Previous Quarterly Editions
Expropriation Risk: 48 48 50 49 Political Violence Risk: 80 83 81 83 Terrorism Risk: 46 46 48 50 Exchange Transfer and Trade Sanction Risk: 64 65 67 67 Sovereign Default Risk: 66 66 69 69
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Ethiopia’s domestic crisis is growing deeper and more complex amid the added challenges posed by COVID-19. Following the electoral commission’s announcement in March 2020 that it could not hold national elections on time in August 2020 due to the COVID-19 situation, the House of Federation (HoF) (which is the upper house of the federal legislature acting as arbiter of the constitution), ruled in June 2020 that the terms of current national and regional parliaments and governments should be extended until elections are held. It also determined that this should be nine to 12 months after the government determines the COVID-19-related crisis to be over, essentially leaving the final election date entirely in the government’s hands. This ruling has provoked deep anger among opposition groups, who fear the government will manipulate the situation to its own advantage. Moreover, the Tigray People’s Liberation Front (TPLF), which was once the dominant force within government but has now split from the ruling party having been sidelined under Prime Minister Abiy Ahmed, insisted it will hold Tigray’s regional elections on time in August 2020. This puts the TPLF on a collision course with federal authorities, as the HoF’s ruling makes such a move unconstitutional and so obliges the federal government to oppose it. Though both sides want to avoid such a scenario, the standoff has the potential to escalate as far as armed conflict or even an attempt at secession. The TPLF has demanded that its grievances with federal authorities be addressed as part of a broader national dialogue, something the government has so far strongly resisted. However, separate developments could force it to reconsider. The murder of popular Oromo singer and protest movement icon Haacaaluu Hundeessaa at the end of June 2020 has ignited inter-ethnic tensions. The violent protests and ethnically motivated attacks that it sparked have left more than 300 people dead and threaten the internal stability of the ethnic Oromo-Amhara alliance that is at the core of Abiy’s administration. The subsequent widespread arrests of prominent opposition figures have sharpened anti-government sentiment and drawn accusations of authoritarianism. Abiy is also under pressure from the ruling party to take a harder line on Oromo nationalists, even though this would only provoke further unrest and leave the prime minister to tread a fine line with great care. The government still projects the economy to expand by 6% in the fiscal year that started in July 2020, down from an original expectation of 9%, although the IMF estimate of 1.9% is far more realistic. But even a small positive figure, which many countries would envy, constitutes a serious situation for a country that has grown used to double-digit growth over the last decade, which means Ethiopia’s pre-COVID progress is now at risk. Political instability, a major locust plague, and the potential for a worsening COVID-19 crisis, all have the potential to disrupt the domestic economy even further.
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Ethiopian Airlines, the best-established East African airline, has been capitalising on its robust infrastructure, strong relationships, and positive reputation to provide a much-needed lifeline for air freight throughout the region during the COVID-19 crisis. It has been particularly important in helping countries get perishable agricultural and horticultural products to European markets. The airline has also picked up major contracts with UN agencies to assist with delivering food and other relief supplies linked to the impact of the COVID-19 crisis and the major locust plague which has affected much of the region. In the process, it is cementing its regional presence as other carriers struggle.
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The potential for further violence in Oromia following Haacaaluu’s murder is very high, and there is likelihood that this will carry over into the capital, Addis Ababa. The unrest could also strengthen the Oromo Liberation Front (OLF) ‘Shene’ faction, a renegade group pursuing a low-level guerrilla war in Western Oromia. Meanwhile, the government is concerned about another flare up of periodic violence along the Tigray-Amhara border. In a worst-case scenario, there could even be rising tensions on the Ethiopia-Eritrea border given historic TPLF-Eritrea tensions. A messy process of decentralisation in southern Ethiopia, which in June 2020 saw the establishment of Sidama State (Ethiopia’s first new federal state in the modern era), could increase inter-ethnic tensions in the multi-ethnic south. The success of Sidama’s struggle for statehood will strengthen similar demands among other ethnic groups. Prime Minister Abiy Ahmed’s efforts to design a comprehensive political solution to these multiple demands may delay but probably not prevent the ultimate breakup of the current Southern Nations, Nationalities and Peoples’ Region (SNNPR).
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The risk of domestic terrorist attacks is rising. Already, the government is talking of the recent murder of Haacaaluu, the 2019 assassination of the army chief of staff, the Amhara regional president, and the July 2018 killing of Grand Ethiopian Renaissance Dam (GERD) chief engineer Simegnew Bekele, as part of an organised campaign by unnamed actors to destabilise the country. While the connections between these incidents are far from established, each one highlights the potential for targeted violent attacks to have major political ripple effects. There are numerous domestic and foreign groups, with the capacity and motivation to exploit such fragility through terrorist actions, even if there is not a clearly established domestic organisation advocating terrorist actions.
The COVID-19 crisis poses significant risks to Ethiopia’s macroeconomic stability. Falling exports and remittance income are weakening external accounts despite significant international support to shore up the balance of payments. Bank asset quality and liquidity conditions are also at risk. However, the government remains committed to avoiding any foreign exchange restrictions. The central bank has also injected new liquidity into private banks, although worsening economic conditions could threaten these measures, especially if banks experience problems with loan repayments. The current crisis will delay the government’s efforts to close the gap between the parallel and official exchange rates and address the overvaluation of the national currency.
Ethiopia’s debt outlook remains broadly stable if still highly stressed. Though liquidity pressures may be rising, debt service relief under the World Bank/IMF and G20 initiatives should create additional fiscal headroom. Authorities remain committed to continued debt reprofiling to improve the country’s overall level of exposure. However, conditions have prompted shifts in Ethiopia’s credit ratings. Fitch has changed its outlook for the country to negative and in May 2020, Moody’s downgraded it to B2 and put it on review for further downgrade based on its participation in the G20 debt-service relief initiative, which, ironically, could complicate Ethiopia’s ability to manage its existing debt issues.
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