For decades, Ethiopia has been the only major economy in Africa without a securities exchange, but this is set to change as the $156 billion economy gears up to launch securities exchange in the third quarter of 2024. Ethiopia Capital Markets Authority Director-General Dr Brook Taye spoke with Julians Amboko about opportunities in the budding capital markets.
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If you look at many jurisdictions, the way capital markets develop is that we have the market growing first and then the regulator develops next to address the emerging legal and regulatory issues. In Ethiopia’s case, the regulator has had a significant head start. Sceptics argue that this creates room for potential regulatory overreach.
Our unique advantage is that we are a latecomer, and we can take advantage of understanding what has worked in different jurisdictions.
Ultimately, it boils down to one thing — an issuer will come to market if it makes sense, if the pricing is right. So, how do we make that work for Ethiopia? Whenever we design a directive or a regulation, we seek to understand what it will take for an issuer to come to the capital market and raise funding both on the debt and equity side versus them going to the private market.
Based on that, we build the necessary environment so that we make it easy for companies to come to the capital markets. Of course, this will be a learning curve — and we will make mistakes —and the authority stands ready to make adjustments if it sees any difficulties.
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From a timeline perspective, where is Ethiopia currently in terms of the journey to formally launching the securities exchange and when can we expect the first listing of debt instrument issuance?
The Ethiopia Capital Markets Authority has been here for 14 months now, and the important thing for us over this period was designing the regulatory framework, hiring experts and engaging in market outreach, both on the issuers side and the investors side, to make sure that we have a pipeline of products and companies to be listed as well as going down to investors and explaining what opportunities this presents.
At the same time, the Ethiopia Securities Exchange has been established as a legal entity and they are finalising their capital raising with pretty much all banks buying into the exchange which will be a public private partnership where 25 percent will be held by the Ethiopia Investment Holdings, our sovereign wealth fund, and 75 percent will be held by private players.
How far are you with the procurement of the underlying infrastructure?
There are three important technological acquisitions that we need to do. The first is a Central Securities Depository (CSD) platform. We have concluded the CSD acquisition and are now in the process of deploying it both for corporate and government securities. Within the next two months, we can have live operation.
The second is the Automated Trading System and monitoring software and we have just received encouraging response from suppliers, 10 global service providers have submitted their tenders, and we are reviewing that. It’s a two-month process to finalise the procurement and award, which will then allow us to launch the exchange as we have indicated in 2024.
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Ethiopia is venturing into the capital markets at a time when there has been a general decline in popularity of going public in Africa. In 2015, there were 32 IPOs on this continent. By 2019, they were down to nine. In an environment where raising capital via private markets has gained traction, how do you persuade companies to go public?
It goes back to your first question. If the regulatory environment is expensive, no one is going to list. One of the things we are focusing on is ensuring the regulatory environment does not hinder companies from going public. That’s the first and most important thing. Secondly, what is the alternative capital raising for companies in Ethiopia? It’s borrowing from banks.
The fact that there aren’t many venture capital or private equity funds to help finance expansion, then the capital markets become a wonderful proposition. Another thing is that even though listings have not been encouraging in the recent past in Africa, if you look at the debt market it is vibrant.
Of what’s in the pipeline, which are some of the notable ones you intend to kick off with?
The first primary offering will be the listing of Ethiotelecom’s 10 percent stake. We have received their prospectus, and we are reviewing it.
There are five other state-owned enterprises for which we have done an IPO readiness assessment, and it’s very encouraging. We are in discussions with the Ethiopia Investment Holdings to see if it has any interest of listing some of its assets.
There are also privately held companies that have expressed interest in coming into market. We have 30 banks and 18 insurance companies that are in this country, all owned by 400,000 domestic retail investors. Technically, they are already publicly held companies so they can simply do listing by introduction. So, we are excited and, of course, there will be challenges along the way that we will learn from.
Will the debut be an IPO or a debt raise?
When we ring the bell at the exchange for the first time, it probably will be a fixed income raise. On the primary issuance side, it will be an equity issuance and I think it will be Ethiotelecom. I don’t see any other prospect.
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I thought Ethiopian Airlines would be a good candidate for the debut listing. From the little information we have it looks like true investment grade, no?
All of them are good candidates and I think the airline can use either debt or equity to come to the market. As you know, the government owns 100 percent and it’s up to it to make the decision. On our part, we welcome both government and private companies to the market.
How will companies come to raise debt in an environment where there is no sovereign yield curve off which they can get a guide on how corporate issuances are priced?
We will leave the pricing to the market. Right now, if you go to a bank in Ethiopia and try to raise any type of debt it will cost you north of 20 percent and my savings account with the bank is yielding about seven percent.
So, the delta between the lending rate and the borrowing rate is so wide and for me anything above what I get in my savings rate I will buy the debt instrument. For a business, if it is anything less than 20 percent, they will be interested in going to the debt market. So, for any company that comes to raise debt, the market will find that sweet spot for each instrument.
If Ethiotelecom or Ethiopian Airlines comes issuing a debt instrument, of course with the backing of the state, and the fact that these are companies with significant revenues and growth potential, the coupon rate will be much lower.
Ethiopia is a market where there has been mandatory uptake of debt issued by government by commercial banks. How do you exit that regime to an environment where we begin to see issuance of benchmark bonds, which begin to help in the generation of a yield curve to guide debt issuance?
We need to look at this from a wider, macro context. The government is in the process of introducing the second version of economic reform, a three-year programme that that has liberalisation and reform in many different sectors. One part of this is the macro reform that looks into our debt issues, unemployment issues, our foreign currency issues and our major problem, which is inflation.
To address some of the issues that you have raised, we are working with several partners, including the International Monetary Fund, to identify what is not working and how to resolve it, one step at a time. Looking at it holistically, we are headed in the right direction, which is a market-based and addresses the macro challenges.
As you go about setting up the exchange and capital markets, have you seen any appetite from intermediaries from East Africa, whether it investment banks or stock brokerage firms?
Whenever we look at policies, whenever we look at new initiatives the first place that we look at is the Kenyan market. One reason, of course, is proximity and the fact that it is easy for us to understand what worked and what didn’t. When our market opens up — and we were justified by the coming of Safaricom — we are confident that our brothers and sisters from Kenya will be the first ones to take advantage of this opportunity.
I am very happy to tell you that one of the first applications for investment advisory that we received is from an institution that is based out of Nairobi, we are going through their application and will make an announcement very soon.
