Zimbabwe: Foreign Currency Shortages Are the ZSE’s Major Undoing

INTERVIEW

The Zimbabwe Stock Exchange (ZSE) will next month host the 57th Committee of Sadc Stock Exchanges (CoSSE) meeting with the main objective of promoting the development of efficient, fair and transparent securities markets within the region while also encouraging cross-border trading. The meeting, which will also promote Zimbabwe as an investment destination, is another first step towards wholesome and effective implementation of CoSSE interconnectivity which aims to enable enterprises to raise capital across all Sadc exchanges should they already be approved to raise capital on one exchange.

At a time the host economy is struggling to place itself on a reformist path, business reporter Melody Chikono (MC) this week spoke with ZSE CE Justin Bgoni (JB) about the regional meeting to unpack the potential benefits for the local bourse to the joy of investors. Find below excerpts of the interview:

MC: You will be hosting the 57th CoSSE meeting next month. Of what importance is this meeting to the ZSE?

JB: As a full member of CoSSE, the objectives set out in the CoSSE charter resonates well with the vision of the exchange, as we are working towards increasing cross-border trading and improving market liquidity.

As the host, we have invited the Minister of Finance and Economic Development, Professor Mthuli Ncube, to be the guest of honour where he will give a keynote address on the investment case of Zimbabwe. This will avail an opportunity to promote Zimbabwe as an investment destination. The ZSE is particularly looking forward to networking and to learn from other markets how to grow the Zimbabwean capital markets.

MC: What do you think will be the key take-away for the ZSE from this meeting?

JB: The ZSE is seeking collaborations and to synchronise its projects with other member exchanges towards creating a more efficient regional market and to also tap the knowledge of other members in terms of research, product and market development.

We are also looking forward to learning strategies to enable us to target the retail investors which have been underperforming in our market.

As ZSE, we will also learn how bonds are evolving in other markets as we work on our own bond market. The ZSE will present (a paper) on encouraging cross-border IPOs (initial public offers) and cross-listings through broker-communication during the stockbrokers’ networking session.

We hope to achieve more collaborations from this meeting as we work on encouraging cross-border listings and providing value for our issuers and investors.

MC: There will also be a stockbrokers’ session. What drawbacks have stockbrokers faced in this market compared to other regional markets?

JB: Our local brokers have experienced:

Poor participation of retail investors on the market;

Investors shunning the market due to high transaction costs;

Limited cross-border trading; and Inconsistent macro-economic policies which have impacted negatively on economic growth and potential listings.

Our brokers are resilient. They have worked in producing quality advice to clients both locally and abroad. Compared to other markets, we have a relatively large number of brokers (18), testament to their resilience.

MC: What would be your comment on the efficiency, fairness and transparency of the securities market in Zimbabwe compared to the region?

JB: In terms of efficiency, fairness and transparency, the ZSE is only second to the Johannesburg Stock Exchange (JSE) in the region. The ZSE operates a robust, three-tier automated trading system which has enabled brokers to operate from anywhere in Zimbabwe.

Automation has also enabled the retail market to have direct access to the market and led to reduction in the settlement cycle from T+7 to T+3.

Our listing rules are also quite robust, having their foundation from the JSE listing rules, which are highly ranked in terms of exchanges in the world.

The ZSE is also operating in an environment with an independent regulator, the Securities and Exchange Commission of Zimbabwe (SeCZ) whose core mandate is to promote efficiency and transparency in the capital market.

MC: I understand that it is now mandatory to trade through Chengetedzai Securities Depository (CSD) .Of what importance is this move to the securities market?

JB: Trading is done through the ZSE and settlement is done through CSD. For someone to trade through the ZSE, it is, however, mandatory to have a CSD account.

The adoption of CSD facilitates the holding of securities in electronic format, reducing inefficiencies and risks, thus promoting security for investors. With a CSD, shares are electronically tradeable which greatly improves efficiency in the market. There is also an advantage of speed of execution of trades, and since the introduction of the CSD, settlement improved and moved from T+7 to T+3, enhancing overall market efficiency.

MC: You have always wanted people to invest in fundamentals, that is, having the right fundamentals on the bourse. What is the latest update on this?

JB: When I joined in March 2019, one of the key focus areas was to get the fundamentals right by ensuring the efficiency and effectiveness of our processes and systems. To date, we managed to revamp our website, making it easier for investors to access market data.

We also strengthened our regulation to enhance transparency and disclosure for the benefit of Investors. We hosted several masterclasses last year to educate businesses on the listing process of the ZSE. We will continue to do more as the exchange to impact knowledge to the market.

The next stage is to create products that meet client needs. This is in terms of the ability of companies to raise money and public to invest.

MC: You have also wanted to create a strong relationship that sees coordination between ZSE, SeCZ and Reserve Bank of Zimbabwe (RBZ) on complex transactions. What milestones have you made on this front?

JB: The relationship with our regulator, the Securities and Exchange Commission of Zimbabwe (SeCZ) has significantly strengthened. We are both working towards the shared vision of growing this market, increasing integrity and streamlining our processes on approval of complex transactions.

Same goes for our relationship with the RBZ, we have engaged them on policies that impact the capital market. We have, in fact, agreed with the RBZ to hold quarterly meetings to keep each other abreast of developments.

The greatest milestone to date is the publication of Statutory Instrument 134 of 2019 which contains the revised ZSE listing rules. We have also recently had our ETP and market-making rules approved by SeCZ and this facilitates the ZSE to introduce new products.

MC: The issue of capital gains withholding tax has been long outstanding, with market watchers saying it is chocking investors. How far have you gone in trying to get this 1% figure reduced?

JB: Zimbabwe is complicated in that there are no strict annual individual tax returns. As a result, the government came up with blunt instruments such as 1% capital gains tax. We have been unsuccessful in terms of the removal of the capital gains withholding tax so far but we will continue to lobby. We understand, though, why the government is doing it in terms of revenue collection.

MC: When we compare the ZSE to the global market, it has continued to be the worst performer in various aspects. What is your comment and what would be the initiatives needed to make the local bourse competitive on a global scale?

JB: We strongly disagree with the notion that the ZSE is the worst performer on the global scale. The ZSE has remained resilient over various economic cycles which include the 2008 phenomena and the recent drought-induced economic contractions, but we have always maintained value for our investors.

Our liquidity ratio of around 7% is comparable to the Kenyan market of around 8% and in the Sadc region, only second to the JSE (Johannesburg Stock Exchange) which is northwards of 30% on the equities market. The ZSE has achieved this liquidity ratio with plain vanilla shares whereas other markets have products like Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs).

Our all-share index posted a return of 39,9% in US dollar terms for January 2020, the highest in the Sadc region. In terms of the number of listings, we have 61 counters which is comparable to Kenya, which has about 67 and more than Botswana, which has about 33. Our major weakness is foreign currency shortages in the country which affects repatriation for our foreign investors.

In the long-term, to ensure that the country has sufficient foreign currency, we need to increase our exports, lure more FDI (foreign direct investment) and portfolio investments.

As a country, we also need to continue lobbying for the removal of sanctions as these hamper the inflow of FDI and capital inflows. The ZSE also has plans to grow the exchange by diversifying and introducing new products which include ETFs and REITs.

The successful implementation of REITs requires tax incentives and we are currently lobbying the Ministry of Finance. The introduction of new products will deepen the markets and improve on liquidity.

MC: Zimbabwe has been undergoing economic meltdown with the main impediment being the currency issue. How do you see non-fungible stocks being affected in FY2020 given there are no indications of economic recovery.

JB: The recently announced monetary policy indicated an expected economic growth of 3% for 2020 and this is supported by the World Bank’s real GDP growth rate projection for Zimbabwe of 2,7% this year.

It, however, remains a fact that the country has a shortage of foreign currency as evidenced by the backlog of repatriation of foreign dividends. In terms of non-fungible stocks, we see them being impacted by the inflationary environment in an ambiguous way. Inflation will likely reduce demand on products for listed companies but the asset prices on the ZSE will likely be pushed up.

MC: May I have an update on the diversification of the investor base in 2019 to date?

JB: Our focus since 2019 is to diversify both product offerings and the investor base, through expanding our offerings. We will be launching an ETFs soon which is a product meant for the retail market.

We will also be diversifying into small-to-medium enterprises financing through operationalising the memoranda of agreement that we signed last year. We are also working on diversifying our investor base especially by encouraging retail investors to come on board. There are several financial literacy programmes that we will be launching this year that will also demystify the perception that the stock market is elitist.

The ZSE will be offering training courses tailored to capital markets products and services. Our training calendar for the year was circulated and we are optimistic that the training will further assist in demystifying the capital markets as well as assist investors and market participants to undertake informed investment decisions.

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