Ethiopia is the largest country in the world with a closed capital account and a functioning capital market. The current underdevelopment of its capital markets starkly opposes the vibrant money and securities market during the 1960s under the Share Dealers Group. The group was a network primarily composed of large banks such as the Commercial Bank of Ethiopia, Development Bank of Ethiopia, Addis Ababa Bank, and other private companies and individual investors. The increased transaction of financial assets prompted the state bank to formalize the Share Dealers Group and the National Bank of Ethiopia opened a department that oversaw its operation under its board chairmanship. Through the market, various entities were able to sell their shares to the public and had access to short-term capital by using equity securities as collateral. However, the group ceased to exist in 1975 following the nationalization of most of the member companies, stymying the development of the financial infrastructure.
It took the country another half a century to reinstitute a similar market dynamic; share companies started emerging after the 1990s’ economic reform that allowed private sector engagement in banking, insurance, and other financial services. But the resurrection had its peculiarities; companies use their own offices to issue shares to the public, limiting market efficiency and the development of a secondary market. The efforts to establish a formal stock exchange failed to materialize until the reforms in 2018. But, following Prime Minister Abiy’s (PhD) administration taking office, talks of capital markets began to resurface. In an effort to place more emphasis on private sector development, the government issued the first proclamation establishing the capital market authority in 2020. Furthermore, the government managed to expand the participants of its money market beyond the national pension fund to also include banks and other large private players. To have a functioning capital market, the development of the Ethiopian Securities Exchange is the missing piece that will revitalize the country’s financial infrastructure.
The trend shows that the country has a sufficient backlog of investment opportunities and capital to jumpstart a functioning capital market and securities exchange if implemented properly. A functioning capital market needs three main players which are active investors, diversified companies that will be listed, and different intermediaries such as brokers, dealers, and investment banks. On the demand side, there is a growing middle class with the potential and interest to engage in a securities market—the number of citizens owning bank shares has been steadily increasing throughout the years. Furthermore, the updated mandate of the Ethiopian Pension Agency allows its participation in the equities market, unlocking investments from the nation’s largest holder, with roughly ETB170 billion in annual outstanding balance. A fraction of investment from the fund in the securities exchange will have a big impact on the liquidity and performance of the securities exchange.
On the supply side, Ethiopia’s growing financial institutions, including private banks and insurance companies are primary potential listees. To a lesser extent, a handful of private companies in other sectors such as real estate, construction, and beverage are also eligible candidates. Perhaps the most anticipated set of listings on the exchange, however, will be companies owned by the government including the Commercial bank of Ethiopia (CBE), Ethio telecom, Ethiopian Airlines, Ethiopian Shipping, and Logistics Enterprise—the commanding heights of the country’s economy. It is expected that the Ethiopian Investment Holdings, a sovereign wealth fund tasked with consolidated management of the nation’s most profitable state enterprises, will restructure them and privatize a portion of them to the private sector. Privatizing a small portion of these companies and listing them in the exchange will not only increase diversification opportunities for investors but also provide credibility to the exchange and incentivize foreign investments. For instance, CBE with a capital of more than ETB50 billion controls a third of the banking sector’s capital. Thus, even a fraction of CBE’s share in the securities exchange will avail a large number of shares for the public to choose from.
The third and final piece of a thriving capital market, the presence of knowledge-driven market movers, is already under formation. Various private and non-governmental organizations such as FSD, PwC Nigeria, and Standard Bank are involved in training personnel and helping shape directives for the Capital Market Authority. Furthermore, NBE is working to develop capital market literacy through training and workshops to equip the sector’s brokers, investment analysts, and bankers.
By utilizing its local resources and learning from the experiences of other countries, Ethiopia has the potential to host one of Africa’s financial hubs. Experience from African countries shows that lack of liquidity—measured in terms of a very low turnover ratio—is the main challenge for many stock exchanges around the continent. Low liquidity means that it is difficult to support a local securities exchange with its own trading system, market analysis, brokers, and the like because the business volume is small. This is due to stringent regulations, lack of online trading, lack of stock market visibility, and, most of all, too few listed companies.
Like other African countries, the country’s potential comes with certain uncertainties. There are many issues, particularly regarding liquidity and diversity of the investment universe that should be addressed for the opportunity to materialize. First, the lion’s share of the country’s financial sector is dominated by the state-owned Commercial Bank of Ethiopia. This means the stock market’s activity will largely be influenced by CBE’s level of participation. Second, the government’s suspension of Ethio telecom’s privatization can create lags in its participation in the securities exchange. Finally, although heavily implied by the government’s development strategies, there still hasn’t been clear confirmation of whether the most profitable state enterprises will be privatized and listed on the exchange. Despite all the above details that are yet to be solidified, Ethiopia’s strong asset base, under the private and public enterprises and growing economy, has provided the initiative with a strong foundation to unlock its vast economic potential through an active capital market and fast-track wealth creation by the private sector.
10th Year • May 2022 • No. 107