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Analysis

Victoria Falls stock exchange struggles to attract investors

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THE Victoria Falls Stock Exchange (VFEX)—dubbed the pan-African bourse—is struggling to attract investors, both locally and internationally, due to country risk, policy inconsistency and a trust deficit, among other bottlenecks.

DUMISANI NYONI
In a bid to help reduce foreign currency and settlement risks facing the economy, the government in October launched VFEX, a wholly owned subsidiary of the Zimbabwe Stock Exchange (ZSE).
The platform was also launched to help raise capital and to stimulate foreign direct inflows into the Zimbabwean economy.
But since the bourse was launched, only Seed Co International has listed, raising fears about its sustainability going forward.
Economic analysts attributed the slow start to a number of reasons, chief among them policy inconsistency, trust deficit, corruption, dividend remittance bottlenecks, as well as unforeseen changes in the legal and regulatory framework.
“Due to the history of policy inconsistency by the government, many investors and companies are acting with caution especially given the current challenges around legacy debt and dividend remittances,” economic analyst Reginald Shoko said.
There is also a serious trust deficit around foreign currency management in the economy, he added.
Zimbabwe has been regarded as a high-risk country to invest in due to its unpredictable legal system, corruption and policy inconsistency.
Veteran economist John Robertson said the government took a huge misstep by opening another stock exchange in Victoria Falls, considering the size of the country.
“It is not very sensible to do this, especially in the days of the internet and days of connectivity across borders. It’s not necessary to have a second stock exchange in a country the size of Zimbabwe. So I am not surprised that there is not much activity there. We have made a mistake to believe that we should have two stock exchanges in Zimbabwe,” Robertson said.
He said it was unlikely that investors’ interests would be served, adding businesses looking for a stock exchange listing would not find special benefits from choices that take them away from the mainstream activities.
Economist Eddie Cross said it will take time for the bourse to gain traction as activity on the stock exchange depends on the trust and confidence people have in the country.
Other economists said while the VFEX should trade in foreign currency, the country is currently facing foreign currency shortages, another limitation and stumbling block for the financial market’s to roll out trading operations.
They opined that foreign investors were less willing to invest in the country because of the political, economic and financial risk, meaning less companies will be listed on VFEX.
Analysts said the government should tackle corruption, investment bottlenecks and economic risk in order to attract the much-needed capital required to fund the productive sectors in the country.
Economist Godfrey Kanyeze said the government needs to address broader issues such as country risk for it to attract meaningful investors.
He also attributed the slow start to the Covid-19 pandemic, which crippled many businesses.
“You can never divorce what’s happening from the general climate. Firstly, we are in a Covid context where investors are very cautious, they are having their own problems. It may not be the time to really provide a normal gauge of what is happening because we are not in a normal environment,” Kanyeze said.
“It also depends in all other things that relate to Zimbabwe, the country risk factors. So, we still have to address all those issues that have resulted in lack of general investment.
“That’s the very reason why foreign direct investors have not been coming. All those broader issues also come to play because if we didn’t have Covid-19, we already had our own issues as a country,” he said.
However, Clive Mphambela, the chief director of communications and advocacy in the Finance and Economic Development ministry, said the government was very satisfied with the developments so far.
“We are very satisfied. It takes at least six months to a year to prepare a company for listing,” he said, adding, “we do have quite a number of entities that are actually preparing to list on VFEX, one or two mining companies that are operating locally.”
Mphambela said they have been approached by several South African companies that have expressed strong interest in listing on VFEX.
“We will be meeting them early in the new year,” he said.
Pressed further to reveal the number and nature of companies that have approached the government, Mphambela said: “I can’t disclose that but they are several. Quite a number.”
He said listing was a process but “we are perfectly satisfied with the developments so far. We are confident that VFEX is the way to go. We are actually in contact with several South African entities, which would like to explore possibilities on VFEX.”
“VFEX is actually going to be a pan-African exchange and is the only US dollar-based exchange on the continent. It’s a very attractive option even for JSE (Johannesburg Stock Exchange) companies, which are listed in rand. The companies are coming from across the board,” he said.
In its report titled: Economic Musings: Of the Victoria Falls Stock Exchange and Capital Flows, Access Finance revealed that many companies in Zimbabwe would struggle to list on VFEX as they were considered start-ups.
Access said before becoming ready for an initial public offering (IPO), many firms go through a life cycle with each stage capable of being classified by risk profile and a certain type of investment being suited to it.
The company then listed the cycles as “start-up”, which requires capital through owner equity and venture capital, “expansion”, which requires capitalisation through owner equity, private capital and structured debt.
The final stage of the cycles was “high growth”, where firms can start considering IPOs or bank debt for expansion.
“Most firms in Zimbabwe fall in the start-up and expansion stage. At those stages of development valuation, bespoke financing and capital structures, management assistance and operational improvements are key for the firm’s growth. Capital market participants best suited to this profile are private equity firms in their various forms and investment banks,” the report partly reads.
“This is where a glaring gap exists in the market. This gap is specifically around the availability of these institutions and asset classes to parties with capital that can be directed to the same for ready deployment into suitable businesses.”
Launching the platform in October, Finance and Economic Development minister Mthuli Ncube said the bourse was a gateway for local and global companies to raise capital in foreign currency.
He reiterated the government’s desire to list a bond meant to raise funds for compensating white former commercial farmers under the Global Compensation Deed Agreement.
The bourse allows listed companies to raise and trade their stock in any convertible hard currency, limiting the exchange risk.
According to Ncube, there is a need for the creation of globally recognised stock exchanges in Africa, those that arise from environments that are devoid of any negative impact of exchange rate fluctuations.
Among the incentives being offered to investors that participate in VFEX is a 5% dividend withholding tax, exemption from capital gains withholding tax, minimal currency risk and ability to move capital and dividends in and out freely.
According to Exchange Control Directive RV177/2020 from the central bank, all foreign currency inflows invested into a resident company listed on the VFEX shall be from free funds or offshore funds and these investment funds shall be credited to the listed corporate’s investments foreign currency account.
It also states that funds held in the investments FCA shall not be subject to any surrender requirements and shall be held for an indefinite period for use by the listed company.
Exchange control approval will be required from resident companies listed on the VFEX, for opening an offshore account for the purposes of receiving investment proceeds.
Non-resident companies listed on the VFEX will receive investment funds in local or offshore investment accounts.
The non-resident company can keep funds raised from the listing or the balance after investing the required amounts in Zimbabwe.
Foreign currency received by resident investors on the VFEX as disinvestment proceeds and dividends into their local FCA accounts, shall be eligible for meeting offshore payments as well as settling local obligations.
Dividend or disinvestment proceeds due to non-resident investors shall be freely remittable through the authorised dealer without seeking prior exchange control approval.
Despite all these measures put in place, VFEX is still failing to attract more investors.

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