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ZSE plans inflation-indexed bonds

THE Zimbabwe Stock Exchange (ZSE) is proposing the issuance of inflation-indexed bonds and the establishment of a US dollar trading platform on listed securities as inflation continues to erode value, a top official has said.

By Melody Chikono

ZSE chief executive Justin Bgoni told the Zimbabwe Association of Pension Funds (ZAPF) 44th annual conference in Victoria Falls last week that inflation-indexed bonds will cushion investors against the vagaries of inflation. It will index the coupons and principal to an agreed inflation index ,while participatory bonds will provide equity-like options for the investors to benefit from the upside by allowing participation in the profits.

Bgoni, saying that the country is not yet in hyperinflation — which he described as cumulative inflation exceeding 100% over three years — said the move will be beneficial to investors.

However, he said the inflation trajectory over the last six months was worrying, adding the troubled country may hit hyperinflation by July 2019 if month-on-month inflation remains at 5% going forward.

When inflation rises above 50% on a month-on-month basis, it is effectively considered to be experiencing hyperinflation. As of April 2019, the cumulative three-year inflation rate was 81,5%.

“If monthly inflation drops to 0% from May going , annual inflation may fall below 20% by January 2020,” he said.
The raft of measures is part of the bourse’s efforts to curb the further erosion of the local currency’s purchasing power and attract new money on the stock market as foreign investors shun the stock exchange due to unfavourable policies put in place by the government.

Participatory bonds are also being considered.

An inflation-indexed bond is a pledge issued by the sovereign, which provides the investor a constant return irrespective of the level of inflation in the economy with the main objective of providing a hedge and to safeguard the investor against macroeconomic risks.

Participatory notes, on the other hand, are instruments that enable foreigners to invest in a country’s stock market and bond markets without regulatory hassles.

The galloping inflation has a damaging impact on pension funds with negative real returns on fixed income and money market instruments. Illiquid property market and overall reduction in economic activity lead to reduced employment and pension contributions, ramping up the contribution arrears.

Given the demand for US dollar-denominated assets to hedge against inflation, the ZSE is also mulling the establishment of a US dollar trading platform of listed securities.

The US dollar board is expected to enable buyers to pay US dollar prices for securities and sellers to receive US dolars when they liquidate their investments.

“Discussions with monetary authorities have been initiated and ZSE will also initiate assessment of the infrastructure and process flows for the platform to work,” he said.

If established, pension funds are expected to be able to liquidate some of their portfolios in US dollars.
The abandonment of the currency peg between the RTGS dollar and the US dollar post the February 20 Monetary Policy Statement led to a massive depreciation of the local unit.

The RTGS dollar is losing value against the US dollar at a faster rate than the growth in money supply, thus inflation is growing at a faster rate than the growth in money supply.

Bgoni said this was an indication of prices which are being pegged to the US dollar and changes in prices reflecting changes in the parallel market rates.

“It is also an indication of economic agents showing lack of confidence in the austerity (tighter money supply control) measures and choosing the safer option, and the country’s reliance on imported products (which require US dollars to procure) as local production has remained subdued,” he said.

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