Zimbabwe has over the years made headlines for many reasons politically and economically. The country has undergone severe hyperinflation, dollarization, de-dollarization, and recently pseudo re-dollarization. The capital markets have not been spared by this financial rollercoaster as evidenced by the little financial capital raised on the Zimbabwe Stock Exchange. Plans are at advanced stages for a new bourse to be based in Victoria Falls.
Understanding Zimbabwe’s Currency Matters and its impact on stocks
At the height of Zimbabwe’s economic crises, ordinary citizens became poor trillionaires and many corporates shut down or halted operations as they failed to cope with the situation. In 2009 the introduction of the multicurrency regime ushered in a period of stability that saw relative economic progression.
Companies and individuals could plan and work towards specific targeted goals that had been impossible in the hyperinflationary period. The multicurrency regime was abandoned in 2019 in favor of a new quasi–currency the RTGS popularly known as the “bond note”. After de-dollarization, the US dollar balances in bank accounts were converted into RTGS that triggered a significant loss of value and renewed inflationary pressures.
By October 2019, year–on–year inflation had risen to 403%. There was a general lack of faith in the new currency resulting in a thriving black market for access to foreign exchange. As a result, Zimbabwe’s exchange rate galloped beyond the control of the authorities and even monetary policy ceased to have much effect, as most available free funds circulated outside the formal economy.
Black market rates determined the prices of goods. On the stock market, investors and speculators alike used an exchange rate determined by the price at which fungible stocks were trading on other foreign exchanges. This rate of exchange, dubbed, the old mutual implied rate was commonly used in favor of the official exchange rate.
Given these currency issues and many other challenges in the country, there was a steep decline in much needed foreign direct investment. In a bid to arrest the runaway black-market rates, authorities resorted to temporarily stopping the use of mobile money and suspended trading on the Zimbabwe Stock Exchange for over a month.
The Rationale Behind The Victoria Falls Stock Exchange
The idea behind The Victoria Falls Stock Exchange is to harness capital in foreign currency terms. The exchange is now licensed by the Securities Exchange Commission Of Zimbabwe and is set to become operational once modalities have been fine-tuned.
The new exchange is expected to attract global players and foreign investors, a necessary step towards bringing in more foreign currency inflows to Zimbabwe. A lack of currency stability has hindered business initiatives thus far. Foreign inflows slowed to 280 million in 2019 from 745 million in 2018.
The exchange rate issues coupled with the difficulty in the repatriation of funds have been major hindrances to drawing foreign investors into the Zimbabwean capital markets. The newly licensed exchange is expected to renew investor appetite for Zimbabwe.
The Minister of Finance, Mthuli Ncube, has said that the government plans to create an international financial center in Victoria Falls. The exchange is mulled as the first step towards that agenda.
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The Victoria Falls Stock Exchange
The VFEX is currently a wholly-owned subsidiary of the Zimbabwe Stock Exchange but there are plans to seek equity partners. Stock exchange players including members and non-member institutes have expressed interest in the new exchange. It is set to operate from Victoria Falls with the hope of creating an international financial offshore center in the tourist resort area popularly known as the home of the 7th wonder of the world.
The country’s main regulatory body, the Securities Exchange of Zimbabwe has granted a license to VFEX to operate as a stock exchange. Statutory instrument SI 196 OF 2020 establishes exchange control provisions for the exchange including exclusive trading in foreign currency as well as offshore settlement of funds among others.
Companies listed on the Zimbabwe Stock Exchange may list on VFEX not more than 20 percent of their capital at any point on the ZSE. Zimbabwe resident companies not listed on the ZSE can list on VFEX if the capital raised by the company on the exchange is from an offshore source or free funds. The Vic Falls-based exchange also provides for the listing of non-resident companies provided that any capital raised on the planned securities exchange is obtained from an offshore source or from free funds.
Implications of The VFEX On The Economy
The currency volatility in the country has compromised the value of investments. Foreign retail and large–scale investments have shied away from the capital markets in Zimbabwe owing to this. The VFEX is expected to address these currency instability challenges and allow for value preservation to attract more capital into the country.
Zimbabwe needs a boost to the productive sectors of the economy. Foreign currency-denominated capital is desperately required to jump-start the economy that is still reeling from years of instability. Strides have been made to try and address the negative trade balance such as the Buy Zimbabwe campaign which saw a positive balance of trade in the last quarter of 2019. However, there is still a long way to go to boost trade and commerce within Zimbabwe. It should also be noted that these statistics may not be a true reflection of the situation. The introduction of the statutory instrument 64 may have resulted in more smuggling of imported goods circumventing the official channels judging by the imported products available on the unofficial market (street and door-to-door grocery vendors).
Industry in Zimbabwe is still mostly operating with archaic machinery and outdated processes increasing the cost of production significantly. It has been estimated that Zimbabwe needs over $8 billion to resuscitate an ailing industry to bring production to a level of international competitiveness and export capacity. The VFEX is anticipated to attract the much-needed foreign currency to Zimbabwe to inject life into industry and commerce.
The protracted economic challenges have led to mass migration out of the country by young people in search of greener pastures. Many Zimbabweans are residing outside Zimbabwe legally or illegally to escape the harsh economic conditions. The majority of those “diasporans“ are looking for opportunities to invest back home. The only viable option available thus far has been real estate. Which explains the booming real estate industry in the country despite the lagging economy. The emergence of the VFEX would enable the diaspora to invest back home and give portfolio diversification options.
For local stock market pundits, the VFEX would provide a means to unlock and preserve value in hard currency which has been difficult in local currency.
Fungible shares such as Old Mutual, PPC which are still suspended from trading will have an opportunity to list on the VFEX allowing restoration to shareholder value.
It remains to be seen if the VFEX will fulfill the value unlocking expectations. Some analysts have expressed concerns over the viability of the IFC in Zimbabwe. There has generally been a fair bit of political rambling in nearly all sectors of the economy. For the VFEX to achieve its goals it needs to be able to operate freely in terms of remittances and expatriation of funds. The extent to which this is possible in Zimbabwe remains unclear. A low level of regulation is the only option.
Further, the policy inconsistency in the country hinders the opportunity of fertile ground for investments. The level of political risk may in itself be too high to allow for the attraction of investment.
The jury is still out on whether the establishment of the VFEX will bring the economic reprieve and progression of capital markets desperately needed by the Zimbabwean economy, suffice to say it is a step in the right direction.