The Horn of Africa has been an attractive investment destination for decades, particularly catching the eye of development finance institutions looking to enhance a number of key sectors in the region. Rich in untapped or underexploited natural resources and with the potential to be an important provider of renewable energy, in this piece, S-RM's Africa experts, Osob Dahir and Matthew Venturas, examine the latest interest in the region from the Gulf states and the challenges and opportunities for all investors more broadly.
Earlier this year, Ethiopia signed a Memorandum of Understanding (‘MoU’) with Somaliland, an internationally unrecognised de-facto state which seceded from Somalia in 1991, that will allow Ethiopia access to one of Somaliland’s ports, facilitating a pathway to the Gulf of Aden and the Red Sea. The contents of the MoU have not been published, and details of its terms are opaque and contested, including the precise location of the port; hence its ironic characterisation by some international commentators as a memorandum of ‘misunderstanding’. News of the controversial MoU was met with consternation regionally, particularly from the Federal Government of Somalia (‘FGS’, the FGS retains an internationally recognised territorial claim over Somaliland and its waters), and has since deepened tensions between Somalia and Ethiopia. At the same time, however, the MoU has drawn a spotlight to opportunities for investment in the Horn of Africa, interest in which is centred around Ethiopia’s status as the world’s most populous land-locked country, with a growing population of c. 123 million. The stalled MoU presents an interesting juncture to assess crucial maritime infrastructure projects and the goals of key external actors in the Horn, currently dominated by the Gulf, and the related opportunities for investment in key strategic sectors, namely in energy and natural resources.
Gulf goals
Gulf-based actors, principally from the UAE, have demonstrated a growing interest in the Horn over the last decade. In 2016, Dubai Ports World signed a USD 440 million agreement with Somaliland to develop and operate a regional trade and logistics hub at the Port of Berbera, thus expanding its existing regional container terminal operations in Djibouti. Similarly, in the neighbouring territory of Puntland, DP World signed a USD 366 million agreement in 2017 for a 30-year concession to manage and develop the Port of Bosaso, a project which is ongoing. In June 2024, perhaps triggered by the financial impact of the MoU, the Djiboutian government awarded a 92-year concession for an overseas logistics zone in the Port of Djibouti to the Government of Saudi Arabia – which some international commentators have positioned as a local competitor to the UAE. For these actors, infrastructure investment is strategic – and often a diplomatic tool – given the Horn’s geographical proximity to the Gulf, high levels of agricultural imports from the region, and security considerations around the Gulf Cooperation Council’s military operations in Yemen. Considering these recent trends, it is likely that the deep pockets of Gulf actors will continue to play a key role in the development of maritime infrastructure and investment in the Horn.
Source: https://www.bbc.co.uk/news/world-africa-67911057
Forward looking opportunities in the Horn
Investors in the region can benefit enormously from these UAE and Saudi-led projects through strategic capital deployment. Agriculture is still the biggest sector in the Horn, and the region continues to be the most rural on the continent. Despite this, countries in the Horn are some of the most rapidly urbanising in the world as a result of the pervasive impact of climate change, as well as conflict; as a result, investment should ideally be made in industries which align with this trend more broadly. One of these areas is extractives. Eritrea, a traditionally isolationist country in the Horn, has been described as ”one of the last frontiers” for miners by sector executives, in light of drilling successes for gold in recent years, and with renewed international interest in the country. Similarly, Ethiopia already has operational gold mines, and there is renewed international interest in exploration in Somalia owing to its geological resemblance to oil-abundant southern Arabia. There is also incredible potential for renewables in the region. In 2021, the International Renewable Energy Agency reported that East Africa has the second highest theoretical onshore renewable energy potential for both solar and wind energy in Africa, and this will become progressively more attractive to investors, especially considering the existing shortfall in foreign direct investment in Africa’s renewables sector. Investments in both areas can profit significantly from the Gulf’s infrastructure development in the Horn, owing to the inevitable and inextricable logistical links between the energy and maritime sectors more broadly.
Regional risks
Currently, investment in the Horn is hamstrung by a number of key geo-political developments and factors, perhaps most notably, the ongoing war in the Amhara region between the Ethiopian federal forces and Fano, the ethno-nationalist Amhara militia. The conflict followed the end of the Tigray War (2020-2022), during which Fano fought alongside federal forces against Tigray’s paramilitary group. The Ethiopian federal government subsequently attempted to disband the Amhara militia and integrate them into federal forces, which was met with rebellion, deteriorating into a state of emergency which recently ended in June, and with allegations of human rights abuses principally attributed to government forces. International commentators have suggested that the conflict’s continuation threatens to proliferate throughout other parts of the country, especially in light of the ongoing insurgency in Oromia, in a country which already maintains a precarious system of ethnic federalism among multiple groups.
Another widely reported development impacting the Horn is the resurgence of piracy around the Gulf of Aden by both Yemeni and Somali actors. While the Houthis have deployed drone and missile attacks against ships reportedly heading to Israel in the Red Sea, Somali pirates have taken the opportunity to target bulk carriers and other commercial ships in the security vacuum caused by a shift of international naval presences in the Red Sea. Given the shift in focus to the Red Sea, the resurgence of piracy in the Horn will likely pose a significant threat to shipping routes in the region, which may have a knock-on effect of increased shipping rates and even commodity prices worldwide.
The region has proven resilient in regenerating international commercial interest, particularly from Gulf actors, which is poised to continue for decades to come, bringing with it incredible opportunities for growth in these frontier markets”
Conclusion
The Horn of Africa remains an incredibly complex commercial landscape, given the existence of oft contentious relationships between communities both within and across state borders – as most recently exemplified by the ongoing fallout from the announcement of the MoU. Notwithstanding these complexities, the region has proven resilient in regenerating international commercial interest, particularly from Gulf actors, which is poised to continue for decades to come, bringing with it incredible opportunities for growth in these frontier markets. With the UAE and Saudi’s economic diversification plans ahead of their respective Vision 2030s, international investors are well-placed to gain a first-mover advantage in strategic sectors like energy which are most closely aligned with key infrastructure development projects affiliated with Gulf actors in the region. Other corporates can otherwise use these opportunities to tap into a massive and incredibly diverse market, which will likely be dominated by Ethiopia.
