Ncube turns stock exchange into a giant lab

IN a press statement dated July 28, Finance minister Mthuli Ncube titled “Conclusion of Investigations on Activities On the Zimbabwe Stock Exchange” all but absolved the troubled trio of dual-listed companies, namely Old Mutual (Zimbabwe), Pretoria Portland Cement and Seed Co International, from manipulating the exchange rate.

The Brett Chulu Column

Of the three, Old Mutual had been singled out as an iniquitous entity that was pre-meditating the systematic collapse of the Zimbabwean dollar through the Old Mutual Implied Rate (OMIR). The origins of the advocacy for the expulsion of Old Mutual from the Zimbabwe Stock Exchange and sullying its corporate reputation with soot are well-documented — they were not sired by the government — it was the brainchild of party apparatchiks. The executive simply implemented a directive from non-state actors, they shut the Zimbabwe Stock Exchange and the spin doctors tried to characterise it as a long holiday.

Predictably, it was left to the technocrats to clean up the mess created by the powerful party politicians. The political czars levelled an accusation: Old Mutual was firing up the exchange rate through the OMIR, with mobile money operators co-accused as assisting unnamed economic sons of Belial to offload local dollars on the stock exchange, putting the exchange on steroids that, in turn, was said to push the Old Mutual Implied Rate up.

The technocrats, in the face of such embarrassing frothing at the mouth, had to sanitise the crude aspersions cast on the financial giant articulated as fact. The technocrats laundered the egregious vilification and framed the accusations as hypotheses to be tested by data.

In this light, what Ncube, on July 28, through the Press statement, gave us is an executive summary of the “research findings”. As argued in this column two weeks ago, it did not make sense from a scientific perspective to single out Old Mutual and leave out the other internationally listed companies as they, too, have implied exchange rates. Ncube, to his credit, focussed on the three companies.

Predictably, Ncube’s findings completely absolved the trio from manipulating the exchange rate. Ncube , a couple of months back, banned shares of this trio he pronounced innocent from being sold on the Zimbabwe Stock Exchange in Zimbabwean dollars and later cashed out in forex on foreign bourses where the shares are also listed.

So Old Mutual, whose reputation was soiled without an iota of evidence for a sin it did not commit, was a figment of a fertile political imagination. There is no apology offered in the presser. Ncube was not compelled to offer an apology as he was not the author of this political melodrama that sought to project speculation as fact. Ncube cleverly sanitised his reputation and hired science to absolve him and let the same science dispassionately rebuke the sponsors of non-science. An apology coming from the apparatchiks is in order. It will be a turning a point in our political economy if the political grandmasters take back their words in public with the same zeal they tore into hapless Old Mutual.

Ncube sought to apply technical erudition in presenting his findings, reporting that there was a correlation between the movement of implied rates (not just Old Mutual’s), the transactional behaviour of the dual-listed shares and exchange rates. He concluded that the Old Mutual Implied Rate was the key driver of the parallel market pricing behaviour. It needs to be understood that Ncube is not saying Old Mutual—the company—is the driver of the parallel market rate. It just so happens that its share prices, which are publicly available, are used by many economic players to calculate an implied exchange rate. In the world of normal rational standards, it is not fathomable for anyone to take issue with a ballpoint pen manufacturer if students use their ballpoint pens as rulers. In accusing Old Mutual of manipulating exchange rates, the apparatchiks are taking ballpoint pen manufacturers as the students abusing the ballpoint pens as rulers.

Ncube has seen an opportunity to carry out his research further, seizing the opportunity of the closure of the Zimbabwe Stock Exchange. It is evident that the initial research did not unearth powerful causal evidence. In social science fields such as economics, causality is mainly established from qualitative research (studying human behaviour), not from dry number-crunching, no matter how sophisticated the mathematical techniques can be be. It is a cardinal fact of scientific research—mathematics cannot establish causality.

In light of inconclusive causal links due to apparent weaknesses in the methodology applied in the Zimbabwe Stock Exchange investigations, Ncube has been presented with a once-in-a-lifetime research opportunity an economist could ever ask for to conduct a rare experiment where you open a stock exchange and exclude three suspect counters from the bourse in order to conclusively establish causality. An experimental research design is what Ncube is now embarking on: the Zimbabwe Stock Exchange, from the day it re-opens on August 3, will be one giant economic research lab.Causality is the holy grail of theory-building from data.

By completely eliminating the trio of internationally listed stocks, Ncube will literally starve the market of data to calculate implied rates. Without implied rates, the thinking is that the parallel market will have no guidance and thus parallel rates should, in theory, stabilise. He will infer the behavioural response of the market as being driven by the absence of the suspected behavioural driver, the implied rates. If that happens, it will be a win for the apparatchiks who will feel justified for calls to expel Old Mutual from the Zimbabwe Stock Exchange. It will also be a win for the technocrats who will have scientifically proved the existence of demons once claimed by the monetary wing to be terrorising the economy. In a more nuanced depiction, the grand scientific experimental research design on the Zimbabwe Stock Exchange being hatched is envisaged to unearth the X-factor alluded to by the monetary authorities as being responsible for feeding the twin dragons of exchange rate and inflation stability.

I would not be surprised if the results of the experiment are eventually published in various journals.If this experiment can result in the market suddenly re-building confidence in the Zimbabwean dollar and bring stability to the local currency, someone must be given an Nobel Prize in economics.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. —

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