Djibouti: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: D
Risk Assessment2
Competitive pressure from the other large regional ports
Growth was sluggish in 2010. Implementation the previous year of the new Doraleh port complex, financed and managed by Dubai Ports World (DPW), already concessionaire of the Djibouti port and airport, augured a significant acceleration of port activity, the base of Djibouti's economy. But the growth in revenues has proven less spectacular than expected and business will likely continue to suffer in 2011 from the competition of other regional ports, in Yemen and Oman in particular. Moreover, the Somali port of Berbera, which attracts shipments of cattle routed from Ethiopia to India, China, and the Gulf countries, will continue exerting high competitive pressure on Djibouti. To make shipments of merchandise from northern Ethiopia more profitable by preventing carriers from traveling through Addis Ababa, Djibouti will launch in 2011 the construction of a third port in the country's northern region, in Tadjoura, financed by DPW. This project will include the construction of a roadway to the Ethiopian border. GDP growth in 2011 will thus also be driven by various infrastructure projects and by economic activity in Ethiopia. The sector of luxury tourism, financed by the Gulf countries, could also provide support for the economy. And the rainfall last summer will enable agriculture and breeding sectors that have suffered from drought for several years to recover somewhat.
Importance of international donors
Djibouti is backed by many international programs. Pressured by the United Nations World Food Programme, the government has undertaken actions to reduce food insecurity in regions that are subject to chronic drought and in cities where food prices have been very high. Djibouti also benefits from the triennial facility for poverty reduction and growth concluded with the IMF in 2008. Despite some progress (introduction of VAT), the lagging pace of structural reforms has prompted the IMF to make the payment of funds initially planned dependent on the achievement of specified objectives, among which a public deficit reduction is to be reached in 2011. Foreign debt has remained at unsustainable levels while the external account imbalance has widened under the effect of the acceleration of imports associated with the various infrastructure modernization projects. These deficits are partly covered by foreign direct investment particularly from the Middle East.
The business environment has not improved
President Ismael Omar Guelleh had the constitution amended to enable him to run for a third term in office in April 2011 and remain in power six more years. But his re-election could spark ethnic confrontations between Afars and Issas (the president is an Issa). Compounded by persistent difficulties with Eritrea, these ethnic tensions are not conducive to improvement in the business environment, besides investment in infrastructure: Companies have suffered from costly regulations, limited access to skilled labor, and a deficient legal system. With its geostrategic position in combating terrorism and piracy, Djibouti nonetheless enjoys the backing of Western powers, France in particular.
Strengths
- Regional hub for transhipment traffic
- Modernization of port infrastructure
- Geostrategic position at the entrance to the Red Sea
- Support of Middle Eastern investors and international financial donors
Weaknesses
- Economy inadequately diversified and closely linked to that of Ethiopia (port activities)
- High poverty rate and food insecurity
- Deficient business environment
- Persisting tensions between Afars and Issas, as well as with Eritrea, whence a risk of insecurity in the whole Horn of Africa
- Re-export represents over 80% of GDP