Pursuant to Statutory Instrument 142 of 2019, proscribing the multi-currency system in Zimbabwe, the Reserve Bank of Zimbabwe (RBZ) immediately followed through with a press statement outlaying various monetary and exchange control policy directives constructed to strengthen the inter-bank foreign exchange market.
As part of those support measures, a vesting period of 90 days was imposed with effect from date of publication on disposal of dual listed securities or shares purchased by investors on the Zimbabwe Stock Exchange (ZSE).
The market and authorities had been fully aware of the motive for acquisition of dual listed and/or fungible securities in Zimbabwe as a method for securing foreign exchange offshore. Fungible securities on the ZSE for companies with multiple listings afforded an avenue for investors, subject to exchange control authority, to purchase securities locally with ZWL/RTGS dollars and subsequently uplift the same for disposal in external stock exchanges where foreign currency was readily available. This had become an exit facilitation window for foreign investors frustrated in procuring foreign currency for their investments in Zimbabwe due to the crippling shortages which had dominated the market for a while.
By far the most popular fungible share on the ZSE used for such purposes was the colossal insurance and investment company Old Mutual with multiple listings on the Johannesburg, Zimbabwe, Namibia, Malawi, and London stock exchanges.
Old Mutual shares, irrespective of the domicile they are purchased or traded in, are fully fungible and guarantee the same claim on the company's earnings, assets and distributions. Consequently, any arbitrage opportunities quickly equalise the Old Mutual share price, adjusted for exchange rate differences across all the stock exchanges bearing its listing.
It is these same attributes which attracted Steve Hanke and his erudite team at Johns Hopkins University, during the dark hyperinflationary era in Zimbabwe (2007-2008) when ZimStats ceased publishing inflation data and as a people we had no idea as to the indicative exchange rate for our local currency, that Hanke promoted the now plausible Old Mutual Implied Rate (OMIR) as an alternative to estimating our inflation and exchange rate. Scholars of finance and economics will appreciate the genius of Hanke in formulating a simple, but indispensable concept of applying principles of Purchasing Power Parity theory (PPP) in estimating inflation and exchange rates in a collapsed economy by substituting prices of goods and services in Zimbabwe with a fully fungible security like the Old Mutual share traded in an organised ZSE and other multiple stock exchanges domiciled in Johannesburg and London where foreign currency was readily available and therein estimating inflation and exchange rates.
The OMIR has been invaluable and has dominated our domestic market parlance since 2007 as the country continues to dither in trying to find its feet on the world financial stage. Through the OMIR, Hanke is credited with estimating the annual inflation rate in November 2008 at 89,7 sextillion percent. At this point our Zimbabwean institutions charged with this mandate had stopped publishing this key economic data.
The decree by the government to introduce a local currency as the sole mode of exchange, along with an inter-bank trading platform still in its infancy reignites the debate on the accuracy of the exchange rate. When the inter-bank trading platform was launched, the rate remained frozen at US$1:ZWL$2,5 for some time in a move clearly choreographed by the authorities to avoid an inflation spiral. The formal rate was perceived to be too low and larger trades took place in the parallel market at significantly higher rates.
Although the formal market has since rebounded with improved trading volumes, spurred by the untethering of the rate by the authorities, it still suffers from exclusionary practices by disqualifying the burgeoning informal sector and individuals in favour of productive distribution for large corporates to encourage economic growth.
The exclusionary practice is understood from the precept of concentrating limited resources to lift our economy from the doldrums, but it fails in meeting the demands of a truly free market. Corporates have also complained of not being allocated sufficient forex for their operations and the RBZ has continued as a key player in allocating forex through a committee for national requirements classified as essential.
Consequently, the rate which is the product of the formal market may not be truly reflective of the intrinsic value of ZWL dollars as many more players will find solace and be accommodated in the illegal informal market to satisfy their needs.
These challenges bring us back full-circle to the OMIR as an alternative. However, I wish to highlight the following issues:
The 90-day vesting period acts as a moratorium for dual listed securities and may inhibit the efficacy of OMIR. The moratorium imposed by the RBZ seeks to limit activity in fungible shares by forcing investors to hold securities throughout the vesting period, a punishing measure not applicable in other domicile for multi-listed companies. An investor may have wanted to sell at whatever period they wanted to take advantage of personalised market timing to maximise investment returns. The recent adjustment of the RBZ repo-rate from 15% to 50% per annum will make it punitive for speculative short-term borrowers wishing to undertake round-trip transactions. Speculative behaviour at the moment in Zimbabwe is considered undesirable, but is an important aspect accepted in finance in facilitating the price discovery process and intended to exploit market deficiencies which later correct once an arbitrage opportunity closes. Although it may appear that introducing the vesting period of 90 days is correcting an out-of-line market parameter by closing an arbitrage opportunity, Zimbabwe will be the odd one out as other jurisdictions with Old Mutual shares and other dual listed shares may not have the same restrictive measures. This will make Zimbabwe a less attractive destination for international capital traded through organised exchanges. We needed, as the authorities, to have attended to out-of-line internal parameters that caused those arbitrage opportunities instead of tinkering with external parameters that now make us less attractive competing for the same international capital.
Now that Zimbabwe has imposed the 90-day vesting period while other jurisdictions with the same dual listed securities have not done the same, implies the security prices on the ZSE have to adjust to reflect the new disposition. This is particularly relevant for stocks like Old Mutual with multiple listings on five stock exchanges. Consequently, this may result in the implied exchange rate between Zimbabwe and other domiciles adjusting to cater for the forced 90-day delay which invariably exposes investors to price risk only peculiar to Zimbabwe. For example, an investor assuming an OMIR of USD$1: ZWL$9,7 prior to the introduction of the 90-day vesting period cannot expect the same rate post-implementation of the moratorium owing to the price risk factor. Within the 90-day window, prices can move in either direction to the detriment or benefit of the investor, which will not be assumed by some other investor avoiding the ZSE. Investors would prefer to be in charge of their investment decision-making timelines as they assume full risk personally. Principles of finance may even dare to surmise that dual listed company securities may have morphed into some sort of derivative instrument of the actual share owing to the 90-day vesting period infringing on personal freedoms of market timing for disposal. Markets may take some time to digest the implications of policy directives and the full effect may only be clearer through the passage of time. We wait to see how OMIR will be subject to the new changes as investors reposition their portfolios and price the new risks being assumed.
We all want prosperity for our great nation and hope the authorities take heed of some of the analysis provided to aid in fine-tuning policy decisions.
Nhlanhla Nyathi, is an independent analyst.