Investment Risks in Djibouti

Over the past two decades, Djibouti has taken steps to open up to foreign investment, and become a regional trans-shipment hub. Its strategic location near the Bab el-Mandeb strait – through which one third of seaborne global trade passes on its way to the Suez Canal – and decades of peace and political stability compared to its immediate neighbors has played in Djibouti’s favor among international investors. However, Djibouti remains a risky destination for investors, and the country consistently scores low in multiple international rankings. Furthermore, poor macro-economic indicators, opaque governance, including deterioration in the rule of law in recent years, and high levels of corruption are likely to prolong a culture of rent-seeking among Djiboutian elites in the coming years.

Although Djibouti has improved in some scores of the World Bank’s Doing Business report this year, the country’s performance in other international indicators, such as the Mo Ibrahim Foundation’s Ibrahim Index of African Governance (IIAG) and Transparency International’s Corruption Perceptions Index (CPI), is not so good. In fact, Djibouti’s scores in the CPI and IIAG have worsened in recent years.

Changing geopolitical dynamics in the region, amid protectionist policies in the United States and a rift between the Gulf countries, are posing additional challenges to investors – particularly from China and the Gulf – who will face political pressures to renegotiate contracts if authorities see an opportunity to gain more revenue from other financiers.

Nearly 95Pct of Ethiopia’s export goods pass through the port of Djibouti. This means Djibouti is heavily dependent on Ethiopia, a position that allows Addis Ababa to exert political pressure against its neighbour, for instance by moving to diversify its port traffic to new deepwater projects in countries such as Kenya, or as more recently seen in Ethiopia’s decision to buy a 19Pct stake in the port of Berbera in Somaliland.

Djibouti is also ever more dependent on Chinese investment; last year, China replaced the United States as the country’s number one source of foreign investment. In 2012, the government ceded 23.5Pct of Djibouti Doraleh Multi-Purpose Port to China Merchants Holdings (International), a Hong Kong-listed Chinese state-owned entity. Currently, Guelleh has made it a priority of his fourth term in office to build two new airports. The China Civil Engineering Construction Corporation has been selected by the government to do this for a cost of USD599 million. Djibouti currently has three main infrastructure projects in the pipeline with China; all three are likely to play key roles in China’s Belt and Road project. Furthermore, Singapore-based contractor Pacific International Lines, which is a member of a Belt and Road consortium of companies, signed an agreement with the government in March to develop Doraleh Container Terminal and increase the volume of cargo handled at the port by one third.

These events indicate that competition with Chinese investors is likely to remain high in the next five years, as construction projects are being finalised and new projects come online as part of Beijing’s Belt and Road project. Djibouti’s reliance on Chinese investments for its infrastructure development, along with poor macro-economic indicators outlined below, pose a growing risk of default, as the elevated debt burden will hamper the government’s ability to access credit in foreign markets. Experience in other countries, such as Sri Lanka and Pakistan, suggests that China will use these debts to assume full control over the projects.

Djibouti’s growing public debt in relation to its GDP is another cause for concern. This problem stems from the country’s need to seek external funding to finance the development of its ports infrastructure. The IMF warns that the economy will face liquidity concerns as current loans reach maturity. Public debt reached 87Pct of GDP in 2018; that is almost double Djibouti’s national debt level in 2013, according to the IMF and the World Bank. Given that a large part of this debt is held by foreign debt holders, this will pose a risk of liquidity shortage and potential default in the medium-term. However, the economy is likely to be able to sustain short-term shocks, as foreign exchange reserves currently stand at 3.8 months of imports.

Potential increases in global interest rates are also a cause for concern, as Djibouti holds a significant share of debt with variable interest rates. It will also pose considerable challenges for the country to access new loans or re-profile its debt, to finance new infrastructure development projects.

The presence of multiple international military bases – China, France, Japan, and the United States all have troops based in Djibouti – also poses a growing risk of political fall-out between traditional partners over newcomers that could offer a better investment potential, and thus access to foreign funds.

This article was first published in a report published by Allan & Associates,
a company that provides security risk management consultancy service,
in May 2018.

6th Year . June 16 2018 . No.62


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