Investor Confidence Low in the Horn of Africa, as Geopolitical Competition Is Rising

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During a visit to Africa, former US President Obama stated that the Horn of Africa – that is, Djibouti, Eritrea, Ethiopia, and Somalia – is “one of the fastest-growing regions in the world.”

These countries have the capacity to generate billions of dollars, which could alter the livelihoods of those living within the region for the better. The African Horn is particularly noteworthy given the strategic placement of its ports. Here, coastlines border the Red Sea, which hosts the world’s most important shipping corridors. Collectively, they are considered the eastern door to Africa. In particular, the Bab al-Mandab Strait enables the transportation of 6.2 million barrels of petroleum products per day.

However, despite this vast potential, the African Horn is currently experiencing strong investor resistance to infrastructure investment. What has become apparent is that development and security issues, the impacts of COVID-19, differences in ethical standards, over dependence on one source of income, and rising geopolitical tensions have all combined to deter foreign investment.

So how should we understand the distinctive combination of low investor confidence and growing geopolitical competition that we now see in the region?

Investor confidence in the Horn

London and Hong Kong-based risk management consultancy A2 Global Risk recently published a report which conveyed concern, appropriately entitled: “Infrastructure Investment Risks Amid Mounting Geopolitical Competition in the Horn of Africa”. Corroborating such concerns, the African Development Bank Group states that “the Horn has large infrastructure deficits and performs poorly against other African countries.”

Indeed, the Horn is one of the world’s poorest regions, challenged by security and development issues. For instance, Djibouti imports 90% of its food requirements due to arid lands. Eritrea has limited access to clean water and food, while Ethiopia is one of the poorest countries in the world, with 30% of its population living below the poverty line. Still suffering after years of conflict, five million Somalis depend on humanitarian aid every day.

Additionally, the former head of the UN’s Economic Commission for Africa recently highlighted Africa’s lack of corporate governance, and asked governments to mitigate risk factors and boost investor confidence in the region’s stability.

Instability in the region has prompted Gulf countries to reconsider potential investments. Issues such as the lack of laws to protect investment and lack of infrastructure are among the most important obstacles to development. It is also unlikely that these problems can be solved in the short term. Therefore, investors may prefer to move their money to places that is more stable and involve less heavy lifting, such as parts of Asia.

However, there is still hope.

While the general perception is that governments are not focused on regional integration, Djibouti and Ethiopia are good models of economic integration for the region due to their multi-billion-dollar electric railway line that was recently launched into operation.

Ethiopia is nearly wholly dependent on Djibouti’s port for its rapidly rising import-export trade. Such alliances can pave the way for greater economic integration between the Horn’s countries, and can help to further unite Africa to overcome the challenges. The World Bank also says the Horn of Africa is an area it has prioritized for regional integration in Africa.

Djibouti, being the smallest country in Africa, is strategically important to global powers due to its proximity to the Middle East, its location on the energy transit road, and its position on the shores of the Bab al-Mandab Strait. Furthermore, Djibouti port is the main transit point for Ethiopian cargo and is a vital connecting point for commercial transport routes to and from the greater Horn of Africa.

Building on this positive example can foster the economic co-operation that brings peace, while developing a stronger infrastructure for the future.

Lessons learned: COVID-19 pandemic and the impact on ports

Horn countries have realized the importance of modern ports during the COVID-19 pandemic. The ports of the Horn of Africa are typically low capacity, which is why regional governments have recently sought to develop them through foreign investment. Any effort to further develop these critical entry points will definitely boost investor confidence.

As the A2 Global Risk report comments, pandemic restrictions on commercial activity and travel lead to unanticipated disruption to global supply chains, mainly due to a lack of coordination between shipping companies and landside port operations. This was primarily due to antiquated port infrastructure, which could not handle landside port operations with speed.

According to the World Ports Sustainability Program (WPSP) report, ports have played an essential role in providing food and medical supplies during the pandemic by using their warehousing and distribution facilities. Thus, countries with stronger ports are more capable of managing a pandemic.

However, despite these steps forward, investor concerns relating to the pandemic still exist. Countries that can better manage a pandemic and return to normal faster are more likely to attract investment. This, in turn, will compound the vulnerability of already marginalized communities, burdening them with hunger and further hardship. 

Growing competition fuels political risks

Only recently did interest in the African Horn begin to revive. As the A2 Global Risk report advances, intense competition has surfaced between global superpowers and regional hegemons, including China, Turkey, and Gulf countries who are keen to have influence over the development of the ports within the region. As a result, billions of dollars are being invested.

While the Gulf States and Turkey are competing for a foothold in these countries, China is manipulating its Belt and Road Initiative to wield economic influence in the Horn and strengthen its position as the top investor in Africa.

At the same time, Djibouti is used by military powers worldwide, hosting countries such as the US, France, Saudi Arabia, and recently China.

Meanwhile, Somalia hosts Turkey’s largest overseas military base, while Qatar is establishing itself in southern Somalia, and the United Arab Emirates (UAE) is engaged with Berbera and Bosaso.

These countries are aware of the importance of the geopolitical position of the Horn of Africa and are well aware of its development potential. The big question is whether the countries of the Horn can use this investment to their own advantage, and avoid being pawns in geo-political games.

Gulf expansion in the Horn and beyond

While countries such as China compete for economic influence, and while states such as the US vie for strategic military outposts, the Gulf States – in particular the UAE – stand out because of long-established historical, religious, cultural, trade, and linguistic ties. The importance of the relationship rose further in January 2020, with the establishment of the Council of Arab and African States.

As the A2 Global Risk report assesses, the Horn is important to Gulf countries as they wish to expand in the Red Sea region to counter Iranian influence and proxies, and they additionally seek to improve Gulf access to food and trade infrastructure.

Thus, it is apparent that Gulf nations are aiming to create new geopolitics realities through economic investment, new military bases, and strategic political alliances. There is a significant risk, however, that the rivalry between different countries for control of the reserves in the Horn of Africa will exacerbate existing domestic and international tensions, increasing the prospect of conflict.

Raising standards

A related challenge is the fact that different countries in the Horn, and different investors, do not all have the same standards when it comes to labour regulations or transparency. 

For instance, Chinese investors, state owned enterprises, and overseas companies participating in African development do not always follow ethical standards. As a result, many investment deals between Chinese – and other – companies and African governments are called out for being vulnerable to corruption. Consequently, there is a growing demand for transparency and good governance.

By contrast, the UAE authorities have set higher standards for expanding domestic businesses in their modern economy, consequently becoming an important determinant of overseas investment. In turn, this is a good example of the fact that maintaining high standards may not drive away investors, who are more concerned about clashing standards than effective ones. 

Resources or worries?

Despite its great potential, the African Horn gives investors reason to worry. The combination of the impact of the global pandemic, the complexities of geopolitical competition, deep set security and development problems, and a clash of ethical standards, means that investor confidence may fall further before it improves.

But with largely untapped natural resources and, thus, the potential for widespread infrastructure and other corporate projects – the interest and investment in the Horn of Africa will not stop anytime soon. Moving forward, the countries of the Horn of Africa are likely to benefit from drawing up a comprehensive roadmap for development as soon as possible and work to increase investment in the region based on the principles of joint collaborations and aligned corporate governance.

Only when this is put in place will the people of the Horn be the ones to benefit from foreign investment.

 

Anton Lucanus is the Director of Neliti and a commentator on international affairs for the Australian Institute of International Affairs.

 

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