Ethio Telecom became the first company to list on Ethiopia’s new stock market in October 2024. It was a watershed moment for the country’s nascent securities exchange, although experts warn it will be some time before the platform takes off.
The Ethiopian government had been working for years to launch the Ethiopian Securities Exchange (ESX) as part of a wider programme of reforms to open up the country – whose economy is heavily controlled by the state – to greater private investment.
‘When major state-owned enterprises have listed, private companies will follow’
Hailed as a ‘game-changer’ by the Ethiopian prime minister, Abiy Ahmed, the ESX is expected to reshape the country’s capital markets, attracting foreign investment and new funding streams for local businesses, which could be transformative, especially for SMEs.
‘It will have a significant impact on the economy from many angles,’ says Tewodros Sisay FCCA, who leads Deloitte’s economic advisory practice in Africa. ‘It will have a big effect on financial inclusion and attracting foreign direct investment.’
Some way to go
The listing of Ethio Telecom on the ESX – which saw the government selling its 10% stake preparatory to divesting a further 45% – is the first in what is expected to be a clutch of financial institutions and state-owned enterprises heading to the new exchange. Prospective listers include the Ethiopian Insurance Corporation, and the Ethiopian Shipping and Logistics Services Enterprise. Ethiopian media reports that more than 90 businesses are expected to list on the ESX in its opening weeks, and the platform has already raised around 1.6bn birr (US$13m) in capital.
‘Establishing the governance mindset and readiness will be a challenge’
But Solomon Gizaw Kebede FCCA, CEO of professional services firm HST, warns there is still some way to go before many private, family-owned businesses turn to the ESX. ‘It is a slow process,’ he says. ‘In this country first-mover advantage is not common – they have a wait and see approach for everything. But somebody has to test the water first. When the major state-owned enterprises have listed, the private companies will follow.’
Mindset challenge
The Ethiopian Capital Markets Authority (ECMA) published rules in November on the listing and trading of securities on the ESX that apply to financial statements, governance, prospectus requirements, disclosure and related party transactions. ESX-listed companies must publish annual audited accounts and disclose information on internal controls and risk management. Companies looking to make an initial public offering of stock must also comply with IFRS Standards.
Getnet Haile FCCA, managing partner at Target Consultants, says that ‘establishing the governance requirement, mindset and readiness, along with the cost of establishing that governance structure, will be a challenge’ for the majority of family-owned businesses.
‘Investors won’t have confidence with current audit capacity’
Tewodros, who led the Ethio Telecom listing, says financial transformation ‘is going to be one of the biggest tasks for companies’ and will become a critical part of their internal investment. ‘My biggest worry is that Ethiopian companies are not used to the disclosures, so it is going to hit them very hard because there are so many things required from the shareholders, the board, the management.’
Market makers
ECMA has developed a regulatory framework, but critical gaps still exist in the Ethiopian capital market ecosystem that will make it difficult for the ESX to maximise its potential.
While the National Bank of Ethiopia intends to issue a handful of licences to foreign banks, there are stringent requirements to become a broker, an investment adviser or a market maker. The lack of licensed investment banks and brokerages could also hit companies looking to list.
‘You will need a broker and a market maker to see the demand and supply for those shares, otherwise it will be a challenge to facilitate the market,’ Tewodros says. The market must also be opened up to larger audit firms, he adds, ‘otherwise investors won’t have confidence with current audit capacity. If a foreign investor invested and found out there was an error in the financial statements, foreign investors would be quick to dump the stocks. Capacity building needs to be a priority.’
‘It should be a policy priority to build contractual savings institutions’
Secondary deals
Shares in unlisted Ethiopian public companies do exist but are often sold through unauthorised brokers in the informal market. Solomon says it is better for the ESX to start with this over-the-counter (OTC) market – it has been granted an OTC licence – before it gets to grips with running a full-blown exchange. ‘The secondary market has to continue but through authorised brokers – people are just selling through informal brokers.’
He adds that it will be difficult to run a vibrant stock market without also building strong contractual savings institutions. Otherwise, collecting retail finance from millions of investors may prove expensive because of the huge transaction costs. It could also have a significant effect on the liquidity of the retail banks, he points out, and the use of retail finance for capital market products may not be suitable for fixed income instruments.
‘It should be a policy priority to build contractual savings institutions by encouraging the establishment of private pension institutions and providing incentives for strengthening life insurance companies,’ Solomon suggests. ‘In three to five years it can be vibrant, but all major state-owned enterprises and all financial institutions will need to be listed – and then the private sector.’
