield target unless inflation exceeds 1 percent,” said Mari Iwashita, chief market economist at SMBC Friend Securities.
Core consumer inflation stood at 0.7 percent in September from a year earlier.
While the timing of a rate hike remains uncertain, one thing is sure: the BOJ won’t spring a surprise like the time Kuroda deployed his ‘bazooka’ monetary stimulus in 2013.
“It’s important the BOJ prepares markets in advance with careful communication,” said a third person familiar with the bank’s thinking.
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