Prime Minister Abiy Ahmed has rapidly changed Ethiopia’s foreign policy priorities by seeking warmer relations with Eritrea, and in the process reducing interstate war risks. Structural weaknesses pose downside risks to the economy, although Ahmed has promised reform of state-owned enterprises (SOEs).
The appointment of Abiy Ahmed as Prime Minister in April 2018 has generated a significant shift in foreign policy, as Ethiopia continues to take a conciliatory approach to neighbouring Eritrea. Ahmed has agreed to accept all the terms of a 2002 international ruling that awarded the disputed town of Badme to Eritrea, leading to a rapid normalisation of relations between the two countries. In July 2018, Eritrean President Isaias Afwerki reopened his country’s embassy in Addis Ababa, following a similar visit by Ahmed to Eritrea.
Telephone links between the countries have been restored, cross border flights resumed and both countries have announced the joint development of Eritrea’s ports. Improved relations will reduce interstate war risks in the medium-term outlook. Ethiopia is expected to withdraw troops from disputed territory in the near-term, mitigating the risk of border skirmishes and collateral property damage.
Ahmed’s changing foreign policy agenda has displeased elements of the security services, particularly as it coincides with the side-lining of hard-line military officials, and this will generate political instability. In June 2018, a grenade attack on a pro-Ahmed rally killed at least two people. In the wake of the attack, a number of senior police officers were arrested, suggesting that the government suspects the involvement of elements of the security services. If this suspicion is correct, the risk of a violent coup or further assassination attempt will be elevated in the one-year outlook.
Ethiopia’s economy will post robust growth in 2018, with real GDP forecasted to expand by 7.5%. Improving weather conditions will support a strong performance in the agricultural sector, while the 13.9% devaluation of the birr against the US dollar in November 2017 has made Ethiopian exports more competitive. Elevated public investment in major infrastructure projects as part of the Second Growth and Transformation Plan (GTP II) will also ensure that Ethiopia’s construction sector is a regional outperformer. A significant portion of this investment is targeting hydropower projects, as Ethiopia looks to support its growing manufacturing industry and become a power exporter.
Despite demonstrating resilient growth, Ethiopia exhibits a number of structural weaknesses. Government spending on infrastructure projects has pushed public debt higher in recent years, from 46.3% of GDP in 2013/14 to 58.3% in 2016/17, whilst foreign exchange reserves represented just 2.3 months of import cover in Q4 2017. SOEs account for around half of total public sector debt, which Ahmed has pledged to tackle through a programme of partial privatisation. However, opposition to privatisation may make it challenging for such reforms to be implemented, ensuring that sovereign credit risks remain elevated in the medium-term outlook.
Ethiopia’s power sector is experiencing gradual liberalisation as implementation of the GTP II progresses, and the government recognises that private investment will be necessary to meet its ambitious targets for the power sector. This will eventually include greater use of independent power producers (IPPs), although progress has been slow on introducing an adequate regulatory framework. The country’s first independent power purchase agreement was signed in July 2015 with Corbetti Geothermal, supported by the US Power Africa initiative.
In July 2018, Ahmed announced the creation of a parliamentary committee tasked with investigating ‘economic sabotage’, elevating the risk of contract alterations or cancellations in key sectors. Particularly at risk are projects managed by Metal and Engineering Company (METEC), which has close links with the Ethiopian military. METEC’s contract with Ethiopia Electric Power to install turbines at the Grand Ethiopian Renaissance Dam, which was financed by a USD 1.8 billion Chinese loan, is expected to face considerable scrutiny, and may be terminated in 2018.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Turkey, Nicaragua, Mongolia and Kazakhstan all of which have been the subject of recent enquiries from JLT's client base.
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In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Nicaragua, Ethiopia, Mongolia and Kazakhstan all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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