Previous Quarterly Editions
Expropriation Risk: 69 65 66 67 ►Political Violence Risk:60 59 59 59 ►Terrorism Risk:45 45 42 42 ▼Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ►Sovereign Default Risk:75 75 75 74 ►
TREND ►
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Before Prime Minister Abiy Ahmed’s rise to power in 2018, Ethiopia maintained close relations with the West and East. With the West, Ethiopia had strong security and diplomatic partnerships, while China was a strong economic partner in terms of loans and infrastructure projects, and at times an ideological partner, driven by its anti-liberal/capitalist stance.
Since 2018, Abiy has shifted the rhetorical and ideological leanings towards the West, while the economic partnership with the East has relatively slowed down, including in the accumulation of Chinese debt. Nevertheless, China remains a key source of Ethiopian debt and imports, and increasingly an export destination.
The security and economic partnership with the West has suffered since the civil war in northern Ethiopia started in November 2020. The West has also significantly cut development aid to Ethiopia. Nevertheless, while the government has in response pursued anti-Western rhetoric, this is primarily designed to shore up domestic unity and support and
has not led to a strategic shift into a security alliance with China.
Instead, Ethiopia has developed tactical security deals, notably with the United Arab Emirates, Turkey, and, to a much smaller extent, Iran. The anti-Western rhetoric has also generated warm support from Russia, and Chinese and Russian protection from condemnation at the UN Security Council.
Overall, therefore, while the security, economic, and development aid ties with the West have suffered since the start of the civil war, this has not led to a systemic shift in geopolitical alliances towards China or Russia. In fact, ideologically and in terms of economic policy, Abiy’s
government is decidedly aligned with the West, as manifested in the opening of the telecoms and banking services to foreign investment, and the privatisation drive.
Accordingly, if the war in the north is resolved, Ethiopia is more likely to drift towards the West than the East, although the country can be expected to continue to maintain close economic ties with China, notably in infrastructure investment and as export destination.
At the domestic level, Ethiopia’s cautious but dual partnership with the East and West is not highly contested. China has also not sought to undermine Ethiopia’s ideological shift towards the West, nor has it sought to replace the West’s temporary retreat in security partnerships with Ethiopia. Accordingly, the country’s geopolitical alignments remain largely stable and uncontested.
The resumption of conflict in northern Ethiopia in August 2022, after almost eight months of relative lull in violence, alongside the impacts of the Russia/Ukraine crisis, skyrocketing inflation, shortage of foreign currency, and an appreciating U.S. dollar, has subdued hopes for quick economic recovery. The limited access to external borrowing and the redirection of resources to the war effort have led to reduced public investment, including in infrastructure, especially outside of Addis Ababa.
The government seems also to be printing money to cover some priority investment, which is accelerating inflation. To hedge against the inflation, many are resorting to investment in property and foreign currency, which has led to exponential growth in property prices, and a black-market rate for U.S. dollars at almost double the official rates.
In this context, the government is likely to seek to accelerate the planned opening of the telecoms and banking sectors, as well as the drive to privatise public enterprises, notably around logistics and sugar. Alongside the reported beginning of power generation from the controversial Grand Ethiopian Renaissance Dam, these sectors offer significant first entry and profit opportunities.
Nevertheless, the war in the north, the overall fragile political and security situation, Western consternation over the war, and limited details on openings of the banking sector all pose risks that can be expected to subdue foreign investment interest, until signs of improved prospects in the war and an overall sense of stability emerge.
Therefore, the risk of expropriation is low. Nevertheless, to make up for the slowing development aid and external loan possibilities, the government may seek ways to improve its tax collection capabilities and even impose new taxes.
TREND ▼
Regarding Jihadist terrorism, Al-Shabab has sought to penetrate southeast Ethiopia. While the group’s efforts have been thwarted, it poses moderate risks which could heighten if the overall security situation deteriorates.
Domestic political terrorism poses a greater risk. Armed groups in Oromia, Benishangul-Gumuz, and Gambella periodically attack business interests or infrastructure, and armed factions across the country, including state security forces, have been implicated in human rights abuses including attacks, killings, and arbitrary detentions based upon ethnic profiling. Intercommunal violence in parts of Amhara and Southern regions also risks violence. Nevertheless, characterisations of political violence as ‘terrorism’ remain contested.
Risks of political violence remain high. As noted above, the conflict in northern Ethiopia has resumed. While the warring sides consistently affirm their commitment to a peaceful resolution, and external pressure to end the war has intensified, the mistrust among the parties will likely see escalation in the short term. Only a relative battlefield stalemate could be expected to get the parties back to negotiating.
The government is also engaged in internecine warfare with various rebel groups in large parts of Oromia, and in Benishangul Gumuz and Gambella regions. The proliferation of small arms and irregular armed forces in Amhara region and the repeated bouts of conflict between security forces of Afar and Somalia regions also pose risks of political violence in large parts of the country, including the key outlet for Ethiopia’s exports and imports through Djibouti port. Tensions among political groups both within and between Oromia and Amhara also remain high.
Moreover, while the government has announced a national dialogue process to resolve longstanding political issues, key opposition forces have refused to partake. The planned dialogue has been a source of divisions rather than reconciliation due to differences over the independence and capability of the Dialogue Commission, and concerns important armed opposition stakeholders would not be included.
In combination, the expanding security problems and political tension are likely to worsen the waves of internal displacement and overall humanitarian situation and disrupt the crops harvest in large parts of the country.
The resumption of conflict in north Ethiopia and the lacklustre move towards genuine national dialogue is likely to see the maintenance of Western economic sanctions on Ethiopia, notably exclusion from the duty-free access to U.S. markets under the African Growth and Opportunity Act (AGOA), mainly affecting textile and apparel exports. Washington has already extended the sanctions against individuals or entities deemed responsible for human rights violations, obstructing aid deliveries, or undermining peace efforts in Ethiopia.
While new sanctions may not come, the resumption of conflict is likely to delay attempts to restructure the country’s debt. While AGOA eligibility is reviewed annually, Ethiopia is unlikely to regain access in January 2023.
Some injection of funds from the World Bank can be expected, and the economy is expected to grow by over 4% in 2022. Nevertheless, overall international reserves remain low and likely dropping to USD3.2 billion by the end of 2022 – 1.7 months of import cover – while the current account deficit is expected to rise to 11.1% of GDP.
While the opening of the telecoms and banking sectors to foreign investment, increased privatisation drive, and possible restructuring of the country’s debt, could be expected to increase reserves and narrow the deficit, higher import prices and reconstruction needs to rebuild the war-ravaged economy dim prospects for strong recovery.
Although the World Bank and China have expressed possibilities for debt restructuring and International Monetary Fund officials have visited Ethiopia to accelerate the process, the resumption of conflict will likely slow it. This means the country continues to face a high debt service burden, expected to average around USD180 million a month over 2022.
This puts further pressure on an already strained fiscal position, which is being aggravated by high inflation and vulnerability to rising global food and fuel prices, heavy depreciation of the local currency, a marked current account deficit and extremely low foreign exchange reserves.
Ethiopia hopes its plans for privatisations will bring in much-need foreign direct investment. This is not unrealistic, with privatisation of banking likely to attract significant interest, but it is unlikely to be enough to offset current fiscal fragilities without concurrent debt restructuring. Nevertheless, the rate of foreign investment is likely to remain subdued until significant improvements in internal security.
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