Ethiopia unrest swells as country forced into state of emergency

The government announced a six-month state of emergency in October and the BBC reported Ethiopia’s information minister as saying groups in Eritrea and Egypt are contributing to the unrest, which has led to a six-month state of emergency.

Getachew Reda said the foreign elements are arming and financing opposition groups, but not necessarily with the formal backing of their governments.

Under the state of emergency, troops will be deployed to quell protests.

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Meanwhile, VoA reported Ethiopia’s tourism sector is suffering. The impact of a year of violent protests and state of emergency has led to a decline in tourists visiting the country, it said.

Ethiopia had been showing signs of becoming a popular new tourism destination in recent years, attracting people not only for its historical sights but also for its reputation as one of the safest African countries.

The rating agencies have also reacted. Fitch Ratings warned: “The escalation in social unrest in Ethiopia increases the risks of spillovers to the economy and so potentially to the country’s sovereign credit profile, although our base case is that protests will not escalate this far.”

It said the protests were sparked by proposed changes to regional borders but also reflect deeper tensions over constraints on political freedoms and high youth unemployment.

“The protests have the capacity to trigger wider political instability, given Ethiopia’s underlying political, social and ethnic tensions,” it warned. “Recent government proposals to create a more representative electoral system appear to acknowledge this. Weak governance indicators have long been factored into Ethiopia’s B/Stable sovereign rating.

“But so far the protests have been largely spontaneous and, while challenging the EPRDF’s authority, have not developed into a coordinated opposition movement with specific aims. The government’s control of the police and army means that the unrest does not appear to be an immediate threat to the regime.”

Under its base case assumption, therefore, the key near-term risk from the social unrest is via macroeconomic channels, said Fitch. In particular, lower foreign direct investment would present risks to growth and the external position.

“Falling donor support and less ability to implement large infrastructure projects are other potential transmission channels, although donors’ focus on poverty reduction, migration and regional security provide incentives to maintain financial support. Potential damage to the tourism sector is another risk, although the sector is small.

“Ethiopia’s economy has proved resilient to recent shocks such as the severe drought (thanks partly to a well managed policy response) and we predict growth to recover to 8% next year, after dipping to 6.5% this year. However, growth is constrained by a structural shortage of foreign exchange and a narrow export base. The government’s ambitious investment strategy should support growth, but a persistent savings-investment gap and reliance on external debt to finance the current account deficit could further weaken external finances if FDI fell due to social unrest or rising political risk,” it concluded.

Meanwhile, S&P Global Ratings has affirmed its B/B long- and short-term foreign and local currency sovereign credit ratings on Ethiopia. Its outlook is stable.

S&P said: “The ratings on Ethiopia are primarily constrained by the sovereign’s weak external position, low monetary policy flexibility, and limited institutional effectiveness. The ratings are supported by strong projected economic growth, which we expect will exceed that of many other countries at a similar stage of development in the next four years.

“Our baseline forecast envisions the EPRDF administration staying in power over the next four years, but we note that political risks and uncertainties are increasing. In our view, persistent uncertainties or escalating tensions could depress foreign direct investment and therefore economic growth. That said, the impact on economic growth and net FDI inflows appears to have been limited so far and we expect this will remain the case, absent a material escalation of the tensions.

“Over the last five years, Ethiopia’s growth has outstripped that of other regional sovereigns. We expect growth will recuperate from 2017 onward as the impact of the drought fades and the government’s infrastructure projects increasingly yield results,” it concluded.