Country risk: Ethiopia is on a rocky road

In Euromoney’s latest country risk survey, Ethiopia’s risk score partially rebounded.

It was hardly unexpected.

The uncertainty of the delayed general election has passed, with the incumbent prime minister Abiy Ahmed’s Prosperity Party winning a landslide majority. This is ahead of another round of voting in September in areas bordering Tigray, which could not hold the vote, but which will not have a bearing on the outcome.

With the global economy also improving, the country’s macro-fiscal picture is brightening. Real GDP growth is even expected to return to 7% to 9% this year after slowing in 2020 due to the health crisis.

In Euromoney’s crowd-sourcing survey, scores have improved for bank stability, monetary policy/currency stability, employment/unemployment and government finances after being downgraded sharply at the same point last year.

The conflict will continue to weigh on the short- to medium-term economic prospects 

 - Rafiq Raji, CSIS

Political risk scores are also higher, along with most but not all of Ethiopia’s structural risk factors, including a notable improvement in Q2 2021 to the soft infrastructure variable, which includes a healthcare sector that has weathered another Covid wave, peaking in early April.

Still, Ethiopia is far from a safe option for investors, despite its longer-term rise through Euromoney’s global risk rankings, including an 11-place jump during the past five years.

All of the country’s indicators are low scoring, indicating high risks, and, after falling three places this year, Ethiopia is now 124th out of 174 countries.

This makes it a similar high risk to Mauritania, Cameroon and Burundi just above, and Swaziland, Gabon and Benin, lying below. This is despite substantial investment-led development spurring 9% to 10% real terms GDP growth in most years before the pandemic.

The evolving Tigray crisis is enough for investors to remain wary, in line with Ethiopia’s low ranking. A nine-month-long war pitting the army against rebel forces is showing no signs of ending.

Ethnic, regional and sectional divides are a feature of many nominal states in Africa. These give rise to longstanding grievances that government spending and constitutional engineering attempt to resolve, often without achieving any long-term success.

And Tigray is not the only problem. The Benishangul-Gumuz border region with Sudan, the al-Fashaga land dispute – also with Sudan – and tensions stirring in the Afar, Amhara, Oromia and Somali regions all point towards the potential unravelling of Ethiopia as a unified state.

That is an extreme, but nonetheless a creeping risk for long-term investors to contemplate.

Rafiq Raji, a contributor to Euromoney’s survey and non-resident senior associate with the Africa programme at the Centre for Strategic and International Studies (CSIS), Washington DC, notes that both sides in the Tigray crisis continue to send mixed messages about their medium- to long-term intent.

“This is because even as government troops recently withdrew from the region voluntarily, there are reports of an aid and logistics blockade in tandem, with Ethiopians of Tigray descent living in other parts of the country reportedly being arbitrarily rounded up and detained by authorities,” he says.

Given that, Abiy’s victory in the recent elections, which were boycotted by a substantial part of the political class, is not particularly inspiring either.

“The conflict will continue to weigh on the short- to medium-term economic prospects of the country, with a potential full-blown multi-ethnic civil war clouding the long-term outlook,” says Raji.

It is notable that country investors are already concerned by the situation, even among Ethiopia’s most ardent international partners, he highlights, adding: “In March, China entered into a security agreement with the Ethiopian police to protect BRI [Belt and Road Initiative] infrastructure projects – a needless arrangement, otherwise.”

The window for a political solution remains open, but it could easily be shut without continued international pressure on both sides.

Added to that there is concern for the rising cost of living eroding real incomes and stoking social tensions, with sharply rising prices of food and non-food items causing annual inflation rates of 24.5% in June and 26.4% in July.

Ethiopia, it would seem, has much to offer, but as these issues underline, its high-risk reputation is not without substance.