Djibouti: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Investment stimulating growth
The implementation of an ambitious infrastructure program is boosting growth. The main investment projects under way concern the expansion of existing ports and the construction of new port facilities, a new rail link and a drinking water pipeline between Ethiopia and Djibouti. Other projects, some of which are under review, relate to the construction of an oil pipeline with Ethiopia, of new airports, a wind farm and a geothermal power station with China. The investment rate could reach 57% of GDP in 2015-2016, compared with 32% in 2010-2014, of which almost half is public investment.
Nonetheless, the country still faces significant development challenges. Despite growth of nearly 5% a year on average since 2006, extreme poverty still affected 42% of the population and unemployment affected 48% of the labor force in 2012. Job creation has chiefly benefitted expatriate workers as the local workforce lacks sufficient skills. Furthermore, agriculture remains an atrophied sector because of the harshness of the climate, while the business climate is still difficult (high production costs, poor execution of contracts, red tape, lack of access to credit). The economy still relies heavily on port activity, it being specified that over 80% of port traffic stems from landlocked Ethiopia. Meanwhile, with China as the main source of finance for recent public investment projects, a sharp slowdown there could affect the financing and the achievement of some projects. Inflation is expected to edge up again insofar as investment spending fuels demand for housing and basic services but will remain moderate thanks to the strength of the Djiboutian franc, pegged to the US dollar under a currency board arrangement.
Public investment expenditure puts strong pressure on the budget and the current account balance
The thrust of public spending and the narrowness of the tax base have led to a strong increase in the budget deficit. The same is true for the current account deficit, which has continued to widen due to soaring imports of capital goods, despite the steady increase in exports consisting mainly of port services. With imports of capital goods starting to decrease and exports of services continuing to rise, the external accounts should improve very slightly in 2016.
Public investment financed by non-concessional loans from China has heightened debt vulnerability factors. In this context, the IMF staff considers that any debt likely to increase the cost of servicing the debt in the medium term should be avoided from now on. External public debt will peak at 79% of GDP in 2017.
The president and his party keep a tight grip on power. Djibouti remains an important link in the fight against terrorism and piracy
Internally, President Ismaël Omar Guelleh, in power since 1999, continues to govern the country with a firm hand. He has announced that he will stand for a fourth term in office in April 2016. Recent allegations of corruption against the Head of State could tarnish his image, especially abroad. Clashes between opposition and security forces could intensify in the run-up to the presidential election. All the same, this is unlikely to undermine the support given to the country by the western powers because of its strategic position in the region. Djibouti is set to continue as the regional capital in the fight against terrorism and maritime piracy, given its proximity to Somalia, Yemen and the Gulf of Aden. The country is host to two important military bases, one a US base and the other French, and in 2015 an agreement was concluded between China and Djibouti for the establishment of a naval military base.