Previous Quarterly Editions
Expropriation Risk: 50 50 Political Violence Risk: 76 78 Terrorism Risk: 46 45 Exchange Transfer and Trade Sanction Risk: 63 62 Sovereign Default Risk: 66 68
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Ethiopia is going through a period of major domestic transformation. Years of sustained grassroots protests combined with political shifts within the ruling coalition culminated early in 2018 with the resignation of Hailemariam Desalegn, prime minister since 2012. His surprise successor, selected in April, is Abiy Ahmed. Representing a reformist wing of the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF), a coalition of four ethnic-based parties, Abiy has already had a dramatic effect on Ethiopia’s political landscape, as well as that of its neighbours, as he promises a sweeping array of reforms in both domestic and foreign policy. However his reform agenda has yet to be backed-up by a detailed plan for implementation. This has created high levels of public expectation as well as considerable competition among domestic interest groups who seek to mould the government’s initiatives in their favour. In addition, while Abiy has been able to strengthen his personal position, his rapid rise has created considerable tension within the ruling coalition. In particular, it has sharpened the divide between reformists and the EPRDF’s ‘old guard’ within the once dominant Tigray People’s Liberation Front. At present there is a fragile balance between pragmatism and principle as the EPRDF’s constituent factions still need each other in order to maintain power at the national level, but internal fissures are deepening. As the central government looks less monolithic, there is already evidence that a host of complex regional conflicts among ethnic groups and formerly exiled opposition factions are re-emerging. Economically, the picture is also mixed. Although the country has averaged growth of 9% since 2000, the annual figure slipped to 7.7% in fiscal 2017-18 from over 10% a year earlier. Recent reforms have had some positive effects, with inflation, debt and the fiscal deficit all projected to moderate. However, this will come at the cost of weaker growth, which is expected to slow to around 7% over the medium term. Pro-liberalisation policies under the new administration suggest increasing space for foreign capital to enter the Ethiopian market, but overall this will remain relatively tightly controlled and limited to partial privatisation in specific sectors. Some areas, such as the financial sector, remain firmly off-limits.
With so much of Ethiopia’s economy still in the hands of state-owned enterprises with direct links to ruling elites, high-level corruption is widely seen as a major drag on economic growth. However, the government’s handling of its recent anti-corruption drive has triggered allegations that it is deliberately targeting hostile factions and individuals within the party’s old guard. While this may make political sense, it is creating high levels of uncertainty over the status and future handling of major development projects. This is particularly a problem for efforts to attract investment, which are already being hampered by the slowdown in China, Ethiopia's largest export market, the steep drop in global prices for coffee, which accounts for a quarter of its exports, and some disillusionment among Chinese investors after disappointing returns from much-hyped industrial and infrastructure projects. An entrenched, pervasive and opaque bureaucracy also discourages investment.
Abiy’s emergence as Ethiopia’s new leader has helped to quell grassroots dissatisfaction with the sclerotic state of the country’s governance, but it has also loosened the central government’s grip on a range of sub-national conflicts. These include competition between ethnic groups along ethno-federal boundaries, such as the conflict between Somali and Oromo communities along their shared border. There are also groups pushing for greater autonomy at the regional level in the south. Another challenge, less coherent at present but already growing in importance, is whether the country should strengthen its central government rather than continue under the coalition of regional and ethnic groups represented in the EPRDF. In September, there were clashes in Addis Ababa between groups representing the two approaches. Meanwhile, the federal government continues operations against the Oromo Liberation Front (OLF) in western Oromia, conducting air strikes on OLF training camps in January.
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Members of the Abiy administration have recently been hinting at the existence of a subversive group with close ties to former officials of the National Intelligence and Security Services (NISS). In November, Attorney-General Berhanu Tsegaye suggested that senior former NISS officials had orchestrated a grenade attack at a public rally in June that targeted Prime Minister Abiy. The government has also suggested that an incident in October involving soldiers marching to the prime minister’s residence, which it initially described as a protest over pay, was in fact a failed coup attempt. While the government may be highlighting concerns about the NISS to justify a forthcoming crackdown, the possibility that a contest for political power may at some point encompass acts of domestic terrorism cannot be ruled out.
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The Abiy government has so far shown little interest in liberalising the banking sector, which remains dominated by the two state-owned banks, the Commercial Bank of Ethiopia and the Development Bank of Ethiopia. With private-sector activity and inflows still weak, the foreign currency crisis could persist for years to come. Devaluation of the birr by 15% in October 2017 helped to close the gap between the official and unofficial exchange rates during 2018.
The IMF changed its assessment of Ethiopia’s risk of external debt distress from ‘moderate’ to ‘high’ during 2018 as exports underperformed and foreign currency reserves fell further below target levels. Abiy’s economic reforms have gone some way towards stabilising the outlook, but deep structural issues mean that debt risk is likely to remain a long-term issue. While exports should improve from 2020 onwards, with sales of electricity overtaking coffee in importance, they will not close the gap with import needs any time soon and foreign reserves are likely to remain precarious. Suggestions that Chinese lenders are less keen on Ethiopian debt could actually heighten repayment risks, as Ethiopia will need to sustain high levels of infrastructure investment from China to underpin its export-led growth strategy.
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