Current Investment Risks in the Horn of Africa

The Horn of Africa (HoA), comprising Djibouti, Eritrea, Ethiopia, Somalia, and Sudan, offers both opportunities and risks for global investors. While infrastructure projects and natural resources draw interest, political instability, economic weaknesses, and climate-related dangers challenge sustainable investment. This article explores key risks—civil conflict, macroeconomic instability, environmental pressures, and geopolitical tensions—with a focus on real-world evidence.

1. Civil Conflict and Security Threats

Ethiopia: Persistent Conflicts and Renewed Tensions

Following the end of the Tigray war (2020–22), violence in Ethiopia has escalated, notably between federal forces and the Fano militia in Amhara. According to S-RM, a risk consultancy, this led to a state of emergency (lifted only in June 2025), with concerns of violence spreading into Oromia and rivalry between regional governments and the federal state impacting investor confidence (S‑RM 2025). Renewed tensions between the Ethiopian federal government and the Tigray People’s Liberation Front (TPLF), primarily driven by Addis Ababa’s reluctance to fully implement the 2022 Pretoria Peace Agreement—particularly its failure to restore constitutional governance and return occupied territories such as Western Tigray—combined with escalating geopolitical friction with Eritrea, threaten to reignite a large-scale war in the Horn of Africa (Africa Center for Strategic Studies, 2025).  Domestic debt levels further strain resources: Ethiopia’s external debt stood at US $28.9 billion by June 2024, around half due to multilateral lenders, with the government defaulting on a US $1 billion Eurobond payment in late 2023 (Reuters 2025).

Sudan: SAF–RSF Civil War

Since April 2023, Sudan has been embroiled in an internecine conflict between the Sudanese Armed Forces (SAF) and Rapid Support Forces (RSF). The World Bank estimates that this war will shrink Sudan’s GDP by 15.1% in 2024, displace 11 million people, and derail regional growth by 0.5 percentage points for Sub-Saharan Africa overall (Daba Finance 2024). The collapse of governance and commercial systems renders the business environment largely ungovernable and fraught with risk.

Maritime Security: Piracy and Regional Instability

The Gulf of Aden has seen a resurgence of piracy by Somali actors exploiting diminished naval presence redirected to Red Sea tensions, particularly amid Houthi threats to commercial ships en route to Israel (S‑RM 2025). These threats drive up shipping insurance and rerouting costs, undermining trade in a region critical to oil and mineral transport.

2. Macroeconomic & Fiscal Instability

Debt Burden and Credit Squeeze

Sub-Saharan African nations face seismic debt challenges. For instance, Kenya’s public debt reached 65.5% of GDP in 2021, with 65.5% debt-to-GDP in 2021 and domestic borrowing crowding out private credit; private sector credit growth dropped from 13.9% in December 2023 to –1.4% in December 2024 (Reuters 2025). Across Africa, cumulative debt servicing soared from US $17 billion in 2010 to US $74 billion in 2024 (Trade Finance Global 2025).

Ethiopia continues to negotiate debt restructuring under the G20 Common Framework, carrying approximately US $28.9 billion in external debt and repaying a US $1 billion Eurobond interest arrears last year (Reuters 2025).

Economic Growth Pressures

The IMF reports that Africa’s median headline inflation dropped to 6.8% in April 2025, down from 9.4% a year prior, opening the door for policy easing. However, high interest payments—averaging 27.5% of government revenue, up from 19% in 2019—hamper fiscal flexibility (AfDB 2025). Kenya’s growth fell from 5.7% in 2023 to 4.7% in 2024, with projected 4.5% in 2025, constrained by public debt, high rates, and poor credit flows (Reuters 2025).

3. Climate and Environmental Risks

Persistent Droughts and Crop Vulnerability

The Horn faces its worst drought in 40 years, placing 40% of Africa’s farmland at risk—including Ethiopia, Kenya, and Somalia (Knickpoint 2025). Agriculture-driven economies are vulnerable: Africa currently loses US $7–15 billion annually to climate shocks, potentially reaching US $50 billion by 2030 (Ortiz-Bobea 2021; Chimtom 2024).

Hydropower and Water Tensions: GERD and Gibe Dam

Abdel Aziz et. al (2019) examined the effects of GERD on Egypt’s Nile Delta. They found that reduced river flows will decrease groundwater levels in the shallow aquifer, leading to soil salinization and threatening agricultural productivity. Their simulations showed that if the dam’s filling takes 3–6 years, Egyptian groundwater extraction would need to be reduced by 40–60% to avoid resource depletion. De Falco and Fiorentino (2022) modeled GERD’s impact on Sudan/Egypt hydrology and economics, showing how seasonal withholding during droughts could destabilize downstream regions and intensify cross-border pressure. SWP (2024) pointed out that GERD exacerbates tensions with Egypt and Sudan, which rely on the Nile for over 90% of water needs; Egypt fears long-term water security erosion.

4. Geopolitical Dynamics & Regional Rivalries

Inter-State Friction

Geopolitical rivalry intensifies investment risk. Egypt remains wary of Ethiopian water projects and has reportedly lobbied militarily in Somalia to pressure Addis Ababa (SWP 2024). Fitch’s BMI analysis warns that inter-state conflict—should Ethiopian forces provoke Somalia—could disrupt trade, pipeline projects, and foreign investment (BMI 2024).

5. Financial Market and Investment Challenges

Weak Financial Systems & Limited Domestic Savings

HoA countries—especially Somalia and South Sudan—lack depth in banking, capital markets, and domestic savings, relying heavily on concessional finance (World Bank 2025). Weak governance further discourages private capital. Innovative financing tools (e.g., local-currency bonds, risk-sharing) show promise but remain nascent.

Cyber and Digital Infrastructure Risk

Internet penetration grows but exposes vulnerability. A 2023 study found 69.8% of Internet of Things (IoT) devices in Africa have known vulnerabilities—HoA nations rank among top targets—posing cyber-risks to financial platforms and investments (Mohamed and Kamau 2023).

Quantitative Risk Summary

Implications for Investors

1. Country Risk Premiums & Political Stability
   Elevated sovereign risk forces high-interest demands. Ethiopia and Sudan’s instability inflate premiums and deter portfolio inflows.
2. Sector Constraints & Infrastructure Risk
   Projects in hydropower or ports may face delays, cost overruns, or outright abandonment due to conflict or transboundary disagreement.
3. Climate Factor & Agri-Investment Risk
   Drought and climate shocks undermine agriculture and rural investments, especially with limited insurance in place.
4. Debt & Currency Volatility
   High debt burdens, coupled with refinancing risk, invite currency devaluation and inflation—KEY threats to returns.
5. Regional Spillovers
   Conflict in one nation impacts neighboring economies, driving insurance costs, deterring supply chains, and disrupting trade corridors.

Strategies for Risk Management

• Diversify geographically across countries with stable governance (e.g., Djibouti, Rwanda).
• Partner with development finance institutions (e.g., AfDB, World Bank) that provide insurance, guarantees, or concessional funding.
• Employ local currency financing and risk-sharing tools, as the World Bank advocates
• Stress-test for climate scenarios, including worst-case drought projections.
• Monitor geopolitical developments, particularly around GERD and inter-state diplomacy.

Investment in the Horn of Africa carries a mosaic of risks—political, fiscal, environmental, geopolitical—that demand meticulous due diligence. Failure to account for them could result in poor returns or capital loss. That said, well-structured partnerships, robust governance, and tailored financial instruments can unlock potential in sectors like renewable energy, infrastructure, and finance. For investors, success lies at the intersection of risk preparedness and strategic engagement.

Bibliography

• Abdel Aziz, S., Zeleňáková, M., Mésároš, P., Purcz, P. and Abd-Elhamid, H., 2019.     Assessing the potential impacts of the Grand Ethiopian Renaissance Dam on water resources and soil salinity in the Nile Delta, Egypt. Sustainability, 11(24), p.7050. Doi: https://doi.org/10.3390/su11247050
• Africa Center for Strategic Studies (2025) Rising Tensions in Tigray Risk Regional Conflict. 24 March. Available at: https://africacenter.org/spotlight/rising-tensions-tigray  (Accessed: 12 July 2025).
• African Development Bank (2025). African Economic Outlook 2025— Africa’s short-term outlook resilient despite global economic and political headwinds. AfDB. Available at: https://www.afdb.org/en/news-and-events/press-releases/african-economic-outlook-2025-africas-short-term-outlook-resilient-despite-global-economic-and-political-headwinds-84038 (Accessed 13 July 2025).
• Business Monitor International (BMI), 2024. Scenario analysis: Interstate conflict in the Horn of Africa unlikely, but risks rising. Available at: https://www.fitchsolutions.com/bmi/political-risk/scenario-analysis-interstate-conflict-horn-africa-unlikely-risks-rising-21-10-2024  [Accessed 11 July 2025].
• Chimtom, N.K., 2024. Climate extremes cost African economies billions, threatening growth and poverty alleviation efforts. Down To Earth. Available at: https://www.downtoearth.org.in/africa/climate-extremes-cost-african-economies-billions-threatening-growth-poverty-alleviation-efforts (Accessed 13 July 2025).
• Daba Finance (2024) World Bank Lowers Sub‑Saharan Africa Growth Forecast on Sudan Conflict. Available at: https://www.dabafinance.com/en/news/world-bank-lowers-sub-saharan-africa-growth-forecast-on-sudan-conflict (Accessed 12 July 2025).
• De Falco, S. and Fiorentino, G., 2022. The GERD dam in the water dispute between Ethiopia, Sudan and Egypt: A scenario analysis in an ecosystem approach between physical and geopolitical geography. AIMS Geosciences, 8(2), pp.233–253. Doi: https://doi.org/10.3934/geosci.2022014
• Knickpoint (2025), Africa’s Economic Outlook 2025: Growth, Risks, and Key Strategies. Available at: https://www.knickpointmedia.co.ke/africas-economic-outlook-2025-growth-risks-and-key-strategies (Accessed 10 July 2025)
• Mohamed, Abdijabar Yussuf and Samuel Kang’ara Kamau (2023). A Continent Wide Assessment of Cyber Vulnerability Across Africa. arXiv:2301.03008. Doi:https://doi.org/10.48550/arXiv.2301.03008  (Accessed 13 July 2025).
• Ortiz-Bobea, A., Ault, T.R., Carrillo, C.M., Chambers, R.G. and Lobell, D.B., 2021. The historical impact of anthropogenic climate change on global agricultural productivity. Nature Climate Change, 11, pp.306–312. https://doi.org/10.1038/s41558-021-01000-1
• Reuters (2025) ‘Ethiopia says debt restructuring negotiations in final stage’, 9 February. Available at: https://www.reuters.com/world/africa/ethiopia-says-debt-restructuring-negotiations-final-stage-2025-02-09/ (Accessed 13 July 2025).
• Reuters (2025) ‘World Bank cuts Kenya’s 2025 growth forecast as private sector squeezed’, 27 May. https://www.reuters.com/world/africa/world-bank-cuts-kenyas-2025-growth-forecast-private-sector-squeezed-2025-05-27/(Accessed 10 July 2025).
• S‑RM Inform (2025) A memorandum of “misunderstanding”: Examining investment opportunities in the Horn of Africa. Available at: https://www.s-rminform.com/latest-thinking/investment-opportunities-in-the-horn-of-africa (Accessed 12 July 2025).
• Stiftung Wissenschaft und Politik (SWP) Berlin (2024). Escalation Risks in the Horn of Africa. SWP Comment 50/2024, 28 October 2024. Available at: https://www.swp-berlin.org/en/publication/escalations-risks-in-the-horn-of-africa (Accessed 9 July 2025).
• Trade Finance Global (2025) Top Geopolitical Trends and Risks 2025 – Debt Servicing. Available at: https://www.tradefinanceglobal.com/posts/top-geopolitical-trends-risks-2025-tfg-pangea-risk  (Accessed 8 July 2025).
• World Bank (2025), Scaling Innovative Finance for Growth in the Horn of Africa. https://blogs.worldbank.org/en/africacan/scaling-innovative-finance-for-growth-in-the-horn-of-africa-afe-0225 (Accessed 11 July 2025)