Previous Quarterly Editions
Expropriation Risk: 65 65 65 65 Political Violence Risk: 66 57 57 60 Terrorism Risk: 48 48 50 45 Exchange Transfer and Trade Sanction Risk: 64 64 64 64 Sovereign Default Risk: 75 75 75 75
TREND ►
Ethiopia’s domestic crisis has moved into a new and more troubling phase since mid-2020. In November 2020, long-standing tensions between the federal government and the Tigray People’s Liberation Front (TPLF) erupted into open conflict. Despite a surprisingly swift victory over TPLF conventional military forces, federal troops have been unable to contain a subsequent TPLF insurgency and face ongoing asymmetric conflict.
Meanwhile, humanitarian conditions have deteriorated significantly, with aid agencies warning of potential mass starvation in rural Tigray, which they have been unable to access fully given ongoing fighting and government obstruction. Additionally, all parties to the conflict, including government-allied troops from Amhara region and neighbouring Eritrea, have been accused of human rights violations, including possible war crimes.
The government’s handling of the crisis has drawn significant international criticism, which has already provoked aid freezes and even discussion of possible sanctions. It has also distracted from, or even aggravated, other multiple domestic and foreign policy crises, including violent inter-ethnic clashes in Benishangul-Gumuz, western Oromia, Amhara, southern Ethiopia and the Afar-Somali border region, as well as a border conflict with Sudan that has produced casualties on both sides. The latter has caused a serious deterioration in bilateral relations with a once-friendly neighbour, which is now increasingly aligned with Egypt in pressuring Ethiopia, politically and militarily, especially over the Grand Ethiopian Renaissance Dam.
Domestic political pressures are also running high, with delayed national elections now due in June 2021. With many leading opposition figures still in pre-trial detention following domestic unrest last June 2021, and significant constraints on opposition political activity, it looks highly likely that the elections will be boycotted by several major opposition parties. This may greatly improve the prospects of a convincing ruling party victory, though likely not without violence or controversy. This would severely undermine the government’s already fragile legitimacy and could extend the political crisis over the medium term – unless, for instance, there was a major policy shift such as the opening of a much-demanded national dialogue.
Before the conflict, Tigray had become a major economic hub, notable for mining, construction, agribusiness, textiles, pharmaceutical manufacturing and tourism. Although details remain scant due to ongoing government restrictions on information, the conflict has clearly caused major damage to industrial infrastructure and assets. The Ethiopian Investment Commission has promised to offer priority support to those affected, including through tax breaks and technical support. Yet it appears highly likely that investors in Tigray will nevertheless face major losses due to the conflict.
TREND▲
The risk of political violence has risen considerably (from an already high level) in the context of the conflict in Tigray and the upcoming elections. Regarding Tigray, the conflict looks likely to evolve into a protracted insurgency that the government has little prospect of containing unless it is willing to open dialogue with TPLF forces, something it has resisted so far.
The Tigray conflict has required a huge injection of military manpower, much of which has been drawn from elsewhere in the country, leaving security gaps that armed groups and disgruntled actors have exploited. The situations in western Oromia and Benishangul-Gumuz look particularly fragile, with the potential to produce worsening violence. Yet there are also dozens of other potential flashpoints across the country. Beyond being overstretched, the Tigray crisis has created fractures within the national military along ethnic lines, compromising its effectiveness at a critical moment.
Meanwhile, the border conflict with Sudan has already produced violent clashes; although both governments would prefer to avoid further conflict, political pressures on both sides are driving an escalation in rhetoric, which could easily spill over into unintended confrontations on the ground. Within Ethiopia, broader political tensions are also rising in the run-up to the national elections. There is a high likelihood that this could manifest in political violence or protests, especially in Oromia, including in and around the capital, Addis Ababa.
TREND ▼
Terrorism remains an outside risk. Ethiopia has no history of domestic jihadist terrorism and, although Somali jihadist group al-Shabaab has often labelled Ethiopia as a potential target and even focused some recruitment efforts on Ethiopia, it has never gained much traction there.
With security forces distracted by other issues, Ethiopia is arguably more vulnerable than before to terrorist infiltration, but current domestic instability in neighbouring Somalia (and to a lesser extent north-eastern Kenya) arguably offers al-Shabaab far greater opportunity that is more in line with the group’s core goals, making the diversion of resources towards Ethiopia less likely.
The risk of domestic political groups resorting to terrorist tactics is likely higher than foreign jihadist activity, and there have been indications in the past that some groups might consider using such tactics. Yet the current political drift is more towards open political conflict than clandestine methods.
The combined effects of domestic instability and the COVID-19 pandemic have aggravated Ethiopia’s economic difficulties as it attempts a tricky transition from a state-led centralised economic model towards a more liberal paradigm. Among other things, this has increased pressure on the birr, which has lost roughly a third of its value since late 2019. It has also put further pressure on already weak foreign reserves, which were estimated to cover less than two months of imports as of mid-2020.
Both factors have historically underpinned burdensome regulation of foreign currency transactions. Nevertheless, the medium-term economic outlook is relatively benign. A return to strong growth in the coming year, an easing of the debt-service burden through the G20’s debt restructuring initiative and a likely inflow of foreign currency through anticipated privatisation initiatives (some of which should also be used to relieve exposure in the state-owned banking sector) will probably see conditions ease from the second half of the year. However, foreign reserves may remain a recurrent problem due to persistent budget deficits.
Trade sanctions present a subsidiary risk; both the United States and European Union have frozen budgetary assistance to Ethiopia because of the Tigray conflict and have warned of the potential for further sanctions. This is highly unlikely to evolve into a trade embargo, but it could threaten sources of foreign assistance upon which Ethiopia’s economic reform plans are highly dependent.
Since the beginning of 2021, Ethiopia has seen its credit rating downgraded by both Fitch and Standard and Poor’s (Moody’s placed the rating on review for downgrade) due to the government’s decision to participate in the G20 debt restructuring exercise, which was seen as increasing the risk of default on private debt.
In reality, the move is likely to be broadly positive for Ethiopia’s debt position. Although Ethiopia’s overall debt exposure had become elevated in recent years, it has borrowed more prudently than many of its peers, and the predominant spread of external debt towards multilateral and bilateral lenders should allow Ethiopia to gain significant relief through the G20 initiative without having to approach private creditors.
Moreover, privatisation receipts are expected to be used to resolve the bloated debt positions held by certain major state-owned enterprises, including to domestic financial institutions, which should both ease debt pressures and reduce those banks’ exposure to bad debt.
Collectively, these developments should see Ethiopia’s International Monetary Fund/World Bank debt distress rating eased from high to moderate, and likely also see Ethiopia recover its commercial ratings, at least in time for the rollover of its USD1bn Eurobond in 2024, which is most likely to be the next time Ethiopia considers tapping global commercial debt markets again.
Return to contents Next Chapter
