Why Ethiopia needs a stock exchange as it liberalizes

2 Mar 2019/Tom Minney – One of Africa’s biggest economies. Ethiopia, is launching a giant privatization campaign that could be lead to transformation, growth and liberalization. It has set a tight timetable for economic reform, including privatization of telecoms by the end of 2019.

To make this work well, it aims to set up a domestic stock exchange by 2020. An Ethiopian securities exchange will help citizens and domestic savings institutions to participate and boost efficiencies and transparency in the economy .

Kaleyesus Bekele of The Reporter newspaper highlighted debates at the third East Africa Finance Summit on 18-19 December 2018, organized by I Capital Institute. Zemedeneh Negatu, Global Chairman of Fairfax Africa Fund, told the summit: “We are going to have a stock market this time. We have been on this path for 18 years. But now it is no more an academic discussion. We do need a capital market. We are part of the global economy,”

He said Ethiopia is by far the largest economy in the world today that does not have a stock market. “We are going to join the global capital market club. We have a bigger GDP than Kenya, there are only two sub-Saharan African countries which have bigger GDP than us — Nigeria and South Africa. I think it is time. We have companies ready to be listed in the stock exchange.”

He says that top priority is to set up a regulatory institution and create a government regulatory framework, and the private sector can incorporate the stock exchange. “We need to have stock brokerage firms and investment banks. Stock traders have to be trained and the local accounting and auditing firms have to build their capacity.. The financial media has to be established or the existing ones should extend their financial news coverage. Financial media is also the key component.”

Zemedeneh says that 50 to 70 local companies can be listed in the stock exchange. “All the banks and insurance companies, which are well regulated, can offer an IPO (initial public offering) the day the Addis Ababa stock market is ready for launch,” Zemedeneh said.
“The bottom line we are ready and it is timely,” he added.

Business community leader and insurance veteran Eyessuswork Zafu said that technical studies for the establishment of the Addis Ababa Stock Exchange were done by Ernst and Young 20 years ago: “Miracle is happening in this country. I can see the twinkling light at the end of the tunnel. Two years ago we were not able to discuss such matters openly.” He called for urgent action to start preparations.

Ethiopia’s so-called “development model” pursued by Meles Zenawi, a previous prime minister, led to annual growth of 10 per cent for more than a decade until 2017, according to official statistics, but ran into capacity constraints and chronic shortages of foreign exchange. Growth was 7% in 2018, but Abiy says that is also due to more accurate measurement,

Both Africa’s telecom giants MTN and Vodacom told Reuters they are interested. MTN says Ethiopia “would be a natural fit for MTN’s existing pan-African footprint.” And Vodacom said “Ethiopia is an attractive market so it follows that there would be interest”.

Establishing the stock exchange will require rapid boosts in capacity and understanding. According to Zemedeneh: “We need to set up the regulatory body and formulate the regulation. All the other things have not yet started except the adoption of the IFRS.” He warns there is a lotof work to be done to prepare. “I hope they would be able to roll out these things quickly. Two years is a very short period of time. It could be at the end of 2020 or slide to 2021. All the infrastructure need to be prepared.”

Privatizations including 49% in Ethio Telecom

Steps highlighted in a recent article in the Financial Times newspaper include completing “a multibillion-dollar privatisation of its telecoms sector by the end of this year, followed by a sell-off of stakes in state energy, shipping and sugar companies”. It says the stock exchange is “part of a gradual but decisive shift towards economic liberalization… alongside other ambitious and transformative programmes.”

“The Government is planning to sell off a 49% stake in Ethio Telecom, according to people familiar with its plans. Ethio Telecom is the biggest telecoms company in Africa in terms of customers in a single country, with more than 60m subscribers.

“But its opaque debt structure and low earnings per customer mean it might fetch less than the government expects, say bankers.

“To promote competition, Ethiopia is also likely to auction off spectrum to two additional telecoms companies, with Vodacom, Orange, MTN and others expected to bid, according to bankers.

“The prime minister said he would proceed cautiously on privatisation in order to avoid any hint of corruption. ‘We do telecom, we learn something, we evaluate seriously, we continue,’ he said.”

Much of Ethiopia’s growth and successes at rolling back poverty are linked to the ambitious road, rail and electricity infrastructure projects by the Government, which pours revenues into this. The ambitious strategy is to transform a nation, which relied on farming, into an industrialized nation where manufacturing provides export earnings.


OPINION – A well run stock exchange is vital in Ethiopia’s successful privatization and transformation

The capital market will bring many benefits to Ethiopians and the economy. A stock exchange enables enterprises to raise capital to create growth, jobs and fight poverty through issuing shares (equity) to long-term investors who are ready to share the business risks. It provides a transparent and efficient market for raising hundreds of millions of long-term debt, including bonds for housing and infrastructure, as in neighbouring Kenya. It would amplify efforts by Ethiopia’s Government and banks to finance the ongoing giant growth potential.

A regulated stock exchange encourages savings and help investors channel these into the most productive enterprises, boosting market size and efficiency. It boosts transparency by requiring companies to publish audited trading information promptly and widely, sharing similar information benefits with smaller investors as the Ethiopian Commodity Exchange (ECX) brings to farmers – any by encouraging professional analysts.

Individual Ethiopians are very keen for additional places to grow their savings, some of which are held in cash or low yielding bank deposits. Like other African countries, Ethiopia has fast growing domestic investment funds at pension and insurance institutions, and these need a much wider choice of productive assets to invest into, offering diversification and growth while seeking to maintain the overall safety of the members’ funds.

There are many Ethiopians both at home and abroad with the skills and character to ensure that any Ethiopian exchange will be one of the best and biggest in Africa. Although speculative trading is expected, it is also a key contributor to market liquidity and efficiency, and ensuring a large and active enough domestic base will counter much of the overall market volatility. Regulation is also needed to protect investors by ensuring that only well run businesses with a good track record and management can offer shares to the public, contrary to many unregulated initial public offers that have happened.

A well run stock exchange is what Ethiopia needs to transform its economy, boost participation, investment and the private sector, and to encourage efficiency and jobs.

DISCLOSURE – The author has worked on proposals on a stock exchange in Ethiopia, including when he worked at EY, and has studied the background and potential of the capital market there.