VFEX: Answer for pension funds’ investment dilemma

Grace Muradzikwa

With inflationary pressures emerging from monetary reforms that culminated in the return of the Zimbabwe dollar last year, pension funds have been calling for United States dollar-denominated investments to both protect and build on their contribution pools.

Pension funds typically have large amounts of money to invest and are the major investors in both listed and private property.

The local pensions industry is heavily invested in investment property and quoted equities (totalling around $50,89 billion) insofar as these are largely seen as value preserving assets.

The underperformance of some of these traditional investment portfolios in recent inflationary phases has necessitated new thinking on investment strategies.

Insurance and Pensions Commission (IPEC) Commissioner Dr Grace Muradzikwa has already highlighted that this shift in thinking is taking place.

“We have seen a high demand for US dollar-denominated policies. Almost on a daily basis the Commission is having to review and assess applications for US dollar policies,” she said at a recent engagement.

The soon-to-be launched US dollar-denominated Victoria Falls Stock Exchange (VFEX) will add another dimension to local investors such as pension funds.

The regulator believes as much.

“Government has already announced the launch of VFEX in order to attract critical offshore capital into the economy to augment local resources.

“This development will go a long way in preserving the insurance and pension industry assets as well as in aiding asset and liability matching, given that the industry has US dollar-denominated liabilities,” said IPEC in its pensions sector report for the quarter ended June 30, 2020.

The establishment of the VFEX is part of Government’s broader plan to turn the resort town into an offshore financial centre (OFC).

“We are trying to remove exchange rate risk from portfolio investment and also foreign direct investment, but around the broader financial service centre concept,” Finance and Economic Development Minister Mthuli Ncube has said concerning the VFEX.

Local pension funds — which are already heavily invested on the Zimbabwe Stock Exchange (ZSE) — will be happy to know that companies on the ZSE can list 20 percent of their equity on the VFEX on certain conditions.

According to Statutory Instrument 196 of 2020 (Exchange Control — Special Provisions for Securities Listed on the Victoria Falls Stock Exchange — Regulations, companies listed on the Zimbabwe Stock Exchange may only list up to 20 percent of their total capital on the US dollar bourse if its capital is raised offshore or from free funds.

“A company that is a Zimbabwean resident and listed on the Zimbabwe Stock Exchange; may list on the Victoria Falls Stock Exchange not more than 20 percent of its capital at any time on the Zimbabwe Stock Exchange: provided that any capital raised by such company on the Victoria Falls Exchange shall be from an offshore source or free funds,” reads part of the SI.

Beyond that pension funds can invest in new companies listing on the VFEX.

The Pensions & Provident Funds Bill, which is nearing promulgation, contains new provisions that will allow local pension funds to invest offshore (and the VFEX falls in this category).

Batanai Matsika, head of research at Morgan & Co, believes that the VFEX will be immune to challenges facing other investment platforms in the country.

“An important observation is that the VFEX is being established to kick-start the offshore financial services centre (OFC) earmarked for the special economic zone in Victoria Falls.

“The basic concept is that the rules in place in OFCs are different from those that are in place in mainland zones,” he said.

“This means that the stock exchange will operate very independently using a different set of rules of trading.

“Securities listed on the VFEX shall be tradeable and settled solely in US dollars or a convertible currency. Investors and traders on the VFEX would, among other things, be able to trade in foreign currency and there will be safeguard in place to promote trading.

“The idea is to allow traders to trade in foreign currency as a way to encourage investors to come through and invest in Zimbabwe given the economic constraints facing the country.”

Local pension funds’ investment environment has been rather constrained due to inflationary pressures and more recently, the Covid-19 pandemic.

Data from IPEC shows that money market returns for pension funds have been sub-optimal.

“Nominal monthly deposit rates for money market investments varied from 3, 55 percent to 14, 99 percent against real negative returns of up to 86, 66 percent and annual inflation rate of 737, 30 percent as at June 30, 2020,” highlighted the regulator.

On the other hand, expectations are also that the earlier closure of the ZSE and subsequent company suspensions will slow down the momentum the bourse had seen in the earlier part of the year.

“The suspension of the three shares is likely to affect the liquidity of insurance companies and pension funds as they are heavily invested on the stock exchange in a bid to hedge against inflation.”

For the real estate sector — another area in which pension funds are heavily invested — the outlook remains somewhat bleak.

“Property sales have dwindled as businesses and individuals alike brace for protracted restrictive measures and the implementation of current and future contracts remains uncertain,” says Christabel Shava, Real Estate and Pro Bono Associate at Manokore Attorneys in an analysis on the impact of Covid-19 on the property sector.

“In the short-term, landlords are faced with decreased cash flow and ultimately making value judgements as they pertain to the retention of tenants.

“In the middle to long-term, landlords must account for decreased occupancy levels, deflation of the real estate market and subsequent downward review of rentals.”

The VFEX could be that ace in a hole for pension funds. – Herald