(Bloomberg) -- East Africa’s biggest company by market value may take longer to break even in Ethiopia after the Horn of Africa nation allowed its currency to trade freely for the first time in five decades, causing it to plunge.
The birr has depreciated more than 44% against the dollar since the devaluation at the end of July, which will inflate debt-servicing costs for Safaricom Plc’s local unit, while also raising local-currency expenses such as leases.
The Kenya-based telecommunications operator started operations in neighboring Ethiopia almost two years ago, enticed by a population of about 126 million people and a wireless industry monopolized by a state-owned operator.
Safaricom Telecommunications Ethiopia Plc, or STE, had anticipated breaking even within four years, but it may have to to push out that target as the devaluation eats into disposable incomes, according to some analysts.
“A depreciation would likely prolong the break-even period,” said Michael Odundo, an investment analyst CIC Asset Managers, Kenya’s biggest money-market fund company. “It’s a negative for them because they entered the investment when the birr was much stronger at around 50.”
The birr traded at 107.12 at 5 p.m. Wednesday in the capital, Addis Ababa, about double the official going rate before the liberalization.
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Inflation in Ethiopia may average 30% this fiscal year, according to the International Monetary Fund, hurting consumers and STE’s acquisition of subscribers because of higher costs for goods and services.
“There’ll be some impact on their performance when they translate their interest rate on the investment they have made in US dollars,” Odundo said.
STE has taken financing, including a $350 million International Finance Corp. loan in May and a further $137 million from a group of banks. The company also plans to issue local currency-denominated bonds in Ethiopia in September.
Capital-expenditure needs will remain elevated until 2026, when they could show a “sharp deceleration,” according to Ronny Chokaa, a senior research analyst at Nairobi-based AIB Axys Africa.
STE is also going up against Ethio Telecom, which was a monopoly until its entry. The Safaricom unit plans to add 10 million users by the end of March. That compares with its rival’s 78.3 million subscribers.
Competition will “serve to prolong the break-even projections, which were more than optimistic,” Chokaa said.
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