Ethiopia Commodity Exchange Mulls Adding Stock, Bond Trading

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By William Davison, May 8, 2015
ecx_traders_on_the_floorThe Ethiopia Commodity Exchange plans to broaden the range of crops it trades and wants to introduce stocks and bonds under a five-year expansion plan, Chief Executive Officer Ermias Eshetu said.
The market plans to move from coffee and sesame seeds, which account for more than 90 percent of volumes and are the two biggest generators of foreign exchange in Ethiopia, to sugar and grains such as corn, Ermias, who became CEO in January, said in an interview. Equities, government debt, power and metals may also be added on the bourse, which traded 26.2 billion birr ($1.3 billion) worth of goods last year.
“We want to be a marketplace for any kind of stock, be it derivatives, agricultural commodities, financial instruments,” Ermias said on April 30 in the capital, Addis Ababa. “That’s the ultimate vision,” he said, adding that formal discussions have yet to begin on trading securities.
The commodities exchange started in 2008 with the support of donors including the U.S. government’s aid agency and the United Nations to improve the efficiency of food markets in a nation where millions regularly went hungry. Within a year, it became the main route for coffee exports in the continent’s largest producer of the beans after the state decreed traders must sell to exporters at the bourse.
Ethiopia allocated 162 billion birr in a five-year plan that ends in July to upgrade its infrastructure including roads and power plants to improve the efficiency of its markets.
Hydropower Dam
The Export-Import Bank of China is funding a railway along Ethiopia’s main trade route to neighboring Djibouti’s port, and a nationwide network of 4,744 kilometers (2,948 miles) is planned. Chinese state banks are also investing in sugar processors, while Ethiopia is funding Africa’s biggest power plant on the Blue Nile river that’s designed to generate electricity for export.
During a government five-year plan starting in July, the state-run ECX will begin serving 24 so-called “agro-centers” that will have increased storage and warehousing facilities and improved transport links, said Ermias.
“With the two components, logistics and scalability, we will be able to introduce multiple commodities to the market,” he said. “ECX must offer the truly transparent marketplace for anything that’s going on in the Ethiopian economy.”
Ethiopia is expected to be sub-Saharan Africa’s fastest-growing economy this year after the Democratic Republic of Congo, with growth forecast at 8.6 percent, according to the International Monetary Fund. The Horn of Africa nation sold $1 billion of Eurobonds in a debut issue in December.
Portfolio Investors
The economy is state-planned and driven, though the introduction of the ECX, along with the sale of Eurobonds and discussions about a secondary debt market, point toward an “increasingly capitalist orientation,” Alan Cameron, economist at Exotix Partners LLP, said in a research note.
“The major question for portfolio investors is how long will it take Ethiopia to open up?” Cameron said. “The official rhetoric suggests five to 10 years, yet the view from inside the business community is more like two to three years.”
The government is establishing an enterprise to oversee the upgrading of warehousing, which will rely on a mixture of public and private capital, said Ermias, a former executive at Addis Ababa-based Zemen Bank. Donors including the World Bank and Bill & Melinda Gates Foundation are considering supporting what will require “huge investment,” he said.
The ECX has the capacity to expand beyond agricultural commodities within 12 months, said Yohannes Assefa, the director of Stalwart Management Consultancy, a Dubai-based group working on Kenyan and Tanzanian exchanges.
Robust Platform
“The existing platform is robust and the regulatory system is mature and well managed,” he said in an e-mailed response to questions on Wednesday.
The ECX can overcome obstacles to trading financial products aside from government regulations, which “may require serious internal consultation before a change of policy,” Yohannes said.
Coffee exporters including Fekade Mamo, general manager of Addis Ababa-based Mochaland Import and Export, have criticized the ECX for not allowing futures trading to hedge positions in a volatile global market. While the ECX plans to introduce futures, farmers first need insurance options in case they can’t deliver, better access to credit and the strengthening of the legal system, Ermias said.
“We don’t see it in the next year or so,” he said.

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