At first sight, Djibouti seems to be an attractive investment destination in an otherwise troubled Horn of Africa region. The country’s apparent political stability is assured by the presence of multiple foreign military bases and relatively low exposure to regional security threats. Djibouti’s strategic location near the world’s busiest shipping lanes, controlling access to the Red Sea and Indian Ocean, continues to attract investment from African, western, Asian, and Gulf investors, particularly in the marine, construction, aviation, fuel, and defense sectors.

EXX Africa published a special report on the country’s investment outlook in May. The report found that the high profile cancellation of a port terminal concession earlier this year has raised questions over Djibouti’s attitude to foreign investment. On the one hand, the government is becoming increasingly nationalist and seems to be promoting statist interventions in the economy. Meanwhile, Djibouti is favoring preferred development partners, arguably in violation of existing contractual arrangements. Such interventions are likely to deter further foreign investment in the services sector, while Djibouti’s natural resources are negligible.

Moreover, while the incumbent president secured a fourth term in office on a landslide electoral victory only two years ago, a reinvigorated opposition is now boycotting local elections and vocally insisting on political reform. Security forces have taken a heavy-handed approach to crack down on opposition supporters and rights activists. By repressing freedom of speech and political rights, the government has intensified fractious clan allegiances and increased the prospect of armed insurgency. Lack of clarity over the presidential succession is also driving internal rivalries and hampering the longer term policy outlook.

Given that Djibouti’s bloated public sector economy is dependent on a financial lifeline thrown by regional powers and has failed to diversify from the port services sector, in reality the country’s investment potential is rather limited. Moreover, nationalist interventions in the economy and weakening political stability indicate that the current mirage of Djibouti’s investment potential is overstated and unsustainable.