Djibouti’s deepening economic relations with China will contribute to rising debt levels and elevated sovereign credit risks. Investor confidence in Djibouti has weakened following the government’s protracted legal dispute with port operator DP World and its willingness to expropriate foreign firms’ stake in infrastructure projects.
Djibouti is engaged in a territorial dispute with Eritrea, which is likely to continue throughout 2019. Both states claim sovereignty over the Doumeira mountains.
While the presidents of Djibouti and Eritrea met for preliminary discussions in September 2018 at the request of the United Nations, little progress has been made on resolving the dispute.
However, no direct military confrontations have been reported in the area since 2008, when artillery fire resulted in the deaths of 44 Djiboutian and 100 Eritrean soldiers.
Renewed violence is unlikely in 2019, as China would be expected to intervene to prevent any military action. China has significant investments in Djibouti and will be keen to prevent any disruption to its activities.
Companies operating in Djibouti will face a moderate terrorism risk in 2019.
The military have successfully weakened the anti-government FRUD-Armé since 2017, which had launched a number of small-arms attacks against military convoys and security outposts.
In March 2016, 30 militants carried out an attack in which 5 soldiers were seriously injured.
However, the group is now largely limited to organised crime activity and will be unable to organise sophisticated terrorist attacks on commercial assets.
Economic growth rates in Djibouti are slowing, but remain robust. Growth was estimated at 6.5% in 2018, down from an annual average of 9.5% between 2014 and 2016.
This is being driven by a drop in public investment in infrastructure projects, but private investment will continue to support economic activity.
Djibouti’s economy is becoming increasingly leveraged to China, as the country lends sizeable amounts for infrastructure projects under the Belt and Road Initiative (BRI).
For example, in July 2018 the two countries launched the first phase of the USD 3.5 billion Djibouti International Free Trade Zone, whilst China has also financed a USD 4 billion railway between Djibouti and Ethiopia.
While engagement with China offers Djibouti the opportunity to develop critical infrastructure, it is also elevating sovereign credit risks.
Djibouti’s public and publicly guaranteed debt was estimated at 104% of GDP by the end of 2018.
As of March 2018, China had reportedly provided USD 1.4 billion of lending funding for projects, equalling 75% of Djibouti’s GDP.
Many loans are offered at commercial rates, elevating the likelihood that Djibouti will fall into debt distress. If Djibouti is unable to repay loans, the government may be forced to transfer ownership of assets to Chinese firms.
Similar issues have arisen in Sri Lanka, where the government ceded a 70% stake to China in the Hambantota port as a result of financial pressures.
Investor confidence in Djibouti has weakened in the wake of its on-going dispute with UAE-based port operator DP World.
DP World held an exclusive 30 year concession with the Djiboutian government to build and manage the Doraleh Container Terminal.
In February 2018, Djibouti terminated its contract with DP World and expropriated the company’s assets at the port. This was followed by a decision in September 2018 to nationalise the company’s 33% share in Doraleh.
A protracted legal dispute has followed, with DP World suing China Merchants Port Holding in Hong Kong for reportedly contravening its exclusivity agreement with Djibouti when the Chinese firm acquired an indirect share in the Doraleh terminal.
DP World’s contract for the operation of port services has already been upheld in the London Court of International Arbitration, and in the long-run any legal rulings are unlikely to be in Djibouti’s favour.
However, the dispute demonstrates that firms operating in Djibouti will face an elevated risk of expropriation and/or contract cancellations in the medium-term outlook.
The monthly Risk Outlook is supported by our 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.
5 Key Takeaways
- Businesses in Djibouti will be exposed to moderate terrorism risks in the near-term outlook
- The probability of government default remains high, raising sovereign credit risks for investors
- Firms face an elevated risk of expropriation and/or contract cancellation in the medium-term outlook
- Economic growth rates will slow over the coming years, driven by a reduction in public spending
- Djibouti’s territorial dispute with Eritrea will continue in 2019 but renewed violence is unlikely.
A number of the countries in this month’s Risk Outlook are the recipient of elevated Chinese investment, with some participating in the Belt and Road Initiative (BRI). Increasingly, our focus is on the implications of BRI for the risk environment within emerging markets.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Myanmar, Peru, Senegal and Guinea all of which have been the subject of recent enquiries from our client base.
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TALK TO AN EXPERT
If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0) 121 514 8307.