On March 12, 2021, Finance Minister Professor Mthuli Ncube, extended the suspension of fungibility on Old Mutual Limited and cement maker PPC by another year on the grounds that the government was still considering the assertions of an audit report which interrogated capital flight through these two fungible stocks.
The implications of this move by the government need to be weighed through an objective lens; examining the effects of the fungibility holdup thus far, vis-à-vis the overarching ramifications of the move on Zimbabwean capital markets.
In the latest statement issued by the Treasury, the government maintained a suspension imposed on Old Mutual and PPC in March 2020 through a statutory instrument up until March 11, 2022. The government last March blamed Old Mutual Limited for influencing forex outflows through fungibility and for allowing the use of the Old Mutual Implied Rate to calculate the parallel market exchange rate, steering a weakening of the Zimbabwe dollar. All these acts were however independent of the company’s influence. Effectively, the Treasury chief suspended Old Mutual’s fungibility alongside Seed Co International and PPC.
Old Mutual is listed on the Johannesburg Stock Exchange (JSE) and London Stock Exchange (LSE) while Seed Co International and PPC are present on the Botswana Stock Exchange (BSE) and JSE respectively. Seed Co International is now listed on the Victoria Falls Exchange (VFEX) after delisting from the ZSE.
On the one side of the coin, since the suspension of fungibility on these three stocks, aided by controls on mobile money transactions, the run-way exchange rate and the resultant astronomical inflation were curtailed as the forex auction system kicked in.
By the end of 2020, annual inflation had plummeted by over 50% from 838% in July to 349% by December, thanks to tight base money targeting implemented in the second half of 2020 and sustainable fiscal spending which helped in cooling the Zim dollar depreciation.
The local currency has lost about 3% of its value against the American dollar on the RBZ’s forex auction system since the beginning of 2021, showing the local currency’s inability to turn the tide against the greenback with indications that this trend is set to continue.
However, on the parallel market the Zimdollar is trading at ZW$120 to the dollar, from ZW$100 in November. The depreciation pressure is coming from increased forex demand thanks to recovering economic activity this year.
On the flip side, government’s maintenance of suspended fungibility reinforces an unrelenting trend of government’s heavy-handedness and interference with the local capital markets. Furthermore, challenges in repatriation of funds plus a lack of economic policy firmness have sucked out investor confidence in local markets.
On the ZSE in 2020, foreign buys came in at ZWL1,.24 billion against foreign sales of ZWL6,.66 billion with foreigners emerging as net sellers at a figure of ZWL5.,4 billion; indicating a waning appetite for local stocks by foreign investors. The trend has been sustained in 2021 with the ZSE registering ZWL988 million in foreign net sales between January and February.
The foreign currency denominated VFEX remains a white elephant with just one listed counter: Seed Co International (SCIL). To date the stock has seen minimal activity, as the share only registered movement twice, one of the cases being the consolidation of Seed Co Limited into Seed Co International.
Prospect Resources and Caledonia Mining expressed interest to list on the VFEX late last year but nothing has materialiszed to date. Falcon Gold’s submission to its shareholders in plea for a ZSE delisting does justice in painting a vivid picture of the challenges surrounding Zimbabwe’s equities markets:
“While Zimbabwe has been attempting to encourage foreign investment for its mining industry, economic and political considerations have essentially foreclosed that source of outside investment capital. Foreign investors previously active on the ZSE have seen significant real losses in the last eighteen months following currency depreciation and, more importantly, an inability to remit proceeds on disinvestment.”
Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — ebenm@equityaxis.