Ethiopia: Can securities exchange breathe new life in parastatals?

Zawya

5 days ago

Ethiopia has finally lost its status as the most populous country in the world not to have a stock exchange. After years of prepa- ration, the Ethiopian Securities Exchange (ESX) was finally launched on 10 January 2025, but this is only the begin- ning of the story as just a single company was listed.
Initial public offerings (IPOs) in many state-owned companies are expected, but Ethiopian Investment Holdings (EIH) hopes to improve the commercial perfor- mance of less efficient ones before seeking to sell stakes in them. (See page 20.)
Investment of $11m was needed to launch the bourse and by April 2024, the ESX announced that the issue had been oversubscribed, with $26.6m offered by domestic and foreign investors. State- owned EIH and its offshoots Ethio Telecom and Commercial Bank of Ethiopia now hold 25% equity, with the remaining 75% held by private sector investors, including 16 of the country's commercial banks, 12 insurance firms and three foreign inves- tors – FSD Africa, Trade and Development Bank and the Nigeria Exchange Group.
It was originally hoped that the ESX would begin operating in October but the launch was eventually pushed back to January.
Wegagen Bank was the only company to list at launch but ESX chief executive Tilahun Kassahun expects 90 compa- nies to join within 10 years. Previously privately-owned, Wegagen is a mid-sized bank but one that has grown strongly in recent years. In the fiscal year 2023-24, it recorded a 40% increase in revenue to 9.8bn birr ($75.9m).
The country's original stock exchange was closed down during the 1974 revolu- tion but creating a new bourse was one of the main planks of the current govern- ment's economic reforms. Ethiopian Prime Minister Abiy Ahmed described the move as a 'major step toward modernising the country's financial sector'. Brokers and dealers are now able to apply for licences.
The delay in launching the ESX may have been because the sale of a 10% stake in Ethio Telecom was scheduled to close on 3 January, which would have enabled it to join the exchange.
The Ethio Telecom shares are being sold exclusively to Ethiopian citizens via the company's TeleBirr mobile money platform. However, the opening of the ESX came and went without any mention of the domestic telecoms giant, apparently because it had failed to secure sufficient interest in its 10% stake by that date, with the deadline extended until at least 14 February.
In addition to the delayed listing, the government failed to attract a foreign investor for a 45% stake in Ethio Telecom last year, with potential suitors perhaps deterred because the deal would still have left the government with a controlling share. However, once the 10% IPO com- pletes, buying a 45% stake may seem more attractive to foreign operators because it would end the government's majority stake. Ethio Telecom is one of the coun- try's more profitable parastatals, record- ing a profit of 21.8bn birr ($184m) for the year to July 2024.
In a statement, the ESX said that it would be 'a key component of Ethiopia's financial sector reform, aimed at foster- ing economic growth and development by enabling companies to raise capital and offering investment opportunities to the public'.
The government hopes that the ESX will support privatisation plans and rebal- ance the economy more in favour of the private sector. Yet while Ethio Telecom is expected to join Wegagen Bank sooner or later, it must be joined by many more other companies before the new exchange is considered a success.
Which companies will be listed?
The big question is how many of the 27 state-owned companies that have been under the stewardship of EIH since De- cember 2021 will actually be listed. As the new EIH chief executive Brook Taye explains on page 20, his company is fo- cusing on reforming state-owned enter- prises in the short term to make more of them commercially viable. However, this is likely aimed at preparing many of them for listing, as the EIH has been tasked with attracting foreign investment.
Officials have said that some companies will be wholly privatised, while minority stakes will be sold in others. Ethiopian Airlines is the jewel in the crown and would undoubtedly attract huge investor interest but it is already profitable and a national success story, so the government may decide to keep it entirely under state ownership. Even if it is partly privatised, the government will be keen to time the sale to secure the best price.
Ethiopian Insurance Corporation, Ethi- opian Shipping and Logistics Services Enterprise and Berhanena Selam Printing were named as founding members of the exchange at its launch. Although they are not yet listed, they are expected to be among the first state-owned companies to seek a listing.
Stakes could also be sold in loss-mak- ing companies in the power, transport and food sectors to help put them on a more commercial footing but they are likely to be of less interest to potential investors.
The government sees many of them as providing a public service rather than solely as commercial enterprises, and may be reluctant to turn them over to the private sector. Their profitability is unknown but it seems likely that many are currently generating losses rather than profits, particularly while having to operate in subsidised sectors.
Economic context
The launch of the ESX has followed the pattern of general government economic policy since Prime Minister Abiy Ahmed came to power in 2018. There has been a gradual process of economic liberalisa- tion, including in the telecoms and finan- cial services sectors, with Kenya's Safa- ricom winning the country's first private telecoms licence in 2021. Yet the pace of change has been slow and subject to huge shocks, including the Covid-19 pandemic, the 2020-22 war in Tigray and armed conflict elsewhere in the country.
These factors contributed towards a sovereign debt crisis that culminated in the suspension of debt repayments to China in August 2023 and then default on Ethiopia's $1bn Eurobond after it missed a $33m payment. However, Addis Ababa reached an agreement with the IMF to implement further economic reforms, including allowing the birr to float in July 2024, in return for $3.4bn of IMF financ- ing that allowed the country to begin re- structuring its debt.
The four-year IMF programme will also require reforms in monetary policy, the management of state-owned en- terprises, tax structures and financial services' regulations. The sale of stakes in parastatals would further help Ad- dis Ababa strengthen its finances but it must time any IPOs carefully in order to secure the most revenue. Waiting until its economic position improves and putting more distance between the debt crisis and any sales could help increase valuations.
Ethiopia's position as one of the world's fastest-growing economies, with average annual economic growth of almost 10% between 2004 and 2020, should make it an attractive investment destination. At the same time, its population of 130m is set to increase to 225m by 2050, providing a huge market for potential investors. Yet a change in corporate culture and regula- tory requirements would greatly help to attract investment and interest in the ESX, as some Ethiopian companies currently fail to offer the financial transparency common in other markets.
It will be interesting to see how many other companies are listed over the course of this year but privatising state owned companies, even in part, is not a panacea for economic improvement. The govern- ment needs to instil more confidence in investors if it is to attract sufficient inter- est in Ethiopian companies. It is therefore understandable that the EIH is reluctant to sell off assets too quickly because a rushed process could undervalue them.
Yet a stock exchange with a single component, or even just a handful of companies, will hardly be a ringing en- dorsement of Ethiopia's attractiveness as an investment destination. n
The big question is which of the 27 state-owned companies under EIH's stewardship will be listed. EIH is likely preparing many for the process.
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