Ethiopia eyes bond trading in cautious capital markets opening

Addis ababa, Ethiopia (Capital Markets in Africa) — Ethiopia is seeking to create a secondary market for local currency Treasury bonds, possibly in a year or so, a move seen as a cautious step towards liberalizing one of Africa’s fastest growing economies.

Ethiopia has become an increasingly attractive destination for foreign investors although the government tightly controls what sectors they can invest in.

Prime Minister Hailemariam Desalegn said last month that Ethiopia was open to opening a stock exchange but said that this would take time. A commodities exchange does operate in Ethiopia, the Ethiopia Commodity Exchange (ECX), which was established in 2008.

A spokesman for the central bank, the National Bank Of Ethiopia, had no immediate comment when asked about the plan.

The opening of a secondary bond market could help the state keep up the pace of its ambitious infrastructure investments, which have pushed annual growth to about 10 percent and built new roads, railways, and dams.

A secondary bond market could be launched in about a year but foreigners would most likely be barred.

Foreigners are already blocked from investing in banks or retail, while the telecoms industry is a state monopoly.

Investors in Ethiopian Treasury bonds are mostly state institutions which keep the debt to its maturity, which means the government has firm control on setting interest rates. The last transaction made on the interbank market was in 2008.

Under plans for a secondary bond market, the price of traded debt would be driven by market forces not only the central bank.

However, there is no sign that other financial restrictions would be lifted. Banks must now invest the equivalent of 27 percent of their loan portfolios in low-yielding state bonds, used to fund development.

A secondary bond market, where market rates prevail, would expand the pool of funds for the government to tap by drawing in a broader range of private investors beyond the banks.

Last year, Ethiopia tapped the international bond markets for the first time with a $1 billion Eurobond.

The prime minister said in May, during a vote in which his EPRDF coalition extended its quarter century in power for another five-year term, that he did not rule out setting up a stock market but businesses need time to mature.

“What matters is that you should have a strong private sector before having a stock market,” he said.

Source: Reuters Africa Online Business News