There seems to be no reprieve for stock market investors on the Zimbabwe Stock Exchange as new monetary and fiscal measures will put further downward pressure on the performance of the economy in general and listed companies to be specific.
The Reserve Bank of Zimbabwe, this week increased interest rates for loans to 200 percent per annum from 80 percent citing the need to align these with prevailing inflationary developments. Annual inflation stood at 191,6 percent at the last count this month.
According to RBZ governor Dr John Mangudya, the Bank’s Monetary Policy Committee reviewed interest rates and statutory reserves with effect from July 1, 2022, as follows; “Increasing the bank policy rate from 80 percent to 200 percent per annum, increasing the Medium Term Accommodation interest rate from 50 percent to 100 percent per annum, increasing the minimum deposit rate for local currency (ZW$) savings from the current 12,5 percent to 40 percent per annum and increasing the minimum rate for ZW$ time deposits from 25 percent to 80 percent per annum”.
The new measures come at a time the stock market was struggling to shrug off another set of fiscal and monetary measures announced by the Government in May 2022.
One of the measures announced in May was the suspension of bank lending amid accusations some entities “were now using funds from banks to purchase foreign currency”.
The decision to suspend bank lending meant reduced money supply in the economy. In addition, cash-constrained companies, that hold shares, would be forced to dispose of their shares to meet pressing working capital needs among other requirements.
Another measure that had a direct impact on the stock exchange, was the increase in capital gains withholding tax to 4 percent from 2 percent for shares held for less than 270 days.
The impact of these new measures was a negative impact on trading volumes. There was also a market sell-off, especially from liquidity-starved corporates holding treasury shares. Just before the new measures were announced, the ZSE was valued at $3,4 trillion as of May 6, 2022.
The market has since lost $900 billion or 26,4 percent of that value to $2,5 trillion as of Wednesday this week.
The downward trend is likely to continue following new measures announced this week.
Higher interest rates impact the entire economy. Borrowings become more expensive putting pressure on profit margins. Lower profits margins make listed companies less attractive to investors.
Higher finance costs slow down cash flows for businesses and individuals and this can lead to reduced demand for goods and services and also put a pause on growth plans. Higher interest rates also mean instead of borrowing, businesses and individuals would rather sell off stocks putting pressure on share prices.
Term deposits were also increased from 25 percent to 80 percent per annum and these might seem more attractive to some conservative investors who see stocks as risky assets.
While in general, an increase in interest rates may lead to a decrease in share prices, the impact is not the same for all investors.
For day traders, an increase in interest rates spells doom, but for buy-and-hold stock market investors with a longer time horizon, rate hikes aren’t a bad thing.
Likewise for banks, lending above 200 percent and paying between 40 and 80 percent interest on deposits, the margins will be higher making them attractive unless they are hit by non-performing loans.
On the other hand, rising rates tend to hurt highly leveraged stocks in particular those that rely on overdrafts to oil their working capital. High borrowing costs can really clip their wings.
But investors should not feel all is lost. While interest rates matter to stock valuations, there are many other factors that determine stock prices. Time will tell!