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Viewing cable 07ADDISABABA3483, PROMINENT FORECLOSURES MAY SIGNAL FUTURE PROBLEMS

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Reference ID Created Released Classification Origin
07ADDISABABA3483 2007-12-10 07:59 2011-08-25 00:00 UNCLASSIFIED Embassy Addis Ababa
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