Previous Quarterly Editions
Expropriation Risk: 65 65 65 69 ▲ Political Violence Risk: 57 57 60 60 ► Terrorism Risk: 48 50 45 45 ► Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 75 75 75 75 ►
TREND ►
Almost a year on from what the government initially tried to describe as a limited law enforcement operation, the war in northern Ethiopia continues unabated. Pro-government forces have been forced to withdraw from much of Tigray and Tigrayan forces have gone on the offensive in neighbouring Amhara and Afar regions. Yet they have been unable to recover large portions of western Tigray, which Amhara regional authorities now claim as their own and which have been heavily fortified by government, Amhara and Eritrean troops.
The question of western Tigray is a critical stumbling block to a negotiated solution to the conflict, with Tigrayan forces insisting a full withdrawal from these areas is a precondition to talks and pro-government forces determined to hold onto this territory at all costs given its strategic value. At present, Tigrayan forces are encircled by their enemies; should they recover western Tigray, they could secure an outlet and potential supply corridor across the Sudanese border.
Ethiopian relations with Sudan continue to worsen amid escalating rhetoric over a renewed border conflict and dispute over the Grand Ethiopian Renaissance Dam. Both governments wish to avoid an escalation to military conflict, but this remains an outside risk. Ethiopia’s broader foreign relations also look increasingly problematic, as Western criticism over the humanitarian and human rights fallout of the Tigray conflict mount. This is almost certain to produce US sanctions in the coming months, while others such as the European Union may follow.
Meanwhile, a partially concluded general election in June has returned a strong majority for the ruling Prosperity Party but has done little to bolster the government’s failing legitimacy, given the lack of meaningful opposition because of boycotts, insecurity and procedural shortcomings.
TREND ▲
Despite the ongoing conflict, Ethiopia remains broadly committed to policies to attract and retain foreign investment. Despite disappointments in the outcomes of auctions of mobile spectrum earlier this year, the government is expected to press on with privatisation plans in sectors such as transport and sugar. However, although the government aims to provide a hospitable climate for foreign investment, there are still risks to investors.
Most immediately, the ongoing conflict in northern Ethiopia and other localised conflicts could directly affect assets or infrastructure, or indirectly disrupt supply chains or operations. More broadly, continued foreign exchange shortages and rising inflation could complicate financial operations and raise the costs of doing business.
Over the longer term, it is possible that sanctions could begin to affect business operations, including disrupting access to foreign markets (for example, through the African Growth and Opportunity Agreement). Meanwhile, the clear priority for the government right now is the war in northern Ethiopia, which means all other considerations, including protecting foreign investment, will be a secondary concern.
Risks of political violence are extremely high and affect almost all parts of the country. The conflict in Tigray now also affects Amhara and Afar regions and has helped to trigger separate border clashes between Ethiopian and Sudanese forces.
Ongoing unrest in western Oromia and Benishangul-Gumuz has continued to deteriorate over the reporting period. In Oromia, a new alliance announced between the Tigray Defense Forces and the Oromo Liberation Army is likely very shallow but has produced heightened insecurity and attention to the western Oromia insurgency. In Benishangul-Gumuz, continued attacks on ethnic Amharas have drawn military intervention from Amhara regional forces. Both situations have potential to worsen.
Long-standing border tensions between the Afar and Somali regions have again flared up, and have involved the official regional security forces on both sides, as well as local militias. In southern Ethiopia, latent tensions over decentralisation processes have the potential to flare into violence in the post-electoral period.
Meanwhile, across the country living conditions are worsening amid high inflation and extended economic difficulties, raising the risk of economic grievances spilling over into protest and possibly violence.
Terrorism remains an outside risk. Despite long-standing hostility towards Ethiopia, Somali jihadist group al-Shabaab remains focused on exploiting domestic instability within Somalia and there is only very limited domestic predisposition towards jihadism in Ethiopia. Domestic political terrorism remains a possibility, but most potential perpetrators remain focused on the conventional conflicts with which they are engaged. The most likely scenario for a terrorist attack would be an attempt to disrupt government through an attack on the capital, most likely against political targets, but this remains a high-impact but fairly low-probability event.
Trade sanctions are now a growing risk. In mid-September, US President Joe Biden authorised the potential imposition of bilateral sanctions against persons deemed complicit in prolonging the conflict in Ethiopia, disrupting humanitarian relief or perpetrating human rights abuses. Biden’s order stopped short of actually imposing sanctions but was clearly intended as a warning to all parties that Washington is poised to do so, absent some concrete and rapid progress towards a ceasefire.
However, the rhetoric on all sides suggests a ceasefire is highly unlikely at any time soon and thus the imposition of US sanctions is almost certain to follow at some point in the coming months. This is likely to focus initially on individuals and entities only but does have potential to expand to more generalised measures if the situation continues to worsen. Other political entities -- particularly the European Union, which like the United States has already frozen various forms of budgetary support to Ethiopia’s government -- may follow Washington’s lead on this.
Ethiopia continues to try to make progress towards easing its sovereign debt position, but progress has been slower than desired. In particular, efforts to secure debt restructuring through the G20’s new ‘common framework’ have been extremely slow as creditors have dragged their feet on the formation of a committee to consider the issue.
Meanwhile, receipts from privatisation initiatives -- which the government intended to use to pay off debt held by state-owned enterprises -- have been lower than expected, dampening the expected economic benefits from these processes. Neither issue will critically undermine the government’s plans to ease its debt position, which remain broadly on track, but alongside broader negative impacts on the economy from the ongoing conflict, they make the outlook more subdued.
These concerns prompted Standard and Poor’s on September 24 to downgrade Ethiopia’s sovereign rating to CCC+ from B-, moving the rating into junk territory. Authorities will still hope that this can be recovered long before they need to return to international financial markets, which is not currently anticipated for some time, but uncertainties related to the ongoing conflict and its potential to damage the economy further will cloud these prospects.
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