Previous Quarterly Editions
Expropriation Risk: 50 50 48 Political Violence Risk: 76 78 78 Terrorism Risk: 46 45 46 Exchange Transfer and Trade Sanction Risk: 63 62 63 Sovereign Default Risk: 66 68 66
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Ethiopia stands at what is essentially the mid-point of a significant transition period. It is now one year since Prime Minister Abiy Ahmed came to power and roughly one year until national elections in 2020 provide the first test of his efforts to transform this historically one-party authoritarian state into a multi-party, liberal democracy. While the pace and direction of reform has been impressive so far, Abiy has raised expectations without fully delivering many concrete results. As political elites increasingly concentrate on next year’s elections, Abiy will face several related challenges all of which must be tackled against the backdrop of a faltering economy. One is creating sufficient political space to ensure that opposition parties and critical voices feel included but doing so without threatening the re-election chances of his own ruling coalition, the Ethiopian People’s Revolutionary Democratic Front (EPRDF). Another is restoring order within the EPRDF itself, which has become deeply fractured by antagonism among its constituent parties, while the third involves managing a growing number of divisive identity and territorial disputes that threaten to undermine the country’s fragile domestic balance. Perhaps the most urgent priority is restoring unity to the EPRDF. A cohesive and coherent ruling party could help dampen rising ethno-nationalism and restore some semblance of security through a coordinated approach. It could also begin to forge consensus on difficult issues such as electoral and economic reform. Perhaps most importantly, it would restore the currently broken links between federal and regional governance structures. There are signs that Abiy is beginning to attend to this issue but bringing greater unity to the EPRDF will require tact, skill and concessions all round. At the Belt and Road Initiative summit in April, Beijing agreed to write off all interest-free loans made to Ethiopia maturing before the end of 2018 and restructure a 4-billion-dollar loan for the construction of the Addis Ababa-Djibouti railway from 10 to 30 years. This constitutes only a fraction of Ethiopia’s debt burden to China, which is currently estimated at around half of the country’s estimated total external debt of 24 billion dollars, but the move was accompanied by several new investment pledges, including a deal worth 1.8 billion dollars for the construction of much-needed electricity transmission lines.
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Ethiopia is making efforts to become a more attractive destination for foreign direct investment. With the help of a national programme launched in December 2018 to improve the investment climate, it has attracted record foreign inflows during Abiy’s first year in office. In April, it even commissioned a study on opening the banking sector to foreign investment, something previously considered off limits. However, the flagship privatisation initiative is moving at a glacial pace and there are signs that the government may be scaling back its already limited plans for liberalisation until after the elections. In April, it issued a handful of new mining licences and floated the possibility of privatising a dozen major sugar factories. This may be a modest attempt to test the waters before any more significant plans are mooted. Part of the reason for the slow pace in even articulating a privatisation roadmap is the continued pushback from vested interests in state-owned and parastatal quasi-monopolies, as well as public disquiet over the possible sale of flagship assets such as Ethiopian Airlines.
TREND ► OUTLOOK ▲
Rising political violence presents a key challenge that the federal government is struggling to address. Many instances are tied to inherently sub-national and often local issues related to land or resources but they also reflect national issues related to identity, political competition and structures of governance. The Oromo Liberation Front (OLF) is not only deepening unrest along the borders of Oromia state but presents a direct challenge to Abiy’s Oromo Democratic Party (ODP) not only in this year’s local elections but in the 2020 national campaign. Violence is also increasing along the borders between Amhara and Tigray regional states and this is producing substantial levels of tension between the Amhara Democratic Party (ADP) and Tigray People’s Liberation Front (TPLF), both members of the ruling EPRDF. This dynamic could worsen as elections approach and the ADP feels pressure to see off competitor parties by pandering to Amhara nationalist issues.
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Tensions are rising again over the status of Addis Ababa, tapping into long-standing anger among ethnic Oromos about the gradual expansion of the capital city into Oromo lands and the exclusion of the Oromo people from the capital’s wealth. Demonstrations over a lottery to distribute condominiums on the outskirts of Addis Ababa saw protesters brandishing machetes and clubs. Plans to demolish illegal settlements in the town of Sululta just north of the capital also have the potential to trigger violent resistance. While the risk is still low, the possibility for targeted attacks against major new development projects in and around Addis Ababa cannot be excluded in the current charged political climate.
While there had been some hope that last year’s deposit by the UAE of one billion dollars into Ethiopia’s central bank might ease chronic foreign exchange shortages, this has not been the case so far. This is not surprising given that this sum would add less than one week’s import cover to reserves, but in April it emerged that banks were again struggling to issue sufficient foreign currency to meet import needs. Even if the government is able to sustain and build upon increased foreign inflows, this is likely to remain a persistent issue as long as import costs outstrip export earnings.
The Chinese debt forgiveness announced in April was welcomed in Addis Ababa. Although the further rounds of loans announced at the same time may increase rather than contract Ethiopia’s significant debt and debt-service burden, they send a signal that China remains committed to supporting Ethiopia’s export-led development strategy after some earlier signs that this commitment was wavering. Now Ethiopia must deliver on that strategy if it is to prove its investments viable and its debt trajectory sustainable.
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