ZSE exodus mirrors dollarising economy?

ZIMBABWE Stock Exchange (ZSE) chief executive officer (CEO), Justin Bgoni, remains defiant that the growing “exodus” of companies from the ZSE to the Victoria Falls Stock Exchange (VFEX) will not lead to the demise of Africa’s fourth oldest stock exchange.

The development mirrors dynamics across other key sectors of the economy.

Amid rapid dollarisation of the Zimbabwe economy, the ZSE has looked more vulnerable to new waves of departures, reflecting the growing affinity for US dollars, which has seen 77 percent of transactions in the economy executed in US dollars.

The Zimbabwe National Statistics Agency (ZimStat) said recently the US dollar now accounted for the bulk of transactions, as depreciation and inflation continue to militate against the appeal of local currency.

The VFEX is a US dollar-denominated stock exchange and subsidiary of the ZSE established in 2020 to operate in the Victoria Falls special economic zone, enabling investors to operate without exchange control risks by using the greenback.

A number of ZSE listed firms have since transferred their shares to the VFEX.

Among its candidates, the VFEX now has Caledonia Mining Corporation, crocodile breeder Padenga Holding, conglomerates Innscor and Axia Corporation, which runs business units such as the TV Sales and Home and the Transerv and Distribution Group.

A similarly platinum mining group Karo, seed breeding firm Seed Co, agro-industrial National Foods, Nedbank and nickel extractor Bindura, have also listed on the bourse. Hotelier, African Sun last had its proposal to transfer its shares to the US

dollar trading platform approved by the firm’s board.

The VFEX has increasingly become popular with ZSE-listed companies due to its flexible exchange rate controls, suitability as a platform to raise capital in hard currency and lower trading fees, which enhance marketability and market capitalisation for businesses.

Contrary, apart from the high cost of maintaining a listing, the ZSE has become less attractive as a capital-raising platform due to the depreciation and volatility of the Zimbabwe dollar while a number of stocks local currency value appear to be grossly discounted.

Bgoni believes the growing interest by ZSE listed companies to move their shares to the VFEX, a US dollar-denominated unit of the ZSE, would not lead to the crumbling of the ZSE, he opined that it was also fundamentally important to offer firms a choice.

“Normally in life, surprisingly if you give people a choice, they are better off. We are not seeing a lot (more) companies wanting to leave, no. Surprisingly this year, we think this year we should get a few (new) listing on ZSE, we will get some REITS, and there are one or two firms we are talking with.

“When you give people choices, life is easier, but we do not think the exodus will continue. Asked how more had indicated a willingness to transfer their shares to VFEX, Bgoni said the ones that were overly keen to leave “ have gone, and there is less demand now,” he said.

Announcing its reason to shift to VFEZ, Innscor said its chances of obtaining equity financing in foreign currencies to fund capital expenditures, working capital, and regional expansion were stronger on VFEX.

It also said reporting in US rather than Zimbabwe dollars will “reduce Innscor’s perceived risk” and aid prospective financiers and investors in understanding its financial performance.

Lower trading costs and increased liquidity

The VFEX’s trading costs of 2,12 percent are lower than the ZSE’s 4,63 percent. This means shareholders can keep more of their capital, potentially making trading in the share more active.

It’s easier to move money in and out of VFEX. Foreign shareholders can repatriate their dividends freely in foreign currency forex and make settlement proceeds from selling shares outside the country.

Tax incentives

A foreign investor on VFEX pays just a 5 percent withholding tax on dividends, half of what they would pay on the ZSE. The shareholder also does not pay capital gains tax on VFEX, while they pay 40 percent when they sell stocks on the ZSE.

Enhanced regional profile of Innscor

Innscor also sees VFEX as a plus for its credibility.

According to Innscor, “migration from the ZSE to the VFEX potentially improves the company’s regional profile and commercial standing, creating pathways to the group’s local and regional prospects”.

Reduced valuation volatility caused by currency translation

Innscor said VFEX’s US dollar valuation allowed its shareholders to realise the true value of their investments and get a more “accurate benchmark of the stock’s performance while mitigating valuation volatility”.

Dollars make more sense

Presenting its accounts in US dollars, as required by VFEX, will be “more effective” in letting shareholders know the true value of the business.

Growing dollarisation of Zim economy

Beyond the benefits of listing on the VFEX, the huge interest of companies wishing to move their stocks to Victoria Falls mirrors the dynamics in the rest of the economy where the bulk of transactions are now in US dollars.

Zimbabwe appears well primed for a second episode of dollarisation. It was forced to adopt the US dollar as its main legal tender in 2009 after the domestic currency was rendered useless by hyperinflation, which reached 231 million percent at the last official count in June 2008.

The International Monetary Fund (IMF) says Zimbabwe’s inflation peaked at 500 billion percent.

Once again, market dynamics are pointing to high likelihood of Zimbabwe retracing its footsteps to the era when it found itself using the greenback as the most widely used transaction currency.

Economist, Eddie Cross , told this publication in a recent interview that the local currency was now, by and large, irrelevant to the national economy; because only a small proportion of transactions was still being executed in Zimbabwe dollars.

“However, in the field of electronic transfers, the local currency is still very substantial and I do not believe the currency is dead by any means; I think what’s happening is that its value is being depreciated on a daily basis.

“And until that stops, and is reversed, I can not see the local currency playing a role as a significant store of wealth and even in the transactions filed,” Cross said.

Cross the US dollar, as readopted at the exclusive medium of change, it would reduce the competitiveness of Zimbabwe’s productive sectors and makes local industries less competitive regionally

“But we also need our own currency, this is ridiculous; we have a currency that is being constantly undermined by what we do in other parts of the economy. All our neighbours now have stable domestic currencies, which are actually quite reasonable.

“Zambia, Kwacha is now stronger that the rand (of Africa’s biggest economy, SA), pula (Botswana) is stronger than the rand, the meticais (Mozambique) is stable; there is no change of value for the last 12-14 months and there is no reason why we can’t be in the same position-ebusinessweekly