Ethiopia is one of the world’s fastest-growing economies and is investing heavily in hydroelectric power and regional transport networks. President Abiy Ahmed has embarked on a series of investor-friendly informs, but a government audit of state-owned firms raises contractual risks in the infrastructure sector. In addition, ethnic and political tensions are expected to rise ahead of the 2020 general elections.
Since his appointment in April 2018, Ahmed has pursued a number of bold policy initiatives, including restoring ties with Eritrea. In July 2018, Ethiopia signed a joint peace agreement with its northern neighbour that re-opened the border, ending two decades of hostility. Although relations between the two countries could deteriorate again under different leadership, the risk of interstate war has therefore decreased. Ethiopia is likely to begin drawing down its troops levels at the Eritrean border, which will mitigate the risk of border skirmishes and collateral property damage.
Al-Shabaab may seek to carry out terrorist attacks in Ethiopia, particularly as the government has deployed troops to Somalia. Aspirational targets would include public transport and airports, but the risk is mitigated by the low capability of Al-Shabaab militants and the effectiveness of the Ethiopian intelligence services. As a result, there has not been a successful major terrorist attack since 2009.
The risk of violent protests between rival political and ethnic groups is likely to increase ahead of local and legislative elections in 2019 and 2020, particularly in the Oromia, Afar and Amhara regions.
Protests in Addis Ababa are generally peaceful, but at least 28 people were killed during political violence in the capital in September 2018. Infrastructure assets are unlikely to be specifically targeted during protests, but demonstrators may carry out arson attacks on foreign-owned assets. Ahmed has reshuffled his military leaders and intelligence services as he seeks to reduce the influence of the political elite, which is dominated by the minority Tigrayan ethnic group. While a military coup remains unlikely, the possible involvement of security officials in a grenade attack on a pro-Ahmed rally in June 2018 increases the risk of further assassination attempts.
Ethiopia is one of the world’s fastest-growing economies and is set to post robust annual real GDP growth of 8% between 2019 and 2021. In addition to recovering agricultural exports, the economy has been supported by high levels of infrastructure investment as part of the government’s 2015-2020 Growth and Transformation Plan II.
Ethiopia benefits from a high proportion of concessional loans, reducing debt servicing costs. However, contingent liabilities are high, as two-thirds of external debt held by state-owned entities is guaranteed by the central government. As a result, public-sector debt reached 62% of GDP in June 2018, but this figure is forecasted to fall to 60% in fiscal year 2019/20 as economic growth remains buoyant and borrowing is reduced.
Foreign currency shortages pose risks for companies operating in the infrastructure sector. Foreign exchange reserves stood at USD 3 billion by the end of 2017, providing less than 3 months of import cover. However, Ahmed has taken steps to liberalise the economy, which is likely to attract foreign investment. In June 2018, Ahmed announced that two state-owned firms, Ethio Telecom and Ethiopian Airlines, would be opened up to private investment, which should gradually improve the supply of hard currency.
Ethiopia’s construction sector is set to expand by 13% in real terms between 2018 and 2020, and it will remain the fastest-growing in sub-Saharan Africa over the coming years. Ethiopia aims to become a major electricity exporter in East Africa as it capitalises on its hydropower potential, which is estimated at up to 45 GW. Power generation is forecasted to almost double between 2018 and 2022, when it is set to reach 27.544 TWh. In addition, Ethiopia is seeking to improve its transport links with neighbouring countries.
However, there is an elevated risk of contract alteration or cancellation in the infrastructure sector, as the government is auditing a number of government-owned entities. Projects run by Metal and Engineering Company (METEC), a state-owned company with close ties to the military, face a particularly risk of contract alteration or revocation. In August 2018, the government cancelled METEC’s contract to install turbines at the USD 4 billion Grand Ethiopian Renaissance Dam. The government subsequently arrested 63 officials from METEC over allegations of corruption. Contracts with Tiret Corporate, another state-owned firm, also face a high risk of revision or cancellation.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for India, Viet Nam, Angola and Ethiopia 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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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org.
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