Barometer of the economy

LAST week the country woke up to another dose of bad news; the Zimbabwe Stock Exchange (ZSE)’s market capitalisation had crashed, losing value by at least US$1 billion in the first half of the year to US$3,8 billion.

The Independent Editorial

Elsewhere in working economies, this may not have been newsworthy; US$1 billion would be a drop in the ocean. In China they are talking about the wiping out of US$3,3 trillion — far more than Africa’s collective GDP — in just about month. But in a country with a US$14 billion GDP, a billion dollar loss in securities value in six months is a lot and signals an economy in deep trouble.

The ZSE, like other bourses, is a barometer of the economy. At the stock exchange, share prices rise and fall depending, largely, on economics forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. A plunge in share prices signifies a problem. An economic recession, depression, or financial crisis can eventually lead to a stock market crash. Therefore, the movement of share prices and in general of the stock indices can be an indicator of the shape of the economy.

So the ZSE negative trend in the first half of the year shows Zimbabwe is going through serious economic problems. The market continued to retreat in June, falling a further 3,22% to close the month at a total market capitalisation of US$4,15 billion. It had remained bearish in May, falling 3,27% to close the month at US$4,29 billion. Prior to that, in April it had fallen 1,17% to close at US$4,44 billion. Cumulatively, these losses topped a billion.

While the ZSE loss is not as shocking as the profuse bleeding in the Chinese markets, proportionally it symbolises huge damage, showing the economy is reeling from serious underlying structural problems.

In the local market, share prices are dipping owing to massive sell-offs by foreign buyers, the key drivers of the bourse. Their bone of contention is government policy. The damaging indigenisation law is a major stumbling block to investment.

Apart from that, government is notorious for trampling on the rule of law, property rights and policy inconsistencies.

Generally, the relationship between macroeconomic variables such as inflation, and interest and exchange rates and stock prices fluctuations is well-documented. This is being reflected on the ZSE.

It is beyond doubt stock prices are influenced by fundamental macroeconomic variables. Using a multicurrency system that helped root out hyperinflation, for instance, left Zimbabwe vulnerable to currency movements. It can’t influence money supply since it doesn’t have its own currency. The Zimbabwean dollar has been officially demonitised. So monetary policy is now largely academic.

Liquidity remains a severe crunch. The central bank cannot be involved in quantitative easing or printing money — a monetary policy instrument used to increase money supply to stimulate the economy when standard policy measures become ineffective or fail.
This is not the first time the ZSE lost huge value. After the 2013 elections the same thing happened. It lost over US$1 billion as well in share value. The situation can only get worse before it gets better.