Djibouti is a small African Country located in the Horn of Africa. It is in a very strategic position, between the Indian Ocean and the Red Sea.
It seems very small on the map, but it is not a micro-state like Vatican City. The area of Djibouti is similar to Macedonia or Israel ones, and the coasts are 300km long
The population is about 900.000 inhabitants, and 70% of them are located in Djibouti City (the capital).
Djibouti was a French colony and it was the last African Country to gain independence from France in 1977.
BUSINESS OPPORTUNITIES
First opportunity: geographic position and port
Djibouti is in a crucial position: it is on Bab-el-Mandeb strait that is the small point where the Indian Ocean is going into the Red Sea. The distance between the two lands is approximately 25km.
Why is it so important? 2 reasons.
- The 15-20% of the commercial ships in the world are transit from here, basically, all the boats that are going from Asia to Europe (and vice versa).
- The region is one of the biggest producers of oil (Saudi Arabia, Qatar, UAE, Bahrain, Kuwait, etc) and a large amount of petrol destined to Europe cross the strait.
It is not a surprise that Djibouti city is the most important trade port of the Horn of Africa.
The economy of Djibouti is largely based on services related to the activity of the port, including shipping, port activities, export & import business, reexports activities, etc
However, Djibouti port is crucial for another motive: it is “the port of Ethiopia”.
Ethiopia is the second most populated country in Africa (109 million of inhabitants) and is landlocked. So, most of the goods that reach and leave Ethiopia from the sea, are transit from Djibouti.
For all this reason the Djibouti port is crucial in the African panorama and speaking about logistic Djibouti is an easy country to reach compared to most African nations.
Second opportunity: political stability
Some Djibouti neighbor countries are politically speaking very unstable (Somalia, Eritrea, and Yemen).
Djibouti is the most stable Country on Bab-el-Mandeb strait.
Due to that Djibouti was able to attract more investment in the logistic area than neighboring countries.
Djibouti has also been included in the list of beneficiary countries of the “Everything But Arms” European Union program.
Third opportunity: foreign military bases
Many countries in the world have a military base in Djibouti, including the USA, China, Japan, Italy, Germany, France, Spain and more other
Why?
The main reason is the Somali pirates. They operate mainly along the coasts of Somalia, which is the south of Djibouti. Many countries established a military base in Djibouti to contrast the pirates of the area.
Djibouti needs to have a foreign military base for 2 main reasons:
- They are bringing money to Djibouti
- Djibouti is a small country with a large and important port, but it is located in an area that is very unstable with recent conflicts that are not exactly ended. At the moment, having the bases of some powerful nations is extremely important for Djibouti’s security and independence.
Fourth opportunity: languages
There are two official languages in Djibouti: French and Arab.
Two of the most important and widely spoken languages in the world.
The people of Djibouti can speak at least one, and many are able to speak both.
If you are fluent in French or Arab, it will be easier to do business in Djibouti.
Fifth opportunity: the local currency
The local currency is the Djiboutian Franc and it is a very stable currency pegged with the US Dollar (1 USD = 177 DJF)
It is curious because most of the former French colonies have pegged their currency on Euro, while Djibouti decided to peg it with the US Dollar and that is quite an exception in the world panorama.
BUSINESS RISKS
First risk: poverty
The GDP per capita of Djibouti is $ 3.600 (it is half of India).
Therefore the Djibouti gross domestic product and the internal market are small (small population and low GDP per capita).
This is not the only negative consequence of poverty.
Djibouti could follow the path of Singapore or Dubai and be a new state-city that attracts foreign capital to become a financial and logistic hub for East Africa in the long term.
However, it needs competencies to do it.
Now, Djibouti is not investing enough in human capital. Just to give you an example: the literacy rate is approximately 70%, which means that 30% of the population is not able to write and read.
Another worrying fact is the unemployment rate: 40% (80% for the youth).
Second risk: corruption
According to Transparency International, the corruption in Djibouti in high.
If we compare it with neighboring countries it seems acceptable, for example, Somalia is the most corrupted country in the world. However, business people that come from most developed economies should consider that the environment in terms of corruption is different in Djibouti.
This aspect is something that Djibouti has to improve if it wants to improve and evolve its economy.
Third risk: low differentiate economy
Like we said previously, Djibouti has only one significant resource: the port.
And the Djibouti economy is largely based on it.
Most of the goods are imported, food included. Djibouti’s natural resources are limited and materials are imported from outside (including oil from neighbor Arab producers).
It is clear that such poor diversified economy is risky.
Fourth risk: dependence on foreign investment
Djibouti is now counting on foreign investments, that are mainly allocated in the infrastructure sector.
In particular, Chinese investment in Djibouti is consistent. The most important project is probably the electric railway that will link from Djibouti to Ethiopia, when it will be fully completed Djibouti infrastructure system will improve significantly.
Attracting foreign investment is a good thing, however, being too dependent on them could be very risky.
What happens if the investments stop for any reason (maybe political)?
Fifth risk: political situation
We said that Djibouti has an optimal geographic position, crucial for the international trade, but it exploits the advantage because other countries on Bab-el-Mandeb strait, like Eritrea or Yemen, do not have political stability.
The question is: what happens if Somalia or maybe Yemen will find political stability in a medium-long term?
Djibouti should lose part of its competitive advantage. Especially if some foreign nations/companies will decide on the development of a new port in a neighbor country.
Djibouti should improve its infrastructure to be more competitive and reduce this possible (future) risk.
CONCLUSIONS
Djibouti has the potential to become a new Dubai or a new Singapore in some decades.
However, it is not an easy path and the risk of failure is relevant.
The risks can be divided into two macro-categories: political risks and economic risks.
- Economic risks: now a relevant portion of the global trade transit in the area of Djibouti. What happens if something changes in the long term? For example, if the new silk road will switch a large portion of the goods trade from ships (that transit from the strait of Djibouti, Red Sea and Suez Canal) to the land.
- Political risks: we spoke about them previously. Just to add one more: will be the politicians of Djibouti able to guide the country to differentiate its economy?
Of course, we are speaking about the future development of Djibouti in the long term view. But when we analyze a country like a small country that is still very poor, we have to see it in the long term perspective.
Link to data source: The World Factbook (CIA)
Globartis Research
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