The East Africa’s largest economy, Ethiopia, is just establishing its maiden stock exchange, the Ethiopian Securities Exchange (ESX). The latecomer in the mix of exchanges in Africa, ESX has been undertaking several preoperational tasks, among which includes raising capital.
October has been one successful month for the team behind the ESX, who managed to found the exchange as a share company. The Ethiopian Investment Holdings (EIH) and four of its subsidiary state-owned enterprises signed the founding agreement, taking a 25 percent stake altogether. Prominent names including EleniGebre-Medhin (PhD) and ZemedenehNigatuhave been designated as founding board memsbers, with HilaweTadesse chairing it.
Situated on the garret of Minaye Corporate Complex,a new building by the Africa Avenue, the Exchange secured an extensive trading floor. It is now revamping the whole floor in order to create the stock market environment that incorporates stock brokers, observers, media court and the yet to be gathered its three dozens of staff.
Tilahun Kassahun (PhD) has been serving intop management for over a year and half, since the exchange was formed as a project office. The Reporter’s Samuel Bogale sat down with Tilahun to discuss the developments at ESX. Excerpts:
The Reporter: What is the bigger picture behind ESX?
Tilahun (PhD):This is a good question and a reminder that we shall always consider, as you said, ‘the bigger picture’. We see the ESX as part of the broader capital market ecosystem. Within that ecosystem, the exchange plays a critical role as market organizer and a pivotal institution in creating liquidity for the securities market. It will be a liquidity providing infrastructure.
There are critical institutions that make up the capital markets alongside ESX. The Ethiopian Capital Market Authority (ECMA) is among others, which is the apex regulator playing critical role in investor protection. Its objectives include ensuring that those who seek to raise capital from investors are transparent, and meet certain corporate governance and financial reporting standards.
Other participants include the capital market service providers, who will play a key role in intermediating issuers and investors by giving advisory services, brokerage, auditing, and management of funds, among others. There are also private and government securities issuers with the desire to raise capitals by issuing bonds or selling shares and equities.
These ecosystems have an ultimate objective of filling the unmet need for long term finance to the government and private sector. The Ethiopian economy, in both sectors, requires 40trillion birr in the next 10 years. These needs will be met by foreign sources such as government borrowing or grants, as well as local sources by issuing treasury bills and bonds, or borrowing from banks.
The role of capital markets in this aspect is to become the additional and alternative sources of finance. Bank and other sources of finance will continue to be the primary sources of finance for the private sector, but gradually capital markets can have a significant role. There are individual and institutional investors such as pension funds, who will be on the supply side and put their savings in investable instruments.
How this ecosystem contributes to the national development objectives by filling the unmet gap for the long term finance, is the bigger picture we look. Our one collective goal is to enhance capital formation. In delivering on these objectives, I think it also plays a key role allowing all of us to share from the growth of the economy. That is why listing of certain key state-owned enterprises on the exchange will be useful. It gives Ethiopians across the country, and indeed in the diaspora, the opportunity to contribute and share from the growth of these companies.
The Reporter: What services will you mostly provide?
Tilahun (PhD): Exchanges play a central role in organizing the marketplace for transactions on securities. They are the infrastructure, or you might say the ‘highway’ which capital market flows. They serve this objective by delivering on key roles, which is to be a central platform for the listing, trading, clearing, and settlement. They also play a key role in product and market development.
Taking these objectives into consideration and learning from the experiences of exchanges in other economies, ESX will be organized as an exchange that caters for both,thefixed income and equity markets. We will list government treasury bills, bonds and corporate debt instruments. One key product that will make ESX an innovative exchange will be the interbank money market, which will allow financial institutions to trade on short-term money to meet their liquidity needs.To cater for Ethiopian small and medium sized enterprises, our equity market will be structured into two market segments, the main segment for high cap companies, and an emerging and growth segment to list small and medium enterprises.
The Reporter: Which of your services are going to be entirely new to Ethiopia?
Tilahun (PhD):Well, we think almost everything will be new and unique to Ethiopia. On the debt market side, we will be introducing a secondary market for government debt instruments for the first time. To date,there is no secondary market for trading on these securities while investors participate in the primary market.
It is more or less the same for the equity market as well. Despite an active primary equity market, especially for the financial sector, the secondary market we have today is what other African markets had some 70 years ago. Shareholders often have to wait a long time to buy or sell a security in a secondary market. Once they have a buyer or a seller, they have to physically meet, go through a lot of paper work at the bank shareholder offices, and incur high commission fees.
ESX will be a game changer for this ecosystem. It will create a world-class secondary market for investors through its best listing, trading and membership rules. It will adopt a world class technology that allows its members and their clients to access the market from their computer or mobile devices. There is no doubt that the security and efficiency of securities trading in Ethiopia will dramatically shift as the exchange launches.
The Reporter: Five state business wings have already been signed, how many shareholders do you expect will own ESX overall? What will be the estimated capital of the ESX upon service launch?
Tilahun (PhD):ESX will be a 900 million to one billion Birr capital company as it launches. This figure can increase as the company expands in the next few years. The government of Ethiopia, through Ethiopian Investment Holdings (EIH) and its subsidiaries, has already committed 25 percent of the said capital. We will be raising the remaining amount from the foreign and domestic private sector.
It is difficult to predict the number of shareholders we may have at this stage. But since the offer is a restricted one, only institutional investors are invited in the first phase with minimum investment requirements placed in the offering memorandum, we don’t expect hundreds of investors. The offer by itself is a private placement. Often, these kinds of placements will not have large number of small shareholders.
The Reporter: How big of the exchange’s share can be owned by a single entity?
Tilahun (PhD):This will be determined by the allocation policy of the Board of Directors at the ESX. From interests already indicated to us, some investors are prepared to invest 50 million Birr while some are interested to invest more or less.
At this stage, our main objective is to have as many of the Ethiopian financial institutions to participate as investors on the ESX, and also have a diverse mix of foreign investors such as other exchanges in Africa and beyond.
The Reporter: What powers and privileges would major shareholders like EIH (government) have?
Tilahun (PhD):ESX is established in line with the Commercial Code of Ethiopia. Like any other share company, the shareholders will have typical powers to benefit from the financial profits of the company, appoint or remove directors and auditors of the company, and approve the financial account of the company.
Putting in place the framework for partnership with the private sector, Government of Ethiopia and EIH were also clear about their commitment to have equal playing field in exercising their ownership stake. The government is committed to take only a minority share in the exchange to the extent there is private sector investment. There are no special privileges and advantages reserved for EIH in the establishment documents of the exchange.
In terms of the role of shareholders in determining the day-to-day operations and other forms of interventions in the market, I would like to say that this is highly regulated by the Capital Market Proclamation and regulation issued by the ECMA and the exchange’s own Rule Book. Shareholders can not intervene in the critical market operation decisions of the exchange, as these critical market operation decisions are determined by market committees that are independent and vetted by the ECMA. There is also a lot of control and framework put in place to repel conflict of interest and any intentional and unintentional interference.
The Reporter: Will the exchange list itself?
Tilahun (PhD):Yes. Eventually we think the exchange may self-list on its own market and to allow participation of the broader public as shareholders. This is a matter that will be determined by the future shareholders of the exchange, but it is quite common across the world.
The Reporter: What are the exchange’s major sources of revenue?
Tilahun (PhD):The main source of revenue for the exchange is transaction fees. This will be a source for more than 90 percent of the revenue for the exchange. Other revenue sources include listing fees, membership fees and other areas. With time, the exchange will earn significant revenue from data.
The Reporter: How will you accommodate foreigners wishing to invest in securities?
Tilahun (PhD):Foreign investors will be able to participate in the exchange through intermediaries. This requires the presence of two major intermediaries, local custodians and broker-dealers that will serve as their local agents. We believe we have the relevantregulatory framework for this. However, foreign investors will be keen to invest in the Ethiopian market only when our macro-economic conditions, capital account transfer rules and foreign exchange availability are in the right conditions.
At this stage, we have not come across any policy level conversation to avail exchange convertibility and transferability guarantees to foreign investors. But this is one tool that can be used to incentivize foreign investors to participate in the market.
The Reporter: When do you see yourself engaging in market competition with other Exchanges?
Tilahun (PhD):I think ESX will be a unique and innovative exchange as it launches. Its products and services can parallel and perhaps also leapfrog other exchanges, especially those in Africa. The fact that ESX is a latecomer to the exchange mix, allows it to learn from the mistakes of others and take stock of what is working well in other markets. Within a very short period of time, we think we will reach a market capitalization and liquidity threshold of well-established exchanges in Africa.
