Ethiopia aims for stock exchange by 2020

Ethiopia has set itself a tight timetable for economic reform, including privatization of telecoms by the end of 2019 and a domestic stock exchange by 2020. A World Bank team was due to arrive in Addis Ababa in December to provide technical help to develop the capital market.

Last week Financial Times repeated the timetable in an interview with Prime Minister Abiy Ahmed, given to FT Editor Lionel Barber and Africa Editor David Pilling, billed his first one-on-one international media interview. Prime Minister Abiy told them: “My economic model is capitalism… If you give me $100bn now, I can’t use it. There is not only money, there is talent and experience. That’s why we need the private sector.”

The Reporter newspaper in December highlighted a “one-page template issued by the Office of the Prime Minister”, which “cited poor financial infrastructure, limited financing and poor financial inclusiveness as the major impediments in the finance sector. The government plans to develop a road-map for introducing a trade financing instruments including capital market. Increasing loans to the private sector by 20 percent annually and ensure its fair disbursement and expanding credit registry to micro finance institutions are the key areas that will be addressed in 2019, according to the document.”

Reporter Kaleyesus Bekele highlighted debates at the third East Africa Finance Summit on 18-19 December, 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 has a commodity exchange and regulator, new regulator needed for capital market

Financial analyst Abdelmenan Mohammed was reported as saying 2 years is a tight timetable to build financial and technological infrastructure, including improvements in auditing.  Although the Government enacted a proclamation that compels local businesses to adopt International Financial Reporting Standard (IFRS) and has established an Accounting and Auditing Board, Abedelmanan says progress is slow: “Not many companies are adopting IFRS and the board is not yet strong enough to oversee that. How can we have a stock exchange where there is no reliable accounting information?” However, Zemedeneh, former Managing Partner of EY Ethiopia, said that the banks and insurance companies have adopted IFRS and other companies and government entities are moving towards it. “That is a start.”

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

Other steps highlighted by the FT in a follow up news story 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 liberalisation… 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.

“Mr Abiy said that earning cash from a state monopoly was less important than launching services such as electronic money, e-commerce and virtual government, in which African peers such as Kenya are more advanced.

“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.

“Miguel Azevedo, head of investment banking for Africa at Citibank, said: ‘When I speak with international investors about opportunities in Africa, the first name that pops up is Ethiopia.’

“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.”

Full interview

Read the full interview with Abiy Ahmed here: Commentary by FT: “Mr Abiy’s emergence has unleashed opportunity and danger in equal measure. Some fear that rapid liberalisation could spin out of control, leading to anarchy or violent ethnic separatism.”

Ethiopian Prime Minister Abiy Ahmed

Describing himself as “capitalist”, he nevertheless cites Meles as saying it is the government’s job to correct market failures. “The economy will grow naturally, but you have to lead it in a guided manner.”

Still, unlike Meles, Mr Abiy is less wedded to the idea that the state must control the economy’s commanding heights. He is moving swiftly towards privatisation of the telecoms sector in an exercise that should raise billions of dollars, as well as modernising a network that has fallen badly behind African peers.

Here too there are risks. “I need to realise the privatisation with zero corruption,” he says, adding that people who have stashed money abroad want to launder it back into the country.

Successful privatisation of telecoms could potentially lead to a similar exercise in energy and shipping, as well as sugar refineries and, most controversially, the successful national airline that has turned Addis Ababa into a continental hub. Mr Abiy says that, for the moment at least, he draws the line at banking.

“The biggest challenge for Abiy is not politics. It is jobs, jobs, jobs,” says Zemedeneh. With 800,000 students in university or college and 2.5m Ethiopians being born each year, lack of opportunity could quickly catalyse unrest, he adds.

The stock exchange will be a critical component of building domestic savings and capacity in Ethiopia’s private sector so that Ethiopians can take charge of their future, see previous opinion article on this blog. The World Bank has pledged $1.2bn to supporting financial sector growth in Ethiopia.

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