05 Mar 2018

Somalia – The Next Investment Opportunity?

05 Mar 2018

By Jan-Carl Stjernswärd

Somalia – not your typical travel destination. “Black Hawk Down”, tv footage of dead bodies, pirates and starving children flash through the mind. Yet the disastrous civil war and American intervention occurred more than 25 years ago. Piracy was largely eliminated around four years ago. Today’s Somalia is a very different place and is currently undergoing an economic renaissance. Bustling ports, modern highways, mineral deposits and fresh seafood entice investors and adventure-seekers alike. This millennia-old civilization is once more taking its place on the world stage.

What has led to this interest? In short, its location and Ethiopia’s growth. This, and some of the opportunities available are discussed below.

Strategic Location

Real estate agents always say location is the single most important factor when choosing whether to buy a property or not. Geopolitics is no different.

One of the miracles of economic growth over the last decades has been Ethiopia. This thriving consumer economy of 120 million has had its GDP increase by six fold from around USD 12 billion in the year 2000 to around USD 72 billion as of 2017. Yet this landlocked economy has not had a port of its own since Eritrea seceded as an independent state in 1991. Relations deteriorated, leaving the country dependent upon neighbouring Djibouti. This in turn led to Djibouti’s remarkable development.

As well as hosting one of Africa’s busiest and most efficient container terminals, Djibouti has a major oil terminal and now a mixed use port, the latter built with Chinese money. It also hosts French, American, Japanese, Chinese and EU bases, with Spanish and other Europeans also permanently based there.

Although relationships between Ethiopia and Djibouti remain strong, relations between Djibouti and certain other nations – particularly the UAE – are more fragile. In part this (and the strategic need for Ethiopia to have more than one route to the sea) have led to an increased interest in Somalia and Somaliland.

DP World signed to develop Berbera (Somaliland) in 2016, and recently agreed to develop a free zone there. Its subsidiary, P&O Ports, then signed with Bosaso, Somalia, in 2017. Meanwhile, Chinese and Turkish interests are developing other parts of the country – with Turkey a major investor in Mogadishu. Currently, Berbera and Bosaso are seen as the two most strategic plays, both being on the Red Sea, through which flows some 60% of the world’s shipping.

Each of Berbera and Bosaso could serve Ethiopian demand – as well as help Somaliland and Somalia develop themselves – both via Djibouti (if transit is permitted) and directly through various overland routes.

In short Somalia sits on some prime geopolitical real estate. As Ethiopia continues to grow, it will require several ports to service it. The only other potential player – Sudan – requires over 1,500 km of transit over non-asphalted roads. While this has led to rivalry between the three ports, outside commentators would note that Ethiopia’s economy will (and may already) be strong enough to sustain all of them.

Goods will not only be flowing in. As Ethiopia imports vehicles, wind turbines and machinery, it exports agricultural produce, leather goods and – soon – oil and gas. Again, each of Djibouti, Somaliland and Somalia are vying to host the export terminal. Reports of Djibouti being chosen appear premature.

Foreign Players

Somalia was once shunned by the international community as a pariah state. Now it is being courted as a bride by many a wealthy prince. The UAE, Turkey and Saudi Arabia all seek to establish military bases in Somalia. Even the US is reported to have a semi-covert presence in the country.

What all this means is that the security situation is rapidly improving. The most problematic region remains the capital, Mogadishu, with Puntland (Bosaso Port) and Somaliland (Berbera Port) both being stable and relatively safe.

The Hospitality Sector

At present, there is no international hotel operator in Somalia, but companies from Europe, Turkey and China have all been recently eyeing the market. It is rumoured that a new hotel may open in Bosaso, Puntland, and Garowe, Puntland, as port engineers, oil prospectors, geologists and surveyors all flood the city. The highway from Bosaso to Garowe is 500km but takes only about 4.5 hours to drive – Garowe, a pleasant leafy garden city and the capital of Puntland, is only a short distance from the Ethiopian border. A dry port is planned for the border area as well as a free zone in Bosaso.

For the non-business traveller, virgin mountain ranges, deserts, geothermal springs, bush and pristine beaches await to be explored. Combine this with ancient architectural sites, organic cuisine and friendly locals and you have a growing market for tourists looking for a fresh experience.

A Flat Society

Somalis have for centuries been nomads. As with other nomadic societies that this correspondent has visited in Central Asia and Africa, there is an ingrained sense of hospitality and trust between people. There is no real class pyramid, and pauper and businessman alike often share the same table at restaurants, political meetings and social gatherings. For a foreign investor, this is refreshingly different from many other sub Saharan countries, underpinned by a strict pecking order of rent seekers.

This sense of grass roots democracy is reflected in some of Somalia’s political life. No President in either Puntland or Somaliland has ever been elected for two consecutive terms – transition of power has been peaceful and uncontested, as this correspondent can attest to having attended the inauguration of the current Somaliland President in Hargeisa in December of 2017.

Also enriching Somalia’s economic and social life are its large diaspora community (stemming mainly from people fleeing the civil war of the early 1990s). Somali communities exist in the UK, North America and Scandinavia. Encountering an otherwise normal looking Somali with a heavy Mid Western drawl peddling his wares in a lively provincial town is becoming an increasingly more frequent experience as educated diaspora members return to Somalia to capitalize on new opportunities. Large sums of cash are remitted through this network, using the Islamic finance system of hawala, in and out of the country. Indeed, in the absence of banks, Somalia has developed some cutting edge solutions to cater for payment solutions, including e-wallets on your phone through which most payments can be made.

 

All in all, while inter clan rivalry remains an issue, foreign guests are invariably shown respect and friendship by the ordinary Somali.

The Future

Even though political and security challenges remain, it seems likely that Somalia’s economic boom will iron out these problems over the next few years. Meanwhile, for the investor seeking potentially triple digit returns and with a healthy appetite for risk (and seafood), Somalia offers many interesting opportunities in the energy, hospitality, finance and infrastructure sectors.

Jan-Carl Stjernswärd, 27 February 2018
jcs@adglegal.com

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