Country Risk Rating

E
The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely. - Source: Coface

Business Climate Rating

E
The highest possible risk in terms of business climate. Due to a lack of available financial information and an unpredictable legal system, doing business in this country is extremely difficult.

Strengths

  • Extensive mineral resources (potash, copper, gold, silver, zinc)
  • Strategic position on the Red Sea

Weaknesses

  • Critical level of debt
  • Country has become an international pariah state
  • Worrying human rights record
  • Very difficult business climate
  • State plays a massive role in the economy
  • Extreme poverty, high emigration

Current Trends

Highly volatile growth

The main drivers of Eritrean growth are mining and agriculture. Each of these sectors is in turn highly dependent on one factor – ore prices in the first case and climatic hazards in the second – creating significant volatility in economic activity. In 2020, growth will remain moderate, mainly because the contribution from mining will continue to be affected by low prices for certain ores (copper, zinc). However, the sector has bright medium-term prospects. The Bisha mine, the country's largest, is expected to continue operating at least until 2024, thanks to exploration work by the new Chinese majority shareholder. Meanwhile, two other major projects will enter their first production phase in 2021/2022, namely the Asmara mining project (copper, gold, zinc, silver), which is comparable to the Bisha mine, and the Colluli potash mine. By 2022, Colluli’s production could represent a third of exports, entailing the construction of a new port. Until now, the mining sector has been the only area attracting the country’s few foreign investments, most of which have come from China. However, the recent resumption of peaceful relations with Ethiopia opens up new opportunities by placing the country in a strategic position on the Horn of Africa. In this context, a railway line between Addis Ababa and the Eritrean port of Assab is planned, as well as two new roads linking the two countries. The United Arab Emirates is also set to start building an oil pipeline between Assab and the Ethiopian capital. Agriculture, which accounts for 30% of GDP, is still very rudimentary and will remain subject to recurrent droughts. The dependence of two-thirds of the population on subsistence agriculture coupled with indefinite military service make the labor market almost non-existent. As a result, private consumption will remain sluggish despite the increase in border trade. After several years of deflation due to tight monetary control and the opening up of borders in 2018, price growth will remain negative.

Efforts to reduce debt

The government surplus should decline in 2020. Revenues are expected to be stable, still driven by non-tax revenues of 17% of GDP (mainly mining royalties and dividends). However, spending is likely to increase with the recovery of capital expenditure, chiefly in mining projects, where the state-owned company ENAMCO is always a minority shareholder. The decline in the government surplus will weaken the downward trajectory of debt that was set in motion by fiscal consolidation efforts begun in 2016. Public debt, which is essentially domestic and denominated in local currency, remains at an extremely high level and will continue to put pressure on the country’s finances in the coming years. In addition, although relations with the international community have improved slightly, access to donor support will remain limited.

Turning to the external accounts, the current account surplus will remain high in 2020 thanks to remittances from Eritreans abroad (12% of GDP) and a trade surplus driven by mining exports (25% of GDP). The current account surplus could even increase owing to the slight recovery in official transfers. By using its foreign exchange reserves, the central bank will continue to maintain the nafka’s dollar peg. The nafka will continue to be overvalued given the exchange rate prevailing in the parallel market.

A return to the international scene to be confirmed

The political landscape is dominated by the Popular Front for Democracy and Justice, the only legally authorized party, which has been led by President Isaias Afwerki since 1993. The total absence of democracy and fundamental freedoms, along with the regime’s totalitarian excesses, are widely acknowledged and make Eritrea one of the most closed countries in the world.

However, in July 2018, the President signed a peace declaration with Ethiopian Prime Minister Abiy Ahmed, agreeing to officially end 20 years of war, reopen borders and restore trade, transport and telecommunications links between the two countries. Originally due to a border dispute, the conflict with Ethiopia, coupled with accusations over the funding of al-Shabab armed groups in Somalia, had excluded Eritrea from the international community and led to UN sanctions (arms embargo, travel bans, asset freeze). These sanctions were lifted in November 2018 to welcome the peace efforts made, which also extended to relations with Somalia, Sudan and Djibouti. The peace agreement has raised high hopes in the region, as illustrated by the various infrastructure investments announced since then. Nevertheless, the unilateral decision to close borders with Ethiopia in April 2019, along with the regime's slowness to comply with the peace agreement and to undertake reforms, are fuelling uncertainties among potential investors. In particular, a reform of the country’s indefinite military service, one of the main reasons prompting Eritreans to emigrate, would be a major sign of openness.

In this context, the business environment remains very poor, with Eritrea coming second to last in the World Bank's Doing Business ranking.

Source:

Coface (02/2020)
Eritrea