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When it Opens, will it Still be the Same?

IT is hardly a week before the stock market marks its third month of inactivity.

Few people could have anticipated the market impasse to remain unresolved up to this day. While discussions are being made for resumption of trading, the processes seem to be dragging at a snail’s pace.

The recent dollarisation, or is it multi-currencying   of the economy added to the problems holding back activity on the Zimbabwe Stock Exchange (ZSE).

Both the monetary and fiscal policy statements, announced recently, allowed the use of multiple currencies on the ZSE. For many, the idea of earning US dollars on their equity investment is a welcome development.

All they want to know is when the market is going to open so that they could realise their gains.

What is deplorable, though, is the introduction of new charges on share transactions. In its wisdom, the central bank announced a 1,5% financial sector levy on equity trades. Concurrently the MPS declared that 3,5% of the sale proceeds shall be liquidated to central bank at the interbank rate.

This was well in line with the economic policy thrust of collecting as much foreign currency as possible for the Treasury from every source imaginable. It would appear that little attention was paid to the adverse impact these directives would have on the market.

The proposed new charges on share transactions make the ZSE one of the most expensive exchanges in the region and possibly globally.

Added to the current charges which include stamp duty, brokers’ commissions, VAT and capital gains the total transaction costs amount to about 17%. In comparisons the regional average is around 2%. The exorbitant costs will put off potential investors who would rather invest in less risky markets.

The increased charges would not have been an issue if trading was to remain in Zim dollars under hyperinflation conditions.

This is because prices were rising by on average 100% per day which would more than compensate for the high charges. Not so with US dollars. Share prices do not easily and quickly rise up by 17% in US dollars even in stable economies, let alone in Zimbabwe.

In 2006, for instance, only the Dow Jones grew by about 17% while other indices such as the FTSE100, Nasdaq and the Nikkei 225 rose by between 6%-11%. The following year, the best performing amongst the big four indices was the Nasdaq at 9,81% while in 2008 the quartet suffered losses of more than 30%.

To then expect the ZSE to rise up by 17% before an investor could sell for a profit would be folly. The economic fundamentals remain negative and the political risk remains high even as an inclusive government is being formulated. Besides the country has stringent exchange controls which distract potential foreign investors who are easily accommodated in more investor-friendly countries in the region.

Another thing that seemed lost on the policy makers even as they dollarised the economy is that there are not many US dollars in the economy. Maybe, they misconstrue the long queues at selected Spar supermarkets as a sign that the economy is awash with forex. Nothing could be far further from the truth.

For starters, the average basket at those shops is hardly US$20. Besides the regular customers seen pushing trolley-full of groceries, many people just come to buy basics such as mealie-meal, cooking oil and sugar intermittently. 

These supermarkets are better stocked than their main competitors thereby prompting people to travel from across town to access desired commodities. Traffic is low in most shops that are not as stocked as the Spars.

With many struggling to raise the little foreign exchange to pay for basic necessities, it is inconceivable to expect them to save let alone invest on risk assets such as equities. Previously, they would invest on the ZSE because it was the only sector which was still accepting Zim dollars.

At the same time, corporates saw the market as a means through which they could manage their working capital. The use of foreign currency in the economy takes away the need for hedging and the little forex earned is usually used for re-stocking, paying staff or recapitalizing their businesses.

When trading resumes many people and individuals are likely to be selling shares to raise hard currency for basic requirements. For people who not long ago would sell and wait for three days before receiving Zim dollars, which they would then use to buy forex, the prospect of directly receiving US dollars will be too good to resist.

The selling pressure will inevitably force share prices down unless foreign investors come in as buyers. Presently, there has not been substantial evidence of foreign investors standing by to buy shares on the ZSE although those rumours have been circulating for some time.  

 The probable lack of buyers on the market will limit activity on the stock market. Until forex inflows improve, few trades will take place in US dollars. It appears like the current illusion of US dollar inflows possibly will turn into a nightmare for many investors unless the trading conditions and regulations are improved.


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