Previous Quarterly Editions
Expropriation Risk: 50 48 48 48 Political Violence Risk: 78 78 80 83 Terrorism Risk: 45 46 46 46 Exchange Transfer and Trade Sanction Risk: 62 63 64 65 Sovereign Default Risk: 68 66 66 66
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The upcoming parliamentary elections in May are now dominating the political landscape. There is still a possibility that deteriorating domestic stability could force a postponement, but Prime Minister Abiy Ahmed appears determined that the schedule should be respected. Abiy managed a major political coup ahead of this contest by securing the transition of the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF), made up of four ethnic-based parties, from a sometimes fractious coalition into a unified national party that has been named the Prosperity Party to emphasise a new focus on economic issues rather than ethnic ones. Abiy hopes this will help to ease the polarising effects of ethnonationalism in domestic politics by allowing the new party to contest elections on a purely national platform, although the new party will need to retain its unity for that to happen. However, the move could instead end up strengthening those ethnonationalist forces that wish to divide regions of government along ethnic lines if some of the EPRDF’s members and supporters abandon the new Prosperity Party. As such, the results of Abiy’s move may be mixed. There is no doubt that the post-election political landscape will be far more fragmented than any Ethiopia has experienced before, increasing the challenges that will face Abiy if he is able to hold on to power. However, he is using the period before the elections to emphasise economic issues by issuing a new ‘Home-grown Economic Reform’ plan. While the over-arching priorities, which include stabilising macroeconomic imbalances, liberalising key economic sectors, deepening the financial sector, addressing underperforming exports and improving the business environment, all make sense for the economy, the list is still largely aspirational. There is little detail about how these goals might be accomplished and Abiy’s government has yet to show that it can formulate concrete solutions to the problems that he has identified. These are significant, and will require a patient, sustained and coherent approach to overcome. This may prove challenging given the likely volatility of the political climate, both before and after elections.
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Government efforts to improve the business environment and open the economy are gathering speed. In the latest of several major developments, which have included a major privatisation effort, the central bank has abandoned its long-standing requirement that private banks must invest 27% of their loan portfolios in its own bills, which were then used to provide advances to the government. The move could see a significant increase in foreign interest in Ethiopia’s banking sector, given that these bills always paid a negative real interest rate. The shift should also create space for increased lending to the private sector, which had historically been crowded out by government borrowing. However, it may also come at the risk of liquidity pressures on the central bank if implementation is too abrupt, as well as curtailing a useful source of low-cost government finance. Continuing challenges for potential investors include a structurally undervalued currency, a chronic shortage of foreign exchange, and a thicket of red tape.
The potential for political violence will rise in the tense period leading up to the elections. Although Abiy hopes to reduce tensions by his restructuring of the ruling EPRDF, the fact remains that almost all facets of domestic political life are still organised along ethnic lines. Instances of political rhetoric intended to deepen ethnic rifts are likely to intensify ahead of the elections, with the potential to trigger violence in many parts of the country. The areas at greatest risk are in Oromia and Amhara regional states, where strong ethnic parties are preparing to challenge Abiy’s new Prosperity Party, and in areas surrounding Tigray state, where the regional ruling party looks likely to stay outside the Prosperity Party. In the Southern Nations, Nationalities and Peoples’ Region (SNNPR), which recently saw a relatively peaceful referendum on independence for the ethnic Sidama, violence is still likely as other ethnic groups seek to put forward their own similar claims.
TREND ► OUTLOOK ▲
Authorities claimed in September to have dismantled an Islamic State cell operating in the country, and warn that Somalia-based al-Shabaab, which has links to al-Qaida, is attempting to make inroads into Ethiopia. This followed shortly after an Islamic State-linked cell in Somalia promised to start releasing propaganda materials in the Amharic language in an attempt to appeal to an Ethiopian audience. The link to Somalia is a particular concern, as Ethiopia is widely seen there as attempting to intervene in domestic Somali politics to the anger of many ethnic Somalis in both countries. Even so, though jihadists may view the current domestic disorder in Ethiopia as a useful moment to try to expand their outreach, the country has shown little interest in Islamist extremism so far. Meanwhile, Ethiopia’s relatively effective security and intelligence forces have sufficient capacity to nullify those threats that do exist.
TREND ▲ OUTLOOK ▼
The foreign currency shortage remains severe, and despite much talk in government about measures to ease the foreign exchange crisis there is little prospect of a quick improvement. Beyond trying to boost remittances, which may have a modest impact, the government appears to be relying on its proposed privatisation drive to bring in foreign currency. However, the forex shortages will only be resolved once underperforming exports can catch up with the country’s inflated import bill, and this will take years to achieve. Though there has been discussion of floating the heavily overvalued Ethiopian birr to ease some immediate pressure, the likely impact on inflation means that nothing will happen until after the elections. In December, the IMF offered a three-year 2.9-billion-dollar package to tackle the foreign exchange shortage and support exchange rate reform, as well as reforms to the financial sector.
Sovereign debt remains a serious risk. Though the overall debt burden fell marginally during 2019 to 59% of GDP, debt servicing costs reached an all-time high of 80% of GDP. Although growth was an enviable 7.4% in 2019, this was down from 10% as recently as 2017 and is expected to plateau at around 6.5% for 2020 and 2021, making it harder for the government to ease the debt burden.
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