BY RESPECT GWENZI
Since the beginning of the year, on the 5th of every new month, fuel consumers have become accustomed to pump price hikes by the Zimbabwe energy regulator (Zera). In the current month, the price hikes saw a litre of diesel going up 1,2% in local currency, from ZW$110,41 to ZW$111,77. The US dollar pump price was left unchanged at US$1,32. Comparatively, in the previous month (March), the commodity was hiked by 5%. As for petrol, Zera announced that a litre is going at ZW$112,96, a 3,5% increase from ZW$109,17 in March. Forex price of petrol also went up 3,1% to US$1,34 a litre from US$1,30 in the prior month. Overall, petrol is up 16% from December level of ZW$97,11 and diesel is up by a staggering 36% in a space of four months between December and April. On the international market, crude oil is up 23% from US$51,80 a barrel as at the end of December to US$63,54 as at March 31.
According to Zera, the recent price hike was necessitated by the rising prices on the global market as well as exchange rate movement. Between March 5 and April 5, the local currency lost 0.61% of its value against the greenback on the interbank market. The price of fuel in local currency is tied to the movement of the interbank exchange rate. So, a loss in value of ZW$ forces an adjustment of prices. A strong dollar makes US denominated commodities expensive for holders of other currencies. This also contributed to the adjustment of domestic prices in line with forex exchange developments. As for global prices, they are 2 things pushing them up: covid-19 vaccines and tightened supply. The situation between December, when the vaccines were approved for emergency use, and March in terms of travel has gained momentum.
Economies have nearly opened up fully, people traveling for various reasons like to meet their families and tourism. All this is pushing oil demand up again from last year lows when global travel and economic activity were nearly grounded. Also, oil is being helped by an organised Organisation of the Petroleum Exporting Countries, Russia and other allied producers (OPEC+). OPEC+ engaged in organized oil supply cuts to support prices since last year including 1 million barrels per day (bpd) voluntary cuts by Saudi Arabia. Thanks to these supply cuts and vaccine-induced global re-opening, oil prices are now up 94% from an average price per barrel of US$33.73 in March 2020 to an average of US$65.57 per barrel in March 2021. Actually, the current crude oil prices which are hovering above US$60 are now in the pre-pandemic range.
In the week under review, OPEC+ agreed to ease production curbs by 350,000 bpd in May, another 350,000 bpd in June and a further 400,000 bpd or so in July. However, the cartel trimmed oil demand growth forecast for 2021 by 300,000 bpd because of renewed lockdowns especially in Europe where covid-19 infections are on the rise again thanks to a faltered vaccine acquisition plan and poor distribution. France has entered into its third 3-week complete lockdown with school closures. Despite all this, vaccine distribution has peaked in the world’s largest economy, the U.S, and the country is on course to fully re-open by July. In the world’s top oil consumer, China, economic activity is nearing pre-pandemic levels. These 2 countries combined accounts for about 46% of global oil demand. At Equity Axis, we believe that this will support prices and our projections puts crude oil at US$70 per barrel by end of Q2.
For decades, Zimbabweans are being charged fuel prices which are beyond the regional average. Currently, our diesel and petrol prices are the highest in Southern Africa. Unlike in most other countries, the Zimbabwean fuel sector is not fully liberalised. On top of the rising prices, importers pay about US$0.05 in levies, US$0.30 in excise duty and there are other charges like NocZim debt redemption levy as well as some taxes like carbon tax which is about 5% of the cost, insurance and freight value (as defined in the Customs and Excise Act). Also, there is mandatory blending using ethanol and ethanol is costly in Zimbabwe thanks to huge state granted monopoly in its production. So, because of these mentioned charges coupled with unstable currency, oil prices in Zimbabwe will continue to remain higher than the entire region. In my view, to get a market clearing price, the sector to be fully liberalized to eliminate pricing distortions. Liberalization allows domestic prices to move in tandem with global developments since the country is a net importer of the commodity.
Albeit dipping in March, ZSE remain top performer against regional counterparts
The Zimbabwe Stock Exchange (ZSE) performance in March was the least over 12 months. The All Share Index (ASI) gained 8.96% to close the month at 4488.78 points. The gain is far much lower when compared with January and February gains of 36.5% and 15.3% respectively. However, despite this dip in monthly performance, the local bourse continue to outperform other regional exchanges both in nominal and real terms. Statistics show that year-to-date (YTD), the returns on the local bourse is up 70.27% in nominal (local currency) terms, which is more than 5 times the next best performing bourse, Ghana Stock Exchange, which is up 13.99%. The Botswana Stock Exchange which is down 5.1% had the least nominal returns out of 17 main equities markets on the African continent. Comparing likes with likes (US dollar terms), the ZSE is also the continent’s hottest bourse with YTD returns of 64.99% followed by Ghana at 15.73% and Johannesburg Stock Exchange (JSE) at 11.39%. At US$6.3 billion, ZSE is ranked 5th from the bottom in market capitalization terms. Market cap is the total value of all shares calculated by multiplying stock prices by number of shares outstanding.
I believe that the slow-down experienced in March is indicative of subsiding inflation in recent months and profit taking given the magnitude of year to date gains. Inflation cooled further down by 81 percentage points from 362.6% in February to 240.6% in March. On a month-on-month basis, inflation sagged by 1.19 percentage points from 3.45% recorded in February, which is the lowest outturn since Jan 2020. According to EA Research, the sagging inflation is a culmination of constrained base money growth and a relatively stabilizing exchange rate. Economists widely believe that excessive growth in money supply particularly base money is inflationary and the opposite holds true. Preliminary statistics show base money falling by 3.4% and 2% in Feb and March respectively and this has helped to moderate ZW$ monthly declines on the forex auction market from -1.5% to -0.61%. Inflation dynamics changed course in Sept 2018 when austerity measures were introduced and it is this rising prices which powered the local bourse, the ZSE. Before the suspension of ZSE trading in July 2020 on allegations by authorities that the bourse was fuelling speculation, the ASI surged 141% in May. Also, when suspension was uplifted, the bourse went on to close December in the gains of 65.2%. Just like gold during the covid-19 pandemic, stock exchanges also act as safe haven for investors during periods of uncertainties like hyperinflation. Inflation increases the opportunity cost of holding cash hence the need to invest it somewhere like in stocks to earn income. It is that increased stock demand that will push stock prices up.
In my view, inspired by EA Research’s ‘cautiously optimistic’ 2021 inflation outlook, the ZSE will continue to outperform its regional counterparts since the price levels albeit declining, are still by far higher than the regional average. Stabilizing exchange rates will increase foreign participation on the local stock market, perhaps leading to a tilting scale in terms of foreign sales. I believe that the overall market slowdown in March provides an opportunity for investors to buy into dips. As economic activity peaks in line with economic growth forecast for 2021, the local bourse will begin to post relatively larger gains months ahead. Typically, stock market performance reflect economic conditions of an economy. If the economy is growing then output will be increasing and most companies should be experiencing heightened profitability. It is this higher profit that makes shares most attractive because they may give bigger dividends to shareholders. Historically, a long period of GDP growth tend to benefit shares. However, I am of the view that the market return in 2021 will likely be much lower than last year when inflation was raging havoc for most part of the year.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org