For over five decades, Ethiopia held the dubious distinction of being Africa’s second most populous nation and one of the fastest-growing economies without a stock market.
On January 10, it shed the tag with the relaunch of the Ethiopian Securities Exchange (ESX). For Prime Minister Abiy Ahmed, ringing the bell to mark the opening of ESX was a momentous occasion and another feather in his philosophy of economic liberalization.
So far, ESX has one listing, by Wegagen Bank. The bourse is optimistic of at least 100 listings in the next 10 years. It will serve both as a channel for privatizing state-owned enterprises, starting with Ethio Telecom, and raising capital for businesses. To encourage listings, the government is offering tax incentives and easing regulatory bottlenecks.
The ESX relaunch comes after critical reforms like opening the banking sector to foreigners and forex floating.
“The ESX offers the private sector a solid platform to raise capital at significantly lower costs,” says Pragma Investment Advisory CEO Mered Fikireyohannes.
Ethiopia has operated without a strong mechanism for equitable access to capital and liquidity, according to FSD Africa, which helped in setting up the ESX. Most obvious was the inability by banks to effectively lend to each other due to lack of an interbank trading platform. This highlighted inefficiencies in liquidity management and high interest rates for borrowers, particularly SMEs.
Tackling the constraints of cheap and long-term financing will be a game changer for businesses. By creating a platform for initial public offers, rights issues, private placements, corporate bonds and other innovative financial instruments, it means businesses will be able to attract capital from a wide pool of retail and institutional investors, both local and foreign.
Also, the injection of dynamism in the debt market will see less scrabbling for credit in the domestic market. Currently, Ethiopia’s stock of domestic debt stands at $40 billion, 59% of total public debt. This indicates the government has been a big factor in crowding out the private sector from the credit market, in the process instigating high interest rates.
