Batanai Matsika 
IN our recently published article entitled, The fallacy of economics by coercion — where we discuss the issue of placing a 90-day lock in period on Old Mutual Limited (OML) — we highlight that the good economist realises that if you want the baker to bake a bigger pie, you do not beat him up and steal his flour. Instead, you cooperate with him and create a climate of freedom for each individual human being to peacefully pursue his own self- interest without fear of punishment.
The movement in the OML share price was being driven by demand from foreign investors that were using the share to exit the market.
This kind of thinking is far from how authorities in Zimbabwe are reasoning. In a recent development, the government has thrown in a “bombshell” by ordering the suspension, for a period of 12 months, of the fungibility of Old Mutual Limited, PPC Limited and SeedCo International Limited shares.
As previously discussed, this directive is hinged on the view that the Old Mutual Implied Rate (OMIR) was being used by market participants as a benchmark to determine parallel market rates.
We strongly argue that this reasoning is completely misplaced given that foreign exchange, like any other market, follows the forces of supply and demand in the determination of an equilibrium price. The movement in the OML share price was being driven by demand from foreign investors that were using the share to exit the market. In addition, the fact that OML was fungible means that it also served as a currency-hedge which made it attractive to local investors.
The government is shooting itself in the foot. By suspending the fungibility of shares, it is effectively erasing Zimbabwe equity markets from the radar of frontier market investors. Zimbabwe should actually be doing all the things an emerging nation has to do to attract foreign and regional partners in order to not just grow but survive in the new global economy. The negative political and economic developments have meant that Zimbabwe has miniscule confidence among global emerging market investors. In this article, we outline the implications of the new measures;
i. Limited foreign activity on Zimbabwe capital markets. A number of Africa-focused Funds were using fungible stocks to enter and exit equity markets in Zimbabwe. This was mainly because of the fact that the Interbank Foreign Exchange System set up by the RBZ proved to be an inefficient exit avenue for portfolio investors. We expect limited foreign participation on the ZSE and FINSEC going forward. The new measures imply that foreigners are literally “trapped” and can only switch positions in listed equities until an exit avenue is established;
ii. The fact that the new measures will discourage portfolio inflows implies that local exchanges like ZSE and FINSEC will become unattractive for issuers given that their ability to attract foreign capital has been compromised. Put plainly, no new foreign capital will be channelled to the ZSE or FINSEC.
Any new Initial Public Offerings would most likely have limited subscriptions from foreigners. Furthermore, listed companies on FINSEC and ZSE will also suffer from limited visibility among foreign investors. It should be stressed that listed companies act as ambassadors of their country to the international investment community.
This is usually done through international non-deal road shows and investor engagement events. There will be no point conducting non-deal roadshows if there are no exit or divestment avenues for foreign investors;
iii. Foreign direct investment (FDI) flows will continue to dwindle. There is also another misguided notion that portfolio investment flows do not help Zimbabwe since they involve the buying and selling of shares. However, an analysis of the profile of some of the Africa-focused Funds that participate on Zimbabwe capital markets reveals that some of them can invest in private equity and directly into projects.
In some cases, foreign investors can divest from shares on the local exchange and channel the proceeds towards specific projects (FDI). We recall that FDI into Zimbabwe declined by 64 percent from USD717m in 2018 to USD259m in 2019. By cutting off foreign portfolio investors, Zimbabwe is not helping itself in terms of attracting FDI;
iv. Loss of confidence in Zimbabwe capital markets. The idea of government interventions and controls reduces the competitiveness of local capital markets as investment destinations. International investors today possess a plethora of investment options in the form of asset classes, projects and specific markets they can invest in.
Authorities in Zimbabwe should know that Zambia, Malawi and even South Africa are competing for the same allocation of funds from international investors. In other words, controls in Zimbabwe capital markets that hinder foreign participation are- in a way — an advantage for other Southern African states; and
v. The depth of Zimbabwe capital markets will be negatively impacted. We expect overall market activity to come down given that the volume of trades in the dual-listed stocks will decline. A slow-down in market activity means that less income is earned by the country through stamp duty and capital gains tax.
In conclusion, while we expect the OML price to dip a bit on the back of the new directive, fundamentals of the stock still remain intact and this should sustain demand in the medium to long term. Regarding the issue of the exchange rate, the fact is that foreign currency shortages continue to loom and there is a high propensity to import among economic agents (including government). This has nothing to do with fungible stocks!
We expect this huge appetite or demand for FX to continue to push the parallel market exchange rates up. That said, we acknowledge that there are uncertainties specific to Zimbabwe and we continue to recommend investors to buy into stocks with ex-Zim exposure and this includes (i) export-oriented stocks like Padenga Holdings, Hippo and Ariston and (ii) regional plays like Simbisa Brands, SeedCo and SeedCo International.
Matsika is the head of research at Morgan & Co, a local investment banking group in Zimbabwe. He writes in his personal capacity.
