The first Monetary Policy Statement of the year is out and key highlights include the downward revision in interest rates from 200% to 150%, and changes to foreign currency retentions. Given that movements in the interest rates revisions are in line with our expectations as set out in our 2023 economic outlook series published in January 2022, we focus on the changes to foreign currency retentions and how these impact the allure of the Victoria Falls Stock Exchange (VFEX).
According to the policy statement, export retentions were increased and standardised at 75% in favour of foreign currency across most sectors, including companies that are listed on the VFEX. The foreign currency retention on domestic sales was also increased to 85%. In layman’s terms, exporting companies will receive 75% of their sales receipts in their foreign currency accounts and the remainder will be converted to ZWL using the prevailing official rate. A key change, however, was the removal of the 100% foreign currency retention incentive on incremental exports that was applicable to VFEX-listed companies.
Before these changes, foreign exchange retention thresholds for agricultural exporters (cotton, tea, coffee, and horticulture) stood at 75% while the tourism sector retained 100% of all foreign currency proceeds. The mining sector bore the brunt of the thresholds given a foreign currency retention ratio of 60:40 before the latest changes, which was among the lowest for exporters.
While these changes come as a reprieve to exporters in the country, we remark that this is not standard in many developed countries. Throughout time, we have seen foreign currency retention in countries like Poland, Pakistan, Sri Lanka, Ethiopia, and China with inconclusive results, and we reckon that Zimbabwe is no different. Despite this, we note that the revisions to the foreign currency retentions will likely have a material effect on the allure of the VFEX, and we expound on some of the pertinent concerns by investors and issuers alike.
A major point of concern is the impact of the removal of the incremental exports incentive on the momentum of VFEX listings. We note that Bindura Nickel Corporation, Caledonia Mining, and Padenga Holdings come to mind whenever we talk of the successes of the incentive on the VFEX. The removal of this incentive brings to question the benefits of listing on the bourse, especially for mining companies. Two further questions ensue from this; Will this derail any planned listings that hinged on this incentive? Will this result in delistings on the new exchange?
To better answer the first question, we unpack the material benefits of the incentive. Mining companies typically incur expenses that are normally referenced to the US Dollar. In most cases, the parallel market rate is the effective rate and this has been a headache for exporters who have some of the receipts converted at the official rate. The official rate has always lagged behind the parallel market rate, and having revenue converted at the lower rate vis-a-vis a cost base driven by the higher parallel market rate, spells mayhem on an exporter’s margins and going concern. A wider gap between the two rates squeezed exporters’ margins, and the incentive provided some much-needed relief. The 100% foreign currency retention on incremental exports meant that the marginal profit per unit exported was higher and this positively influenced profits overall. The removal of the incentive, regardless of the increase in the foreign currency retention, closes the door on a stronger marginal profit per unit.
We contextualise this by referring to the future of Caledonia’s Bilboes mining acquisition. One of the transaction’s conditions was that Bilboes will, for the life of the mine, be able to export gold directly and to retain 100% of the sale proceeds in US dollars with no requirement to convert US dollar gold revenues into domestic currency. Changes in the foreign currency retention policy could materially dent the prospects of the acquisition. Hence, an apt response to the first question is that listings on VFEX will likely slow down compared to last year.
As for the second question, we opine that it is highly unlikely that the exchange will witness any delistings because of these policy changes. There are other benefits for listing on the VFEX that remain in play. From the perspective of issuers, we identify the ability to raise USD capital as a key driver to list on the VFEX. Between 2019 and 2020, companies in Zimbabwe struggled to operate at capacity because of the chronic shortage in foreign currency. According to CZI, capacity utilisation in the country fell from 48,2% in 2018 to 36,4% in 2019. A recovery in the economy’s agriculture sector in 2021 and, more importantly, an increase in internally generally generated USD by local companies underpinned the subsequent increase in capacity utilisation, which reached 56,5% in 2021 and likely remained flat in 2022. We reckon that the recovery could have been quicker for listed companies in the case that they could raise additional funds for capital expenditure and working capital through a USD exchange like VFEX.
From a shareholder’s perspective, the denomination of their investment in a stable currency is a key reason they would still vote in favour of a VFEX listing. The volatility on the ZSE in 2022 churned investors’ stomachs after the real value of the stock market fell by c.80% between May and November 2022. This alone was enough to push investors’ preference towards a less volatile exchange like the VFEX and we think that this is why the migration of ZSE stocks to the VFEX are being approved by shareholders without much opposition.
Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.