Since the beginning of the Covid-19 pandemic financial markets have been subject to some of the highest levels of volatility observed in many years. According to PriceWaterhouseCoopers (PWC), compared to other health-related crises, it was noted that the 2003 SARS epidemic and the 2015 Ebola epidemic led to modest, short-lived spikes in volatility, while the Bird Flu (‘H5N1’) and Swine Flu (‘H1N1’) epidemics of 1997 and 2009 respectively, barely registered any effects.
Esther Dzviti Mapungwana economist
In developed markets, some of the largest and typically stable equity indices have experienced unprecedented volatility. In the South African market for example, both the JSE’s All Share Index (‘ALSI’) and ALSI Top 40 started to decline towards the end of February2020, two weeks after the S&P 500 started declining.
On the other hand, an analysis conducted by the Zimbabwe Economic Policy and Research Unit (ZEPARU) shows that in September 2020, the Zimbabwe Stock Exchange (ZSE) industrial index was the best performing among selected regional stock exchanges having gained 368.7 percent since the beginning of the year and 15 percent on a month on month basis. This is a significant difference from all other regional stock markets which have been experiencing negative trends as a result of the pandemic. The performance of the ZSE was buoyed by high inflation which was recorded at 761% as at August 2020 and also the negative economic outlook which left the local bourse as the best alternative investment option.
According to the report, the continued deterioration of the economic outlook has resulted in changes in the valuation of stocks as inflationary pressures persist. The ZSE was briefly suspended following a ministerial directive on the 28th of July 2020 and trading resumed on the 3rd of August 2020.
The suspension of trading was meant to allow for investigations into the dealings on the ZSE with some allegations that it was being used to fuel the parallel market exchange rate as well as violating exchange control regulations. Whilst trading on the ZSE resumed on the 3rd of August 2020, trading in the shares of dual listed firms namely Old Mutual, PPC and SeedCo remained suspended pending further engagement.
The ZSE also announced the granting of a licence to operate a securities exchange to its subsidiary, the Victoria Falls Stock Exchange Limited (“VFEX”).
The analysis of stock market indicators shows that turnover value and volume grew by 1,421.3% and 508.6% respectively from January to September 2020. The increase in turnover value was largely necessitated by inflationary pressures within the economy. Due to a negative economic outlook, interest in investing in the local bourse by foreign investors declined as both value and volume of shares bought by foreigners declined by 69.3 percent and 40.2 percent respectively, whilst the value and volume of shares sold by foreigners increased by 679.4 percent and 1,693.7 percent respectively.
The banking sector is one of the financial markets that has been severely affected by the pandemic and research has predicted that the impact of the pandemic is more profound in this area as compared to capital markets. According to a research conducted by SOAS University of London published by ResearchGate, the COVID-19 pandemic will certainly have some negative consequences for African banks.
Financial markets in Africa tend to be bank-based, meaning the banking sector plays a more important role than capital markets. In comparison with the other regions, the banking sector shows lower broad money as a percentage of GDP, and bank credit to the private sector as a percentage of GDP. For instance in 2019, average bank credit to the private sector in SSA was 28.35 percent of GDP, lower than that of emerging economies and the world average for low- and middle-income countries.
The CDC Group says (The U.K’s Development Finance Institution and Impact Investor), the crisis has put severe pressure on African banks as foreign banks withdraw correspondent banking relationships in an effort to ‘de-risk’ their operations (CDC Group, 2020). Additional to this, the COVID-19 crisis is likely to constrain the ability of banks to mobilise deposits and make loans. The reduced ability to raise deposits is likely to affect the liquidity of banks leading to banks being likely to reduce their lending to productive sectors of the economy as a precaution. Indeed, this conjecture is supported by evidence from the great recession that took place between 2007 -2010.
The research has also shown that the crisis is also likely to have an impact on brokerage and asset management firms across the continent. This is likely to be the case because of increased withdrawals by clients due to liquidity reasons.
Investors are likely to also invest less because they want to hold on to their money for precautionary reasons in case things get worse. Further, the increase in unemployment and under-employment is likely to lead to less investment by both businesses and individuals.
Given the negative returns posted by stock markets, investors may shift their funds more into money market instruments for protection and safety. This is likely to adversely affect the ability of businesses to tap into long-term funds to increase productivity and growth. Further, it is instructive to note that the crisis has seriously affected the ability of firms to raise capital on the stock exchange. This has consequential effects on future economic growth and development as implied by the finance and growth literature.
The pandemic has also affected the FinTech industry in Africa with elevated risks associated with cybercrime due to enhanced adoption rate. The increased risks in connection with FinTech adoption will be more prominent in Africa given the weak regulatory regime. Considering the vulnerability with respect to the FinTech business, FinTech firms may be confronted with challenges with respect to finance since the majority of them have been in business for less than a decade and are yet to make profits.
Relying on investor funding will no longer be guaranteed considering the declining revenues as a result of the effect of Covid-19 pandemic. The present condition also makes it challenging establishing new FinTech start-ups. It is important to note that irrespective of these challenges and risks posed by the pandemic, it also presents some opportunities. The FinTech industry appears to be better placed for the digital transformation taking place in Africa’s financial services sectors (Abor, 2020).
(Agbloyor and Abor 2021) stated in the research that FinTech offers an attractive choice of accessing financial services during crisis, given the restrictions to movement and social distancing protocols as well as risk of infection in connection with holding cash.
Additionally, the use of FinTech enables providers of financial services to swiftly respond to shocks by introducing new products or services, changing or upscaling existing ones. The outbreak of the pandemic coupled with the related lockdowns imposed by the government have led to considerable increase in FinTech and digital finance adoption which is an area policy makers need to invest in.
In the case of Zimbabwe, the pandemic has not been the only factor that has negatively impacted the sector. The country was already in an economic recession due to inflationary and exchange rate pressures among other factors, which had already put the financial sector in a tight position and the pandemic became an add-on to an already struggling economy, however, as alluded to earlier, the ZSE market has actually been booming as it has been perceived to be the safest investment in the unstable circumstances. According to the February 2021 Monetary Policy statement Zimbabwe’s banking sector financial intermediation remained subdued, as reflected by a loans to deposits ratio of 39.5 percent as at 31 December 2020, largely as a result of cautious lending approach adopted by some banking institutions.
Reduced incomes through the decrease in employment, reduced business activity and restrictive accesses to credit, all resulting from the pandemic, have restrained financial market development in Africa.
In this regard it is important for policy makers to look into policies that would foster the health of the sector. As already highlighted, investing into FinTech may be one opportunity to consider tackling some of the challenges that the pandemic has brought, however, more research is needed to come up with solutions that promote the growth and stability of the sector in Zimbabwe and Africa.
Mapungwana is a local independent economist and consultant. These weekly New Horizon articles are co-ordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. — email@example.com and mobile +263 772 382 852.