Ethiopia: Long way to go before the country can build securities exchange from scratch

By Harry Clynch
Posted on Thursday, 8 December 2022 16:12

Coffee traders shop for deals on the floor of the Ethiopian Commodities Exchange (ECX) in Addis Ababa on May 31, 2013 (Photo by JENNY VAUGHAN / AFP)

Earlier this year, Ethiopia launched Ethiopia Investment Holdings (EIH), a new sovereign wealth fund, in a bid to spur foreign direct investment under a wider programme of privatisation and financial liberalisation. EIH has since announced its intention to establish the Ethiopian Securities Exchange (ESX).

Working with the finance ministry and the specialist markets development agency FSD Africa, EIH expects the exchange to launch in two years, with 50 companies initially listed. 

However, there remains a lot of work to be done if Ethiopia is to succeed in becoming an African capital markets hub.

Infrastructure, awareness

Last week, Tesfaye Hailemichael was appointed as one of the seven founding members of the Ethiopian Capital Markets Authority (ECMA). His job partly focuses on investing in the physical infrastructure that Ethiopia requires to establish before launching its securities exchange. 

Hailemichael tells The Africa Report that “in order to have a successful stock market, you must have the infrastructure to support it”, and this requires Ethiopia to “upgrade its telephone and internet capabilities to ensure fast and accurate trading”. This could entail a broader campaign of “public education about the stock market”, he adds. 

The Consultative Group is attempting to prepare domestic companies for potential Initial Public Offerings (IPOs), inform local lawyers about the legal processes that will be required, and set up the relevant capital market authorities. This work is crucial if the ESX is to become “functional and vibrant”, as Hailemichael believes it will be.

[Although] there are definitely characteristics that would interest us from a macro standpoint, there are a number of things, such as corporate governance standards, which we would need to see in place before we actually invest there.

Hailemichael is a member of the Capital Markets Development Consultative Group at the National Bank of Ethiopia, the country’s central bank. Prior to taking up this position, he was the Chief Financial Officer at three public companies listed on NASDAQ and has over 30 years of experience in trading.

Rigorous regulations

The regulatory landscape, which authorities in Ethiopia are currently working on establishing, is also essential to attract foreign investors.

Mathias Althoff, a vice chief investment officer and partner at Tundra Fonder, a Stockholm-based asset manager that specialises in frontier markets, believes that Ethiopia is “a very interesting market demographically”, with a large and young population that has “produced very nice GDP growth over the last few years”.

“[Although] there are definitely characteristics that would interest us from a macro standpoint, there are a number of things, such as corporate governance standards, which we would need to see in place before we actually invest there,” says Althoff.

Assefa Sumoro, a senior capital markets advisor at the central bank, tells The Africa Report that he’s been tasked with “establishing a regulator that can compare with the Financial Conduct Authority (FCA) in the UK, the Securities and Exchange Commission (SEC) in the US, and those in similar jurisdictions such as Kenya’s Capital Market Authority”.

International practice

Sumoro says the National Bank is looking to replicate international best practice when it comes to the market framework. “The core principles of our Capital Markets Proclamation Law are aligned with those of the International Organisation of Securities Commissions (IOSCO),” he says.

“The main objectives of the capital market authority are to protect investors, ensure the existence of a capital market environment in which securities can be issued and traded in an orderly, fair, efficient, and transparent manner,” Sumoro says. 

“[We also aim to] reduce systemic risk by ensuring the integrity of the capital market transactions, and create, promote, and facilitate a robust capital market environment fit for long-term investments. These are all internationally accepted principles that are portable [to the ESX].”

He also notes that the National Bank has been inspired by other emerging market jurisdictions that have established securities exchanges, such as Kenya and Malaysia, and seeks to replicate their successes. 

Global experiences show that the more open economies are, the more foreign direct investment is going to come in, and the easier it will be for everyone to do business.

Sumoro hopes that the new regulations, along with further detailed proposals on financial disclosures and corporate governance, will assure foreign investors that their capital can be safe in Ethiopia.

Major opportunities

If the sovereign wealth fund, the central bank, and the government are successful in launching the ESX, the benefits for Ethiopia could be profound. 

Althoff believes that this is “a very positive step” and that “there are no real downsides to establishing capital markets”.

Hailemelekot T. Berhan, a capital markets and securities analyst in Addis Ababa, argues that this initiative could support a wider “innovation ecosystem” and support the growth of Ethiopia’s start-ups. 

He says that it’s currently “very tough for start-ups to access finance” because local banks are either too conservative in their deployment of cash, require too much collateral, or are “overly focused on short-term financing”.

Berhan is hopeful that the ESX could allow more entrepreneurs “to bring their start-ups to the market”, encourage more venture capital funds and angel investors to come to Ethiopia, and thereby “help unleash the opportunity”.

Such developments could yield direct benefits for Ethiopians themselves. With inflation in the country currently running at over 30%, Berhan is optimistic that the securities exchange will offer “citizens another vehicle to invest their excess cash”. 

IPOs will also allow Ethiopian companies “to raise funds for growth, expand, hire more people, pay more tax, and help the economy grow”, he adds.

“Global experiences show that the more open economies are, the more foreign direct investment is going to come in, and the easier it will be for everyone to do business,” Berhan says. “An open Ethiopia will be one that is attractive to investors around the world.”

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