AS government spending surged due to preparations and projects related to the Southern African Development (Sadc) summit, Zimbabwe has experienced an expansion in local currency liquidity, leading to increased volatility.

Over recent years, this has repeatedly resulted in the rapid devaluation of local currency-denominated assets. With the introduction of a new currency, the prospects for value preservation in liquid form are worth exploring.

In April 2024, Zimbabwe introduced a new currency, Zimbabwe Gold (ZiG), whose exchange rate is pegged to gold prices. Consequently, the ZiG/USD exchange rate on the interbank market directly correlates with global gold prices, ignoring economic developments within Zimbabwe.

While the interbank rate is expected to eventually factor in inflation and demand-supply forces, its performance since inception has aligned with global gold prices. ZiG appreciated by 0,8% against the US dollar in May before depreciating by 2,8% in June and 0,6% in July. Conversely, the parallel or informal exchange market, which the new currency aimed to suppress, has remained resilient. In July, the parallel market rate devalued by a notable circa -8%. This decline was attributed to the increased supply of ZiG due to rising government expenditure and heightened public demand for foreign currency, which serves as both a safe haven and a medium of exchange in the highly informal economy.

As a result, the exchange premium widened from 11% in April to 74% by the end of July. The exchange premium here refers to the difference between formal and informal exchange rates, essentially the fee someone pays to obtain foreign currency on the informal market. At 74%, the current exchange premium is comparable to the peak volatile days of the Zimbabwean dollar (ZWL).  This scenario fosters speculative trading driven by arbitrage opportunities created by the imbalance between controlled economics on the interbank market and free-market forces in the parallel market. Notably, the general public still perceives the US dollar as a safe haven, and the parallel market offers a convenient and ready supply of foreign currency at a premium.

Therefore, since most individuals and institutions rely on the parallel market for convenient and ready supply of foreign currency, using the parallel rate as a basis for valuing local currency denominated assets leaves less room for misstatement of value.

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Given this backdrop, it is crucial to examine how the Zimbabwe Stock Exchange (ZSE) bull-run is driven by its ability to outpace inflation or whether it is merely a speculative gamble.

Additionally, obtaining foreign currency in the parallel market has become challenging due to government crackdowns on illicit activities. While ZiG capital markets are currently limited, the ZSE remains an accessible option for many. In July, the mainstream ZSE All Share Index achieved a 54% nominal growth, translating to 53% in USD terms, buttressing a nominal return of 27,3% garnered in June. Since the change in currency, the ZSE has gained 95% in USD terms.

Meanwhile, ZiG has shed off -1% and -42% against the USD on both the interbank and parallel markets, respectively. This means the local bourse has successfully outpaced exchange loss, but for how long will this be sustained?

Value preservation on the ZSE is highly dependent on the government’s stance regarding the widening exchange premium. Over the past three years, the government has addressed exchange rate premiums by floating the official rate, causing sudden increases in official rates and devaluing local currency denominated assets.

During the first half of these years, the ZSE registered real gains exceeding 50%, which were quickly negated by controversial monetary policies. While some investors may hope for policy stability with the new currency, recent budget reviews suggest the government plans to incorporate inflation and market forces into ZiG valuation later this year. Consequently, the exchange rate may be influenced by both gold prices and market dynamics, potentially leading to further official devaluation of portfolios.

  • Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_