THE recently held parliamentary elections captivated people from all walks of life, and investors were among those eagerly awaiting the outcome.
With elections co
me the possibility of a change of government, and with a change in government comes the possibility of a change in economic policy, as well as other policies which could directly or indirectly impact on the investment markets. It is therefore no wonder that activity on these markets in the period preceding the election was to some extent influenced by these expectations.
While many people expected some change in the balance of power, it would not be amiss to say that the eventual outcome was not anticipated by most people. However, now that it is out (and there does not seem to be any serious challenge to the results for now), it is important to try to determine the likely future path of the financial markets.
Given that the ruling party has retained power, it is likely that the economic policies that were in place prior to the election will remain in force. Their main aim from an economic perspective has been to reduce inflation. Interest rates and money supply have been key components of this battle.
The Reserve Bank appears to have hit a wall in terms of reducing interest rates as originally planned, as inflationary pressure has emerged, forcing it to maintain the same accommodation rate effected in January, instead of following the gradual decline outlined in the fourth quarter monetary policy.
The central bank also needs to raise at least $15 trillion from the domestic market to finance the budget deficit and the Parastatals, Local Authorities Reorientation Programme (Plarp).
The change from the 91-day to 365-day instruments for open market operations has met with strong market resistance, therefore the Reserve Bank has either to reverse this change, come up with a way of coercing market players to accept this long paper or offer more attractive rates. It is unlikely that the RBZ would resort to printing money. But if it does, this would impact negatively on inflation due to an increase in money supply against a declining production base, thereby defeating the primary goal. Whichever way one looks at it, the chances of interest rates hitting 70% by June are very remote, and borrowers can expect to be faced with the same high cost of money for some time to come as this is determined by the RBZ’s accommodation rate, while investment rates will continue being negative for investors because of the lack of suitable, high-yielding paper.
Another key factor is the availability of foreign currency. With the foreign exchange auction currently meeting only about 8% of the country’s official requirements, it is clear that something needs to be done to augment the current supplies.
Exporters have attributed their declining productivity to an unviable exchange rate (which is understandable given that the auction rate from inception to date has depreciated 44,9% against an inflation rate of 173,8% over the same period). But even if this situation was rectified immediately, the magnitude of the disparity between bids and supplies clearly shows that the country would still not be able to meet its foreign currency requirements, even after taking into account the fact that a major portion of the current bids are “carryover bids”.
This does not take into account non-qualifying foreign currency requirements, and financing of government’s deficit, which would best be done via external funding, as opposed to crowding out the local private sector.
Taking into account all the above factors, it appears that the money market is the least attractive option for investors, given negative interest rates and the long tenor of the available paper.
Stock market performance is likely to be mixed, with those counters dependent on borrowings and foreign currency, or those having relatively elastic demand for their products finding the going tough, while those not reliant on borrowings or imported inputs, and having stable, relatively inelastic demand for their products will weather the storm better.
Having said all this, it is interesting to note that the ruling party, inspite of having the long-sought-after two thirds majority, is showing the clearest signs yet of engaging the opposition on a more constructive basis. Should pride and egos not get in the way, such an approach is probably in the best interests of the country as a whole, as it could result in the re-engagement of multilateral donor agencies, which would go a long way towards addressing the biting foreign currency shortages, as well as reducing pressure on the domestic money market should government be able to obtain foreign funding for its capital projects. This would probably only happen in the medium to long-term (two to three years). But for now, investors are better off looking for fundamentally solid stocks. Our website, www.adway.co.zw has more specific stock recommendations.