Index trend
Previous quarterly editions
Expropriation risk: 70 69 70 70 ► Political violence risk:66 66 66 60 ▼Terrorism risk:45 46 48 51 ▲Exchange transfer and trade sanction risk: 63 63 63 55 ▼Sovereign default risk:74 74 83 83 ►
Overall Risk Temperature: 67 (Medium high -4) TREND ▼
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
3
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
4
The possibilities for gray zone actions in the Horn of Africa have increased following the signing of a memorandum of understanding between Ethiopia and Somaliland in January 2024. Under the memorandum, Somaliland would provide Ethiopia an area on its Gulf of Aden coast to build a naval base and access ports. In return, Ethiopia has committed to recognize Somaliland as an independent country and to offer shares in one of the country’s profitable public enterprises (potentially including Ethiopian Airlines and Ethio-telecom). If Ethiopia recognizes Somaliland, it would be the first member of the United Nations (UN) to do so. The African Union, which is hosted in Ethiopia, recognizes Somaliland as part of Somalia.
The memorandum has therefore generated a serious rebuke from Somalia, which considers Somaliland as part of its territory and its secession as an existential threat because it could lead to similar attempts from other parts, notably Puntland. Somalia considers the Ethiopian move as a form of aggression, with historical parallels: Ethiopia supported the then rebel Somalia National Movement, which declared Somaliland independent in 1991. Somalia has therefore requested that Ethiopia withdraw from the understanding.
Despite Turkish-led efforts to mediate the dispute, the situation has escalated, now seemingly regardless of the fate of the memorandum of understanding. Notably, Somalia signed a defense pact with Egypt, including the possible deployment of thousands of Egyptian soldiers in Somalia. Furthermore, Somalia is also seeking the withdrawal of Ethiopian soldiers from Somalia, who are there as part of the African Union Transition Mission in Somalia peacekeeping force and based on bilateral agreements with Somalia. In line with this pact, Egypt has deployed arms and some personnel to Somalia.
The Egyptian involvement is critical because Egypt and Ethiopia continue to contest the Nile River, more than 85% of the water of which originates from Ethiopia. Notably, Egypt continues to attack what it considers is the unilateral building of the Grand Ethiopian Renaissance Dam on the Nile, the largest in Africa, as a danger to its water security. Following announcement of recent filling of the dam, Egypt informed the UN Security Council that it reserves the right to defend itself under the UN Charter.
After the Somalia-Egypt deal, Ethiopia appointed an ambassador to Somaliland, after promoting its consulate into an embassy in May 2024 -- a step toward formal recognition. Ethiopia considers the Egyptian military presence in Somalia a significant security threat.
Somalia government officials have also indicated the possibility of supporting rebel groups in Ethiopia, unless the memorandum of understanding is cancelled. Somalia and Egypt are also seeking to build alliances with Eritrea, particularly supporting a possible rapprochement between the Eritrean government and the Tigray People’s Liberation Front (TPLF), which fought against the Ethiopian government (then supported by the Eritrean government) between 2020 and 2022. If Eritrea and the TPLF agree to work together, it could increase the chances of reigniting the war, this time with Eritrea supporting the TPLF, and potentially the secession of Tigray.
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The risk of expropriation remains low, particularly for foreign investors. Nevertheless, the government is under pressure to increase the tax-to-GDP ratio and close the budget deficit. This may entail more scrutiny of the finances of businesses and the imposition of new taxes and tariffs, including for electricity. Subsidies on certain commodities, especially fuel, are also likely to be lifted completely in the near future, which could increase business costs.
In addition, government officials also increasingly seek ostensibly “voluntary” contributions from businesses for various government initiatives. This may constitute a form of informal taxation or arguably a kind of expropriation. Moreover, officials from the Oromia region, which surrounds Addis Ababa, often impose arbitrary fees on businesses’ cargos moving in and out of Addis Ababa through the region.
The government is also engaged in “corridor development” initiatives, mainly in Adis Ababa. These involve expansion of public roads leading to demolition of houses and business buildings, often at short notice and with low compensation. While foreign businesses may not be directly affected, as they are currently not allowed to own real estate, it can at least cause operational disruptions.
In combination, businesses may bear more financial scrutiny, disruptions and costs.
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The risks of terrorism remain low. Nevertheless, the contestations between Ethiopia, Somalia and Egypt mean that threats from Al-Shabaab, which mainly operates in Somalia, may increase. The group rejects the aforementioned memorandum of understanding and, in fact, aspires to bring all Somalian-speaking areas within its ambit, including Somali regions in Ethiopia.
So far, despite the threats, the group has not managed to launch significant attacks in Ethiopia — but this was when Ethiopia and Somalia were working together. With relations deteriorating, and Egypt and Somalia potentially tolerating and even aiding the group, the risk of attacks may increase.
In addition, rebel forces in Amhara (and possibly Oromia) may also stage small-scale attacks against security organs and cause disruptions in the capital.
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Political violence remains a key challenge in Ethiopia. While the November 2022 cessation of hostilities agreement (Pretoria Agreement) between the federal government and the TPLF is still holding, large areas of Amhara and Oromia regions — the two largest in the country — remain in deadly conflict. War in Amhara has escalated with rebel “Fano” forces controlling virtually all rural areas and with movement and the state administration system largely crippled. Other parts of the country are also under effective military command/administration. These conflicts are unlikely to be brought under control soon.
Moreover, the TPLF is facing an internal struggle between two factions, involving the chair of the party (Debretsion Gebremichael) and the interim president of the regional government (Getachew Reda), which was established after the signing of the Pretoria Agreement. The Debretsion-led faction has expelled Getachew from the party, while Getachew is appointing allies into the regional administration. Debretsion’s faction is seeking to replace Getachew as interim president, while the federal government appears to support the interim government. This contestation could lead to the collapse of the Pretoria Agreement, especially if the main TPLF faction succeeds in removing Getachew without the federal government’s consent.
The Ethiopia government has recently finalized a deal with the International Monetary Fund (IMF) and the World Bank that has seen the country enact wide-ranging macroeconomic reforms, notably the liberalization of foreign exchange and an interest-rate based monetary policy framework. In theory, this would make exchange transfer less constrained. Nevertheless, this may not be realized in the short term due to the foreign currency crunch, despite the immediate transfer of billions of dollars as loans and grants from the IMF and the World Bank.
While the government says the policy will encourage foreign direct investment, exports and remittances through the regular banking system (rather than the black market) in the short term, banks are likely to be unable to satisfy demands for foreign currency. Pervasive insecurity and political violence may also reduce appetite for private investment, particularly from Western companies.
Ethiopia remains suspended from the African Growth and Opportunity Act (AGOA) since January 2022. The government is seeking reinstatement based on reviews by the end of 2024. The U.S. has recently become more open toward the Ethiopian government, notably in allowing the crucial deal with the IMF and World Bank, but Washington appears to be using AGOA as a leverage, particularly to ensure continuous implementation of the Pretoria Agreement and to urge negotiations to end the conflicts in Amhara and Oromia. In this context, the reinstatement of Ethiopia’s AGOA access is uncertain.
The risks of new trade sanctions are low, but escalation of the contestation with Somalia and Egypt may lead to potential sanctions. The U.S. has affirmed support for Somalia’s territorial integrity. Ethiopian recognition of Somaliland could undermine this U.S. policy. In addition, if Ethiopia refuses to withdraw troops from Somalia or otherwise seeks to undermine the peacekeeping mission there, it could lead to tensions with the West, increasing possibilities for sanctions.
Ethiopia technically defaulted in late 2023 after it failed to pay interest coupons on its $1 billion Eurobond. The $1 billion is due for payment in December 2024. Restructuring talks for this and other debts are ongoing, with better chances following the deal with the IMF and World Bank. Nevertheless, restructuring talks are likely to take time, and a breakthrough is unlikely before December, in which case Ethiopia will either have to pay the amount or be under formal default.
As Ethiopia has largely avoided resorting to non-concessional private debt, this outcome might not have an immediate impact on the country, if it were to happen. Nevertheless, payment will cause significant foreign currency shortages, and a default may subdue investment appetite.
