THE government of Zimbabwe, through relevant bodies, has gone back and forth since 2020 on policies pertaining to the stock market. Inconsistent in policies directly targeted at stock markets demonstrate a lack of appreciation and understanding of the mechanics and implications of stock markets to overall economic performance. Capital markets in general have the ability to spur growth through pooling and distributing funds to companies looking for funding to grow. The implication of policy framework and its alterations to the stock market is very evident from a more broader macro perspective.
They say capital flows to where its least rattled. In other words, this means that capital will go where it attracts the best risk adjusted return. While volatility is part of market cycles and behaviour, the resultant risk adjusted return has to be positive and predictable. Policy flip-flopping increases the risk associated with investments into a particular jurisdiction.
This typically reduces investor attraction. With regard to Zimbabwe, foreign investors have also been worried about the repatriation of dividends or funds post liquidation. The exchange from Zimbabwe dollar to foreign currency through formal channels has remained tedious. Following the introduction of the Zimbabwean dollar as the sole trading currency on the Zimbabwe Stock Exchange (ZSE), companies have raised several concerns. The main concern has been centred on asset valuations and financial and operational projections or modelling. In response to the highlighted issues, among many others, a subsidiary of the ZSE was introduced in 2020.
The Victoria Falls Stock Exchange (VFEX) came as a US dollar denominated offshore market. While the entire formal sector was mandated to report in the Zimbabwean dollars despite being allowed to trade using different currencies, companies listed on VFEX were exempted. They have been allowed to report their financials in US dollars. This has allowed better assessment of company performances, as well as giving realistic financial performance projections. Initially, the bourse was intended to attract totally new listings. However, out of the six companies currently listed on VFEX, only one is a new listing while the other five migrated from ZSE.
Writing in the Sunday Mail recently President Emmerson Mnangagwa said: “Instead of a relationship of complementarity, I am beginning to sense that businesses are delisting on one to re-list on the other. This may very well relate to discrepancies in incentives we have attached to either of the bourses”.
Some benefits, which the VFEX used to boast of included tax incentives for investors, easy repatriation of funds as well as transactional flexibility for shareholders. In May 2022, stringent measures were introduced, targeting the ZSE, which was accused of fueling inflation. These measures led to a bloodbath on ZSE last year. It recorded the worst annual performance in the world, according to official data. Resultantly, most, if not all, companies on the bourse were undervalued. This led to companies announcing their plans to either delist from the market or migrate to VFEX. In response, the government loosened the contractionary monetary policy to encourage borrowing, which effectively stimulates demand on ZSE.
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As more companies started contemplating on migrating to VFEX, the government moved to standardise retention levels across all sectors at 75%, including VFEX stocks. The cat and mouse chase between the government and stock markets has resulted in companies tagging along. In January 2023, Seed Co Limited, in perspective, approved of a delisting from ZSE to migrate to VFEX. Following the precedented policy change, the company suspended its plans to migrate to VFEX indefinitely. The company opted to take advantage of the liquidity position of the ZSE despite its high volatility. The ZSE has since emerged the best performing bourse in Africa on a year-to-date basis in US dollar terms, while VFEX has succumbed to sell-offs. If this position sustains in the medium-term, it remains to be seen how the government will intervene to shake the balance once again.
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