Turmoil engulfs Zimbabwe Stock Exchange

By Phillimon Mhlanga

The Zimbabwe Stock Exchange (ZSE), once a go-to destination for companies seeking cheap funding, has taken a huge lurch downwards as equities tumble, with the market capitalisation plunging by about US$715 million during the 12 months to September this year.

Market capitalisation, according to official data obtained from the local stock exchange last week, shed nearly 20 percent to close September at US$2,725 billion, compared to US$3,44 billion recorded in September 2015.

Other key performance indices such as the all share index declined by 36,19 percent or  632,8 points to close September  2016 at 1115,99 points, from  1748,79 points recorded in September 2015.

And many believe that this slump is due to political instability, economic difficulties and the imminent bond notes which have eroded confidence in the market.

Reserve Bank of Zimbabwe governor John Mangudya indicated that the bond notes would be unveiled to the market in November. This stock market slump is a significant attenuation in value for stockholders, whose funds are locked on the lacklustre local bourse.

What makes it a little more difficult is that the local bourse remains fragile, with total equity exposure, which has remained the preferred asset class, clearly in an underweight position.

Analysts said this trend is likely to continue.

The local bourse, which had 79 counters in 2008, now has 60 listed companies after several collapsed or opted to delist due to financial challenges.

Out of 60 counters listed on the ZSE, less than 10 counters are currently trading positively and the rest are in the red, meaning that investors are losing money as stock prices tumble due to a worsening economic situation in the country.

They have now become poorer than they were in the last few years.

This has resulted in a crisis on the equities market where investor sentiment has been hit by low returns, a volatile political situation and declining corporate earnings.

Finance Minister, Patrick Chinamasa, contends that the stock market has lost its glitter, indicating that the decline in capitalisation reflected that the economy has contracted, leading to the erosion of the local bourse’s value.

This is bad news for investors seeking to park their money long term.

Chinamasa said: “The (decline) in market capitalisation is a reflection of the contraction of the economy, which weakened share prices. In addition, subdued trading, disinvestment by mainly foreign investors and weak local investment also led to value erosion on the Zimbabwe Stock Exchange.”

Chinamasa added: “Companies in the commodities and manufacturing sector were the most affected, in light of declining aggregate demand, on the back of waning consumer spending power, as well as weak international commodity prices.”

While Chinamasa last month revised Zimbabwe’s 2016 growth forecast from 2,7 percent to  1,2 percent, citing the impact of a devastating drought on the agricultural sector, weak mineral prices, low foreign direct investment and a liquidity crisis, the International Monetary Fund (IMF) last week projected that Zimbabwe’s economic prospects remained difficult and that the economy would register a negative growth of  0,3 percent in 2016 and  contract further  by 2,5 percent in 2017.

The warning is the strongest ever by the Bretton Woods institution from which international investors and financiers take a cue on an economy within the cusp of an implosion following widespread company closures and job losses.

Zimbabwe is currently grappling with a liquidity crisis caused largely by inadequate supply of foreign currency in the economy.

Since ditching the Zimbabwe dollar, the country’s central bank has been unable to print money to create liquidity in the economy.

As a result, the country had to depend on exports, diaspora remittances and foreign direct investment to boost liquidity.

But exports have suffered from the closure of local companies, whose operations were ruined during the hyperinflationary crisis.

The demise of the local industry has resulted in the country depending largely on imports, which have sucked liquidity created from exports.

Zimbabwe’s economic growth had averaged 10 percent during the period between 2009 and 2012, but this had declined to an estimated 4,5 percent in 2013, 3,8 percent in 2014, and 1,5 percent in 2015,reflecting the liquidity shortages in the economy.

Now the projected negative growth by the IMF confirms the end of a seven year rebound from a decade-long recession.

Weak economic activities have resulted in the ZSE experiencing declining investor interest and trading volumes in the past five years, with a significant number of counters delisting from the local stock market after failing to meet the listing requirements, an indication that the volatile climate that has dogged the bourse since dollarisation in February 2009 is deepening.

Counters that exited the local bourse include Apex, Interfresh, Lifestyle Holdings, Trust Holdings, Cairns, Gulliver and Steelnet, Radar Holdings and Pelhams.
Other counters that have delisted are Chemco Holdings, Interfin and Phoenix Consolidated.

During the hyperinflationary era, the ZSE was rated among Africa’s best performing capital markets on the continent, as investors sought stocks to hedge themselves against an erosion of value on the domestic currency.

But its fortunes changed when the country ditched its currency for a multiple currency regime to escape the hyperinflationary scourge.

The hard currency regime brought with it a liquidity crunch as imports soured while exports shrunk, reducing the stock of currency in the economy.

However, three counters listed on the ZSE in the past two years, namely Proplastics, Getbucks and Axia.

While Proplastics and Axia listed through a dividend-in-specie after being unbundled from Masimba Holding and Innscor Africa respectively, Getbucks listed through an initial public offer (IPO) in January this year.

This was the first IPO since the country adopted a multiple currency regime in 2009, giving investors a chance to participate on a new offering on the market.

Due to the turmoil that has engulfed the market, the ZSE is planning to revive a regulated bond market, which became dormant 15 years ago, in an attempt to diversify avenues through which entities could raise much-needed capital.

Its proposal is being accessed by the securities and capital markets regulator, the Securities Exchange Commission of Zimbabwe.

A bond market involves the issuance and trading of debt securities in the financial market where participants can issue new debt in the primary market or buy and sell debt securities in the secondary market.

This is usually in the form of bonds but it may include notes and bills, with the primary goal being to provide a mechanism for long-term funding of public and private expenditures.

The revival of the bond market is expected to attract more capital to the market and ease a tight liquidity situation. Financial Gazette