• Ethiopia is among the biggest five economies in sub-Saharan Africa.
• Ethiopia has enjoyed strong economic growth over the past two decades, averaging about 9-10%.
• Ethiopia will be able to finance its budget deficits by issuing long-term bonds in local currency.
The long-awaited introduction of a local Ethiopian bourse is set to kickstart following the conclusion of the cooperation agreement between Ethiopia’s Ministry of Finance, the Ethiopian Investment Holdings and FSD to establish the Ethiopian Securities Exchange (ESX).
Ethiopia is among the biggest five economies in sub-Saharan Africa and is the second largest in terms of population; yet, it does not have a stock exchange. Some decades ago, when the military government in Ethiopia was abolished, the Addis Ababa Share Dealing Group went along with it, and no capital markets existed in Ethiopia. In the late 1950s, there were attempts to re-establish a capital market, but the efforts hit a brick wall.
In the last five years, there have been continuous efforts by the Ethiopian finance ministry in association with African market specialists to pave the way for its stock market. It is understood that the new stock market is set to become a reality in 2024-25 after all the operational facilities and mechanisms have been put in place.
Once established, the ESX will become the 30th exchange on the continent. At least fifty companies, including banks and insurance companies, are expected to list at the launch of the exchange. The exchange is designed to provide a fundraising platform for small and medium-size enterprises, which are the backbone of the Ethiopian economy. The exchange will also offer a platform for the privatisation of Ethiopia’s state-owned enterprises.
Opening Ethiopia for business
When Prime Minister Abiy Ahmed came to power in 2018, the country was improving its accessibility, seeking to pursue economic reforms and establish a stock exchange governing body. In line with this reconfiguration thrust, the Ethiopian government has implemented several reforms to open the economy and the launch of a securities exchange will be a catalyst for attracting new investment from the private sector.
Ethiopia has enjoyed strong economic growth over the past two decades, averaging about 9-10%. With strong fundamentals, such as young and educated labour force and improved infrastructure, the economy has the potential to sustain such a high growth if structural challenges, such as limited access to finance, are addressed.
In a joint statement concerning the launching arrangements, the three parties said that through the Exchange, the Government of Ethiopia will be able to finance its budget deficits by issuing long-term bonds in local currency thereby reducing reliance on inflationary and foreign sources of budget financing.
How the securities exchange will operate
In line with the country`s Capital Markets Proclamation (No. 1248/2021), the exchange will be established as a Share Company (public company in Ethiopian law) by government in partnership with the private sector, including foreign investors.
Between 25% and 55% of the ownership of the ESX will be for corporations, capital market intermediaries and operators of international securities exchanges, while government will not own more than 25%. It will be a for-profit entity albeit with the core objective of boosting investment in Ethiopia.
Towards this goal, the Ethiopian Investment Holdings (EIH) has established a dedicated project team (“Project Team”) with the support of Financial Sector Deepening Africa (FSD Africa). The Project Team is expected to lead the task of developing the ESX business plan, organisational, management and ownership structures, and designing and setting its market segments.
The project team will also lead development of the ESX trading rules, policies and procedures, the trading and operating systems, and other ICT infrastructure.
Through the cooperation agreement, FSD Africa will fund technical support, legal advice, and the costs associated with getting the exchange operational.
ASEA to link 7 African Capital Markets
Meanwhile, the African Securities Exchanges Association (ASEA) is moving closer to linking the African capital markets by facilitating cross-border trading and free movement of investments in Africa.
Already, the African Exchanges Linkage Project (AELP) has onboarded 30 broker firms to facilitate cross-border trading. Throughout this process, ASEA will link 7 African capital markets together, which will help companies bring in new capital and create value for shareholders.
The introduction of the ESX means that the traditional method of raising capital in the Africa continent will expand with possible prospects of increased liquidity coupled with a diverse spectrum of capital raising avenues.