The City’s attention has been diverted from gilt yields this morning by a rather more volatile asset: the stability of the Horn of Africa. Abiy Ahmed’s landslide electoral win, while expected, has sent a shiver through the diplomatic corridors of Whitehall. The prime minister’s electoral mandate is undeniable, but the market for political stability in the region is pricing in a significant risk premium.
Let us be clear. A 90% share of the vote in a nation fractured along ethnic lines is not a sign of unity. It is a sign of dominance. And dominance, in the complex political economy of Ethiopia, often invites a backlash. The Tigray conflict has already demonstrated the cost of miscalculation. Now, with the Oromo and Amhara regions simmering, Abiy’s victory may be interpreted as a licence to consolidate power, rather than build bridges.
British diplomats, as ever, are scrambling to de-risk the situation. The Foreign Office’s contingency plans are no doubt being dusted off. The calculation is simple: a destabilised Ethiopia means a destabilised region, which in turn threatens the already fragile trade routes through the Red Sea. For the markets, this is a supply chain headache no one needs.
The reaction in London has been muted, but wary. The FTSE 100 barely flinched, but the pound has taken a slight knock against the dollar. Currency traders are hedging their bets. Capital flight from emerging markets is a perennial concern, and Ethiopia’s neighbours are already feeling the heat. Kenya’s shilling has weakened by 0.3% in the last 48 hours.
Central bank watchers will note that the National Bank of Ethiopia has been burning through foreign reserves to prop up the birr. That strategy is not sustainable. The IMF will be watching closely, and its patience may be wearing thin. The fiscal discipline that Abiy promised in his first term has given way to military expenditure. The budget deficit is widening, and inflation is creeping up. The parallels with other over-leveraged states are uncomfortable.
From a market perspective, the key metric to watch is the yield on Ethiopia’s Eurobonds. They have already risen 50 basis points since the election results were announced. If that trend continues, the cost of borrowing for Addis Ababa will become prohibitive. That is when the real trouble begins.
The optimists will argue that Abiy has learned from the mistakes of the Tigray campaign. They point to recent peace overtures. But the market is not convinced. The VIX of geopolitical risk is elevated. British diplomats may be able to paper over the cracks, but they cannot fill the fissures in Ethiopia’s political landscape.
Ultimately, the bottom line is this: Abiy’s victory is a double-edged sword. It provides a mandate for reform, but also for repression. The City will be watching the Treasury bills, the foreign reserves, and the headlines. If the latter turn sour, the capital flight will accelerate. Ethiopia is a bet on stability, and right now, the odds are not favourable.
The scramble for the Horn of Africa is underway. British diplomacy is working overtime, but as any trader will tell you, you cannot negotiate with reality. The numbers will tell the story, and the numbers are flashing red.
