Despite offering huge investor potential underpinned by infrastructure development in recent years, analysts are jittery about the country’s prospects.
Ethiopia has become more unsafe for investors this year, according to Euromoney’s country risk survey, with its risk score deteriorating after showing substantial improvement during the past 10 years.
As a consequence, it has plunged a whopping 30 places in the global risk rankings to 109th out of 174 countries, to sit alongside Bolivia and Burundi, which are also declining.
The pandemic is part of the problem, undermining Ethiopia’s stellar economic performance.
So far, there have been more than 106,000 reported cases of Covid-19 and more than 1,600 deaths from the disease among a population numbering 109 million, and the totals are rising.
The country has managed remarkably high real GDP growth, sometimes touching 10% in recent years, but it is predicted to fall to 2% this year with no growth at all in 2021, according to the IMF’s latest forecasts.
This will naturally impact on the labour market and the fiscal accounts.
The budget deficit is not large by sub-Saharan Africa standards, but it will increase this year to 3.5% of GDP, the IMF predicts. Meanwhile, Ethiopia, like many countries, is relying more on official creditor support for its growing healthcare and social needs.
Although this has led to some improvement to its capital access score, Euromoney’s survey experts have been downgrading the full range of economic risk indicators in the survey this year.
Political risk has similarly worsened, largely in response to the increased civil strife after fighting broke out between government forces and regional fighters in Tigray, the northern region bordering Eritrea, which has now continued for almost three weeks, killing hundreds.
Elections that were due to be held towards the end of August have been delayed until 2021 due to the pandemic, and the Tigray region held parliamentary elections in September that were declared illegal.
The Tigray People’s Liberation Front (TPLF) was one of four constituent parties that had made up the former ruling coalition Ethiopian People’s Revolutionary Democratic Front (EPRDF), which was dissolved in November 2019.
The TPLF refused to join its successor the Prosperity Party, accusing its leader prime minister Abiy Ahmed of overseeing an illegitimate government with no mandate after postponing the elections.
The rising tensions led to an attack on a military base, igniting the conflict.
Abiy, an Oromo, likely always felt insecure about the faltering but still enduring influence of the sulking Tigray elite- Rafiq Raji, CSIS
Euromoney survey expert Soumendra Dash explains the historical context of the current crisis.
“The EPRDF was the power base of former prime minister Meles Zenawi. However, it was composed of Oromo people (34% of the total population), Amhara (27%), Tigray (6%) and various other groups (33%),” he says.
“Meles was representing the Tigray (a minority) and commanding EPRDF with his overwhelming charisma. But after his death the largest ethnic group in EPRDF, the Oromo, gained popularity with the strong leadership demonstrated by current prime minister Abiy Ahmed, [who] was appointed as Ethiopia’s fourth prime minister in April 2018.”
These regional ethnic divisions are commonplace on the continent and Euromoney’s survey contributors are concerned by the implications, as they threaten the vision of the “New Ethiopia”.
This vision involves establishing a strong democracy and achieve reconciliation among the Ethiopian people, maintaining the current level of strong economic growth to reach lower middle-income status by 2030 and promoting peace in the Horn of Africa.
Rafiq Raji, senior associate (non-resident) with the Africa programme at the Centre for Strategic and International Studies (CSIS) in Washington DC, is another survey expert.
He believes that as resentments run deep on what are ostensibly both determined sides, a prolonged civil war in Ethiopia is likely. This is clearly a worrying portent, given that it would create a humanitarian crisis and quite easily destabilize East Africa.
“Abiy, an Oromo, likely always felt insecure about the faltering but still enduring influence of the sulking Tigray elite,” says Raji.
“Since a Tigray challenge to Abiy’s authority was inevitable and expected, the current military action is clearly the prime minister’s attempt to fend off what he and his allies have always considered a formidable threat.”
He adds: “Besides, Abiy faces opposition from within his Oromo youth base as well, which after supporting his rise to power, reckons he is not committed enough to its interests.”
Other ethnic groups worry that a Tigray hegemony has simply been replaced with an Oromo one. This will also likely increase tensions, and in the light of this experts such as Raji doubt whether international mediation would be effective, or indeed sanctions.
Survey expert Dash says: “The prime minister is looking for ways to reconcile the differences with TPLF and bring the peace to the country to focus on sustainable economic development.”
He notes that the current political disturbance is putting investors on a state of high alert, and while he does not think investment activities and economic development will be much affected in the short term, the war against the TPLF can pose a serious threat to investor sentiment in the long run.
Ethiopia’s risk profile has already started to take a turn for the worse and, according to CSIS’s Raji – who largely echoes Dash’s sentiments – it may deteriorate even further if the conflict endures.
Investors will need to monitor events closely, even if Covid is eventually beaten.