Risk consultancy firm, Allan & Associates has called for caution as investors prepare to profit from Djibouti’s expanding economic profile.
In one of its latest reports, the firm has offered guidance with regard to investing in Djibouti just as the tiny country prepares to make itself a major regional shipping destination.
Djibouti, which is seeking to become a Horn of Africa trans-shipment hub, has proved attractive to investors in recent years. Located near some of the world’s busiest shipping lanes, with access to the Indian Ocean and Red Sea, it has experienced decades of peace and political stability, unlike neighbours that include divided Somalia, secretive Eritrea and war-torn Yemen.
As countries across the Horn of Africa embark on ambitious programmes to attract foreign investment, Djibouti appears to be a stable option in a volatile region.
According to Allan & Associates, infrastructure in East Africa and the Horn of Africa region is under-developed. The consultancy firm asserts that economic powerhouses Ethiopia and Kenya are upgrading their infrastructure provision to integrate into international trade routes, including China’s Belt and Road initiative.
Several neighbouring countries with access to the sea are competing to become regional transport hubs. This has implications for port operators, as strategic competition between foreign governments, as well as domestic elites, is likely to intensify in the sector in the five-year outlook.
Countries across the Horn of Africa have embarked on ambitious programmes to attract more foreign direct investment. In Djibouti, the government is pursuing a strategy to become a regional trans-shipment hub.
Allan & Associates says that the country faces competition to the east from Somaliland, a self-declared autonomous state in north-western Somalia that is developing its port at Berbera, and Sudan to the west, which plans to sell stakes in the management of Port Sudan, the country’s only commercial port, on the Red Sea.
When African Development Bank officials met in Busan, South Korea, on May 21st, 2018, details of new foreign investment opportunities in Africa emerged. It also emerged that Djibouti is among the countries looking to make a splash in the shipping arena.
“Djibouti offers an attractive environment for investors in the Horn of Africa, but be careful how you tread,” says Allan and Associates Senior Analyst and Sub-Saharan Africa specialist Olivier Milland, author of the new report on the country.
The analysis, titled ‘Investment Risks in Djibouti and the Horn of Africa’, states that Djibouti is indeed an attractive investment destination.
However, indicators suggest that significant investment risks exist in Djibouti, Allan & Associates assesses. These include growing corruption concerns as the country has slipped in international indices for transparency and governance, as well as regional competition for contracts may see national elites attempt to access rents from foreign investors
Poor macro-economic indicators, with public debt reaching 87% of GDP in 2018 has also been cited as a factor.
Over-dependence on neighbour Ethiopia has been listed among the risks as well since 95% of Ethiopian exports pass through the port of Djibouti, while Chinahas been cited as its top source of foreign investment.
Yet another set of risks is Djibouti’s vulnerability to a global protectionist trend, driven by United States President Donald Trump, due to a reliance on port traffic; rifts between Gulf countries threaten stability of investments; and concerns over renegotiation of contracts under a new law and localization
“Changing geopolitical dynamics in the region, amid protectionist policies in the U.S. and a rift between the Gulf countries, are posing additional challenges for investors,” says Milland.
Nonetheless, the consultancy has described some of these concerns as medium term risks. It has been implied that in the long term, Djibouti’s investment potential is likely to continue growing given the right policy changes.
In fact, Allan & Associates agrees that over the past two decades, Djibouti taken steps to open up to foreign investment. The small nation has also improved in some scores of the World Bank’s Doing Business report this year.
Like every potentially lucrative investment destination, Djibouti has its risks. But the country has proven to be relatively stable in terms of its political environment, which experts say should serve as a key indicator that Djibouti is indeed, open for business.