Ethiopia readies its first full stock market for launch

After more than two years laying the groundwork for an effective capital markets system, Ethiopia is now on the brink of launching its first fully fledged stock market. Preparations for the launch of the Ethiopian Securities Exchange (ESX) are in the final stages, with stakeholders from the country’s private sector, including major local banks and insurance companies, bidding to acquire stakes in the new bourse.

ESX expects to raise 625m birr ($11m) from the private sector including local financial services firms, according to local reports. It has already raised 275m birr ($4.9m) from four state-owned enterprises under Ethiopian Investment Holdings (EIH), which is the country’s sovereign wealth fund, and FSD Africa, a “financial sector deepening” operation funded by the UK government.

The backing from Ethiopia’s private sector, government and overseas development partners – and the strong local participation it signifies – is aimed at bolstering the appeal of the new stock market to foreign investors. Government representatives and finance executives from Ethiopia are currently hosting investor roadshows across the continent and beyond.

Their aim is to highlight ESX and the chance to tap into the country’s burgeoning private sector, says Tewodros Sile, associate director at Africa Practice, an Africa-focused strategic advisory firm.

“ESX’s launch remains scheduled for late 2024, or early 2025, and continued investor roadshows throughout this year will remain critically important for building continued foreign investor confidence,” he tells African Business from Addis Ababa.

“The roadshows have targeted key financial centres, including London, and are a recognition that, despite the potential opportunities in Ethiopia, the complexities and difficulties associated with market entry require a proactive approach to investors outside of the country.”

A boon for government and private sector alike Sile points out that the successful launch of a securities exchange could ease the perennial issue of limited capital access, a burden that many businesses in the country grapple with.

“ESX presents an opportunity for increasing funding flows from both domestic and international investors for firms listed on ESX. This is especially important, as in many instances, access to finance and lack of capital inflows form some of the biggest obstacles to business growth in the country.”

Ethiopia’s government also hopes the establishment of the exchange will help to cut its over dependence on foreign debt. Through ESX, the government could issue long-term bonds in local currency, thereby reducing reliance on foreign sources of budget financing. Ethiopia’s debt default in December, precipitated by the government’s inability to make a $33m coupon payment on its Eurobonds, underscores the economic risks that Ethiopia faces due to lacking a robust domestic capital market.

Getting citizens onboard

The launch of ESX is also aimed at giving Ethiopian citizens the opportunity to have a direct stake in their country’s economic prospects. In advanced economies, individuals often engage in the stock market via mutual funds, exchange-traded funds, and direct stock ownership. However, in emerging markets, the rate of citizen participation tends to fall short due to limited financial inclusion.

Sile concedes that the journey towards encouraging Ethiopians to participate in the country’s nascent capital markets will likely be a slow and uneven process, given the vast number of people in the country who are yet to have access to formal banking services.

“Ethiopia has not had a stock exchange before,” Sile points out. A share exchange department within the State Bank closed in 1974 when companies were nationalised.

“More than two-thirds of the population remain outside of the formal banking system,” Sile says, emphasising that boosting domestic awareness of the importance of lively capital markets will be crucial.

This must go hand in hand with efforts to deepen financial inclusion and promote financial literacy. A World Bank survey published in 2021 shows that about 30.5% of adults in Ethiopia had an account at a formal financial institution in 2018/19. While this is an improvement from the 21.8% recorded in 2015/16, the level of financial inclusion in Ethiopia still pales in comparison to neighbours like Kenya, where 90% of the adult population has access to formal financial services.

Ethiopia must also prioritise investments in technology and innovation if its ambitions of building a competitive capital market are to be successful. This includes investments in the technology and market infrastructure underpinning the exchange, such as trading platforms, clearing and settlement systems, and information dissemination mechanisms.

“Having a robust technological solution and infrastructure in place will be critical to avert fears of interference in ESX’s operations, and to give credibility as it starts its operations,” says Sile.

Strong line-up of listings

In the early stages of its operation ESX is set to host listings for at least 50 companies. This pipeline is largely backed by the country’s sovereign wealth fund, EIH, which plans to offer minority stakes in unnamed state-owned enterprises from its portfolio. The exchange is also anticipated to launch trading in equities, derivatives, debt securities, and foreign exchange contracts.

A significant hurdle that could potentially hamper the growth of the exchange is the country’s shortage of key financial industry players, including stockbrokers, investment advisors, fund managers, and custodians. However, as the new exchange becomes operational, demand for these services is expected to rise, which could stimulate growth in these critical areas in the coming years.

Privatising amid macroeconomic challenges

The macroeconomic backdrop in Ethiopia may prove to be a sticking point for some investors. The country’s currency, the birr, has been experiencing a long-term decline in value against major international currencies, most notably the US dollar. This challenge has been exacerbated by persistent foreign currency shortages. Ethiopia’s economy has also been hobbled by persistent droughts and the 2020-2022 civil war between the Ethiopian government and the Tigray Liberation Front, which has cost hundreds of thousands of lives and strained relations with the United States and other Western nations. Ethiopia lost eligibility for preferential treatment under the US’s tariff-free African Growth and Opportunity Act (AGOA) in January 2022 due to its conduct in the war.

The US government’s African Affairs Bureau said in November 2023 that “Ethiopia’s internal conflicts have complicated the pursuit of peace and stability and created an environment where human rights abuses can proliferate.”

But a peace deal was signed to end the war in November 2022, and the IMF expects growth of 6.2% this year.

Banking on the fundamentals

The country’s economic fundamentals – including a 120m-strong population and a youthful demographic – have emboldened officials in Addis Ababa to continue with market-oriented reforms.

“ESX is part of the broader economic transformation and liberalisation programme, which is currently focused on the financial services sector, following the initial liberalisation of telecommunications and entry of Safaricom into the market,” notes Sile.

As part of these reforms to promote foreign participation in the economy, Ethiopia is currently amending existing laws to open up the country’s retail sector, which was previously solely run by locals. Ethiopia also aims to pass legislation to let foreigners own real estate as part of the country’s broader plan to open up the economy and attract investors.

“We will introduce a law which will allow foreigners to own property,” Prime Minister Abiy Ahmed said on state TV late in March. Activity on the new exchange will be a crucial barometer of whether the government has persuaded investors that it is serious about its promises of economic liberalisation.