The Zimbabwe Stock Exchange (ZSE) is reeling from a hyperinflation hangover. Having doubled on the back of an official inflation rate approaching 700% throughout last year, it has fallen 30% so far this year and is accelerating downwards. This is what happens when hyperinflation grips an economy. Those with cash are spending it as fast as they can because tomorrow it will be worthless.
The market capitalisation of the ZSE’s 75 companies hit a record Z$5-trillion (R125-million) mark in January, fuelled by a bidding frenzy among inflation-fatigued investors. Foreign investors deserted the ZSE two years ago as the country was plunged into a political and economic crisis, but local investors have taken up the slack in a desperate effort to preserve what wealth they have.
The value of shares traded shot up 371% last year to Z$650-billion (R13-million), but not all of this was inflationary. The number of shares traded increased by 41% as Zimbabweans ran out of alternatives to protect their wealth. Now some shares on the ZSE are so cheap they cost less than toffees, according to one Zimbabwean newspaper. Insurance company Zimnat’s shares trade for between Z$5 and Z$6, while a toffee costs between Z$100 and Z$150 on Harare’s streets. Fidelity, another insurance company, trades for Z$7.
The country’s banking sector has stumbled into a liquidity crisis, and for a brief period in December money market rates shot above 1 000%. Several Zimbabwean banks had entered into speculative lending using relatively cheap money provided by the Reserve Bank of Zimbabwe. This also accounts, in part, for last year’s boom in equity prices on the ZSE: Zimbabweans were able to borrow cheap money to speculate on the stock market.
The ZSE has captured a substan- tial chunk of the country’s savings after the Reserve Bank’s decision in February 2002 to drop interest rates. Rates have fallen from 700% to 200%.
In December the Reserve Bank introduced a new monetary policy to curb inflation, strengthen the Zimbabwean dollar and restore confidence in the financial sector. Banks are now required to keep 10 times more reserves, or Z$500-million, with the central bank. This has halted the speculation bubble that drove the financial sector.
For all the talk of economic collapse, most companies on the exchange are profitable, says ZSE CEO Emmanuel Munyukwi. “If you can run a company profitably in Zimbabwe, you can run a company anywhere in the world. Managers have to make sure they have enough fuel for their fleets and foreign currency to purchase essential imported supplies.”
Foreign currency earners such as the Cotton Company of Zimbabwe and Miekles Africa, which owns supermarkets, hotels and the Cape Grace hotel in Cape Town, were partly hedged against the Zimbabwean dollar’s collapse over the past two years.
The gold sector, however, is facing its worst-ever crisis, according to the Harare-based Financial Gazette. Despite a soaring gold price, mines are making less than Z$25 an ounce as working costs shot up 40% in US-dollar terms last year.
Munyukwi says that Zimbabwean managers are schooled in hard times, having survived a succession of crises going back to the bush war. But the latest crisis, like the ZSE, has broken all previous records. Like their South African counterparts, many Zimbabwean businessmen are now complaining of an appreciating currency. In January the government introduced a parallel market for the Zimbabwean dollar. The parallel rate for the US dollar has fallen to Z$4 000 from Z$6 500 late last year, helping to bring imported inflation under control.
Zimbabwean exporters are allowed to keep half their foreign currency earnings but must surrender the other half to the Reserve Bank. The bank purchases 25% of the foreign currency at Z$824 per US dollar, and the other 25% is made available to the market via auction. Businesses complain that the fixed rate of Z$824 amounts to daylight robbery by the government, and many say they can no longer continue exporting if it remains in place. Even the auction rate bears the hallmarks of a fixed exchange rate. “It’s a bidder’s market,” says one Zimbabwean businessman. “The Reserve Bank puts a cap on the auction rate.”
These are all short-term fixes contrived by the government to paper over its most serious economic crisis in two decades. But unlike the post-independence crisis, when whites reportedly swapped luxury houses for colour TV sets they could ship across the border to South Africa, this time asset prices are holding their ground against the inflationary monster.
The Financial Gazette says long-term stabilisation of the exchange rate depends on “policies that encourage the export sector, re-engagement with the international community and attracting foreign direct investment”.
Additional reporting by Ngoni Chanakira