Irrational exuberance’ on ZSE

By Special Correspondent

WHEN Alan Greenspan made his famous “irrational exuberance” speech on December 5 1996, markets fell across the globe from Japan, Hong Kong, Germany, London to New York. <
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According to Robert Shiller, who many believe is the man who actually coined the phrase, throughout the 1990s, global markets rose sharply, buoyed by the spirit of prosperity and success that had gripped the United States. For the US, the decade was marked by strong economic growth, benign inflation and strong productivity gains and it was assumed that prosperity in the US would spill over to other developed countries.


The point to make is that the irrational exuberance that Greenspan was referring to occurred against a backdrop of unprecedented growth and prosperity in the US and other developed countries. Can the same be said of the situation on the Zimbabwe Stock Exchange? Clearly not, as our situation is completely the opposite, with a shrinking economy, falling productivity and high inflation. As someone once said: “I have made up my mind, please don’t confuse me with the facts.”


Central bank governor Gideon Gono yesterday opened up on the ZSE, accusing it of irrational exuberance fuelling the parallel market. He proposed measures to bust the stock market bubble.


The governor is correct in saying the ZSE is increasingly becoming a growing source of “imaginary and inflationary” wealth but it is not accurate to equate this with the exuberance that Greenspan was talking about. He was talking about excesses brought on by success and prosperity and not excesses caused by despair and economic meltdown that foster a propensity to gamble and accumulate speculative wealth.


Zimbabwe’s productive base has been shrinking and the supply of quality assets is constantly being depleted due to company closures and lack of new investment. One of the few remaining places where quality assets can still be found is the Zimbabwe Stock Exchange. However, the problem arises when desperate investors are not able to buy shares of quality companies because of a shortage of scrip and end up bidding up share prices of second-rate companies.


Clearly, the problem of an overvalued stock market is not an isolated occurrence but is symptomatic of underlying, structural distortions affecting the entire economy. You do not slow down a car with faulty brakes that is rattling down a steep slope by pulling out the speedometer cable. You have a better chance of survival if you grapple with the brakes which are really the source of the problem. In trying to tinker with the stock market, the RBZ faces the same prospect as the motorist trying to stop a car by pulling out the speedometer cable. In short, more attention needs to be paid to fundamental issues relating to slow economic growth, shortage of quality assets and a yawning foreign exchange gap.


It is interesting to note that the governor concedes that stock market valuations have been stretched by speculation arising from misdirection of cheap money made available through the central bank’s accommodation policy. In other words, the RBZ has contributed in no small measure to the problem that it is now complaining about. Surely, this calls for a reversal of the offending policy and waiting to see if that fixes the problem. Tinkering with other aspects of the system may result in a malady worse than the cure.

The governor also bemoans the fact that over the past 15 months there have been minimum primary issues of shares to benefit capital budgeting programmes of the productive sectors. The question to be asked is whether indeed this should be an issue for the central bank. Primary issues proliferate in a climate of an overvalued market and the existence of profitable investment opportunities. Would the RBZ have been satisfied to see companies raising funds through primary issues and then sitting with bloated balance sheets overburdened by excess cash balances? It would make more sense to work at improving the investment climate, as this would encourage firms to undertake new investments and fund them through primary issues.


It is regrettable if some dual-listed companies on the Zimbabwe Stock Exchange have become conduits for foreign currency externalisation and parallel market dealings as the governor alleges. However, the central bank has the power to change the rules and procedures for dealing in these shares. Stockbrokers would no doubt welcome any changes that safeguarded and enhance the integrity of the local bourse.


Ultimately, unproductive wealth is going to be created, the only question being whether it is created on the stock market or on the money market. That is a function of the economic crisis that we now face. Unlike in December 2003, investors are better prepared to respond to whatever policy changes are made this time around. The situation can only be corrected through a stable macroeconomic environment, attractive investment environment and a stable socio-political environment. The RBZ ought to have an idea of what things they can control and influence and what they cannot. At present, it does not appear to know the difference.


* The writer is a leading Harare-based stockbroker.