ZSE boses throws tantrum over fungibility suspensions


THE Zimbabwe Stock Exchange (ZSE) is fuming over government’s decision to suspend the fungibility of three counters last week, saying it was an unwise move, as it punishes the whole market, further dampening the attractiveness of the local bourse, businessdigest can report.

Analysts say the suspension is the last nail in the foreign investment coffin, as the perceived high correlation between the Old Mutual Implied Rate (OMIR) and the parallel exchange rate is not only spurious, but gross misrepresentation of facts, which lacks empirical research and fundamentals to confirm a direct relationship.

Through General Notice 583 of 2020 contained in an Extraordinary Government Gazette this week, Finance minister Mthuli Ncube suspended the fungibility of Old Mutual Limited, PPC Limited and SeedCo International Limited for the next 12 months amid allegations of abuse of the fungibility platform.

The ZSE says the country should now brace for another year of the local bourse being shunned by foreign investors due to challenges in repatriating dividends and capital. ZSE CE Justin Bgoni on Wednesday told businessdigest that the suspension came as a surprise, as the bourse was in the process of implementing measures to investigate and stop the alleged abuse.

“We believe the suspension was blunt in that it punishes the whole market rather than the alleged abusers. Statutory Instrument 109 of 1996 on Exchange Control provides for penalties for those who fail to comply with exchange control regulations. ZSE was made aware of the alleged abuse of the fungibility and had agreed on a certain course of action. The surprise was that the action to suspend was taken earlier than anticipated. The suspension on fungibility is expected to lead to a decline in the demand for the dual-listed counters and consequently a decline in their prices. Between March 13 and 17, 2020, Old Mutual has declined 28%, while PPC has shed 24%. SeedCo International has marginally gained 3% over the same period,” he said.

Fungibility meant that the shares of the three dually-listed companies could be bought from the ZSE and sold on the JSE (for PPC and Old Mutual) or on the Botswana Stock Exchange (for SeedCo) and the vice versa could also happen where the shares purchased on the foreign exchanges could be sold on the ZSE.

It is meant to provide shareholders of the dually-listed company maximum benefits of improved liquidity and price discovery and, in the case of Zimbabwe, fungible stocks also provided a means for foreign investors to repatriate their dividends and capital, given the acute foreign currency shortages.

A ban on fungibility was once imposed on the ZSE around 2008 and 2009, but was ineffective in strengthening or stabilising the local currency.

In the long term, the continued shunning of the ZSE by investors is seen promoting capital flight while reducing the local market’s liquidity, as foreign investors used to contribute a significant percentage of the total trades (peaked at 56% in 2015 and 34% in 2019).

“As alluded to before, is the likely decline in foreign participation and overall liquidity in the market. In terms of strategy, the ZSE is lobbying through the regulator, the Securities and Exchange Commission of Zimbabwe for a review of the position. The SECZ is supportive of market development and has established robust regulatory oversight of the market, “he said

“Admittedly, the suspension of fungibility dampens the attractiveness of our market for potential issuers from other markets and consequently sets us back in terms of the regional initiatives. Current agreements are not impacted directly as they were not on specific counters. We are however engaging government on other initiatives that are aimed at assisting local companies in raising capital from regional investors.”

Meanwhile, FBC Securities research and investment analyst Enock Rukarwa says the Extraordinary Government Gazette is a huge blow and a last nail in the foreign investment coffin.

“Fungibility was now a recognised and a permissible way of repatriating investment proceeds by foreigners given forex scarcity on the interbank market,” he said.

Rukarwa said the move will immediately dampen and further reduce foreign investment appetite on the local bourse with Old Mutual being the hardest hit.

“The parallel market rate incremental path is basically a function of excess demand of the scarce US dollar commodity and suspension of fungibility might be insignificant in influencing the rate downwards. More so, this measure was once introduced around 2008/9, but was ineffective in strengthening or stabilising the local currency,” he said.