THE demonitisation of the Zimbabwe dollar could boost valuations on the country’s capital markets and financial services sector despite several counters having exited the Zimbabwe Stock Exchange for the foreign currency-indexed Victoria Falls Exchange, a new report by Imara Asset Management has revealed.
Despite gaining 40% of its value over the past month, the domestic currency continues to be shunned by most businesses as the economy continues to face headwinds ahead of next month’s general elections.
According to Imara’s quarterly report titled Once Bitten, Twice Shy, Zimbabwe has gone through several cycles of currency volatility which have heavily devalued stocks, as well as other assets in the financial services sector.
“If the Zimbabwe dollar should be abolished anytime soon, then the stock market and specifically the ZSE, should witness a sharp recovery in USD terms from what is a very low base today, Imara chief executive John Legat says in the report.
“Listed companies are largely thriving; based on our interviews with senior management and as their numbers show. The same can be said for counters listed on the VFEX where at last analysts can understand the financials being presented now that they are in USD. Most of them are growing fast, are cheap and offer good dividend yields.”
A re-rating in real terms of equities and property in Zimbabwe as we saw from 2009 to 2013, Legat added, will prove hugely beneficial for the insurance and pensions industry whose size today is tiny in the overall scheme of the economy.
“The same could be said for the banking sector under a dollarised economy, but depositors won’t trust their money in the banks under a USD environment until such time as they know their USD nostro funds are safe from government interference. You can fool someone once but, once the trust has been broken, not for a second time. Once bitten, twice shy!” the report reads.
The southern African nation first experienced its post-independence dramatic crash of the domestic currency in the late 1990s when the government doled out hefty payouts to resentful liberation war veterans who were demanding the distribution of land held by white farmers.
Now known as Black Friday, on 14 November 1997 the Zimdollar lost 75% of its value almost overnight.
After the payouts, Zimbabwe took part in an unbudgeted war in the Democratic Republic of Congo which caused further economic turbulence.
In years to come, the country went through more episodes of currency volatility which forced the authorities to legalise foreign currency as legal tender.