ADDIS ABABA (BLOOMBERG) - Almost a year after winning the Nobel Peace Prize for forging an end to two decades of animosity with neighbouring Eritrea, Ethiopian Prime Minister Abiy Ahmed has sparked international concern after resorting to force to quell internal dissent.
Accusing the regional government in the northern Tigray state of attacking an army base to steal equipment, Mr Abiy ordered the military to strike back. Heavy fighting between the army and forces loyal to the region's ruling Tigray People's Liberation Front (TPLF) claimed dozens of lives this week, according to two foreign diplomats who spoke on condition of anonymity as they're not authorised to speak to the media.
Air strikes were carried out on arms depots in Mekelle, Tigray's capital, and rocket launchers and other military hardware were destroyed, Mr Abiy told state television on Friday (Nov 6).
The showdown spurred calls for restraint from United Nations secretary-general Antonio Guterres, the US and Germany. It also spooked investors, who've been pouring money into Ethiopia since Mr Abiy took power in 2018 and began opening up the state-controlled economy.
The yield on Ethiopia's US$1 billion (S$1.35 billion) of 2024 Eurobonds has climbed 98 basis points since Tuesday, handing bondholders a 2.8 per cent loss. That compares with a 1.3 per cent average return for African sovereign issuers. Ethiopia was the only one of 15 to post a loss this week.
The conflict could distract the government from implementing plans to open telecommunications and other state-dominated industries to outside investors. Negotiations with China for a debt-service moratorium, potentially deferring US$2.1 billion in payments in 2020-2023 may be at risk, while US$2.2 billion in World Bank loans that were projected to be disbursed between 2021 and 2023 may also be in jeopardy, said Mr Mark Bohlund, senior credit research analyst at REDD Intelligence.
Relations between Tigray and the federal government have frayed since Mr Abiy took office and sidelined the TPLF, once Ethiopia's pre-eminent power broker.
Mr Abiy blamed the violence on the "criminal hubris and intransigence" of the TPLF leadership, while indicating that military operations would be limited in scope. A state of emergency came into effect in the region on Friday that will give a military task force the authority to disarm the security personnel in Tigray, impose curfews and use "proportionate force" to maintain order.
"The federal defense forces are determined to bring an end to this criminal enterprise, with the least possible cost to the civilian population in Tigray and the rest of Ethiopia," Mr Abiy's office said in a statement on Twitter.
The odds of an escalation in hostilities nonetheless remain high, with Tigray's president Debretsion Gebremichael warning that the region has the capacity and resolve to destroy those who attack it. More than half of Ethiopia's armed forces and mechanised divisions are situated in Tigray, according to the International Crisis Group - a presence that was built up during Ethiopia's conflict with Eritrea, which borders on Tigray.
"Hopes for a surgical in and out are probably misplaced," said an East Africa analyst with the Eurasia Group Connor Vasey. "Tigray is among the most militarily organised and equipped regions, and the TPLF has gained a lot of grassroots support which could come into play as the conflict evolves."
There's also a risk that turbulence could spill over into other restive regions that have been dogged by protests and violence this year, or into neighbouring states including Eritrea, whose relationship with Tigray has remained frosty despite the peace deal it reached with Abiy.
Sudan, Djibouti and Eritrea have all shut their borders with Ethiopia, citing fears of a widening conflict.
"We are monitoring several potential conflict escalation pathways," said executive director of political risk advisory firm EXX Africa Robert Besseling. "One is the prospect of the powerful Northern Command of hardened and elite fighters defecting to Tigray, where these soldiers are based. Another one is the potential of cross-border Eritrean military incursions in support of the Ethiopian federal offensive, which would potentially destabilise the entire Horn of Africa region."