Eritrea’s strategic location and operational environment offer potential in sectors such as mining, tourism, and logistics. Situated in the Horn of Africa along one of the world’s busiest maritime trade routes, potash mining and port development will drive long-term annual growth of 4.3% over the coming decade.
A rapprochement with neighboring Ethiopia resulted in the resumption of economic ties, which will boost air transport, cross-border trade, and foreign direct investment in the near to medium-term.
Security Environment
Interstate war risks with Ethiopia have decreased significantly following the peace declaration in July 2018 and the countries’ subsequent partial withdrawal of troops along the border.
Before relations improved between the two countries, assets in Eritrea faced an elevated risk of damage as a result of military activity.
In 2015, the Bisha gold mine, operated by a Canadian mining firm, suffered damage to a thickener plant, releasing water into the plant area. Unverified reports suggested the incident was the result of an airstrike by the Ethiopian military.
Militant attack threats to mining operations in Eritrea from Ethiopia-based armed groups have also decreased following the peace agreement.
The rapprochement has nevertheless created widespread expectations that President Isaias Afwerki’s administration will initiate domestic reforms.
For example, possible unwillingness from Afwerki to end national service is expected to cause discontent among military personnel and increase the probability of military mutinies and anti-government protests in the one-year outlook.
Trading Environment
Sovereign credit risks are elevated for foreign investors, owing to Eritrea’s total debt vulnerability. Public debt sat at around 130% of GDP in 2018 and external debt is close to US$820 million, with accrued principal and interest payments arrears constituting 13.5% of this total.
Debt-servicing capacity to private creditors will remain a significant concern in the medium-term.
However, any revival in foreign-financed mining production could boost the state’s source of hard currency for imports and stabilize the debt position.
At present, Eritrea has limited sources of hard currency, with most stemming from remittances (which are estimated at 40% of GDP) and export receipts of metals such as gold, zinc, and copper.
The Eritrean nafka remains a weak currency, allowing a black market rate to flourish at triple the official exchange rate peg of ERN15.38/US$1.00.
Real GDP growth of 3.6% is forecasted in 2019, up from 3.2% in 2018, driven by economic re-engagement with Ethiopia. The re-establishment of relations with Ethiopia offers upside risk for port traffic through Assab and Massawa and intra-regional connectivity.
The Eritrean government has made mining the centerpiece of its long-term economic growth plans. The Colluli potash mine alone has the potential to produce exports worth US$537 million, potentially representing 50% of Eritrean exports by 2030.
The Eritrean government retains the right to a 10% stake in mining investments, with the option of acquiring 30% more.
The government currently owns 40% of the Bisha mine in Asmara and 50% of the Colluli potash mining project. Development of Eritrea’s ports will also bolster long-term growth.
In October 2018, the chief executive of a Dubai-based global port operator stated that Eritrea will play a key role in the firm’s future plans in the Horn of Africa.
Investment Environment
In principle, Eritrea’s investment code protects investors from the risk of nationalization, confiscation, and expropriation.
However Eritrea has failed to enter into several bilateral and multilateral investment protection treaties — specifically the International Centre for Settlement of Investment Disputes (ICSID) — increasing the potential cost of arbitration for foreign investors.
While expropriation risks in the mining sector will remain limited due to its importance to the government’s economic plan, business disruption across other sectors is more likely.
Tight capital controls have increasingly strained foreign companies over the past decade. Those firms who have sought to repatriate profits have faced risks of contract frustration, expropriations and deprivation.
In September 2004, foreign mining companies faced an export ban and were forced to halt operations until the government completed a full review of its Mining Act in January 2005.
Foreign mining companies may also be exposed to reputational risks over allegations of the use of forced labor.
This is particularly true of the mining sector, which requires a substantial construction component to be sourced from government-backed construction companies.
The government employs Eritreans conscripted under the national service program, and consequently operations are at risk of forced labor accusations.
4 Key Takeaways
- Real GDP growth of 3.6% is forecasted in 2019, up from 3.2% in 2018, driven by economic re-engagement with Ethiopia.
- The Colluli potash mine alone has the potential to produce exports worth US$537 million, potentially representing 50% of Eritrean exports by 2030.
- Interstate war risks with Ethiopia have decreased significantly following the peace declaration in July 2018.
- The Eritrean nafka remains a weak currency, allowing a black market rate to flourish at triple the official exchange rate peg, of ERN15.38/USD 1.00.
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.