Kudakwashe Mundowodzi
THE year 2024 has been a transformative period for Zimbabwe’s capital markets, marked by significant developments and challenges.
The Zimbabwe Stock Exchange (ZSE) and the Victoria Falls Stock Exchange (VFEX) have both experienced unique trajectories influenced by local and international events.
Zimbabwe Stock Exchange (ZSE)
The ZSE has shown resilience amidst economic turbulence. The most notable change was the replacement of the Zimbabwean Dollar (ZWL) with the Zimbabwe Gold (ZWG) in April 2024. This shift aimed to stabilize the currency and restore investor confidence. Initially, the ZSE All Share Index achieved a nominal return of 334 percent in ZWL terms, translating to 15 percent in USD terms due to the ZWL’s depreciation. Post the introduction of the ZiG, the index realised a nominal return of 28,64 percent, equivalent to a 27,38 percent return in USD terms. This stability attracted both domestic and foreign investors, although overall liquidity remained tighter compared to previous years.
Victoria Falls Stock Exchange (VFEX)
The VFEX, operating in USD, faced different challenges. Despite an increase in listings and a modest 2,7 percent rise in the All Share Index in the first half of 2024, the market struggled with liquidity constraints. Public mistrust in banks and inconsistent monetary policies led to decreased real savings and less foreign cash directed towards capital market investments. However, the VFEX’s ability to raise capital in hard currency and lower trading fees provided some relief and potential for growth.
Impact of local and international events
Several key events in 2024 significantly impacted Zimbabwe’s capital markets:
- Currency Reform: The introduction of the ZiG was a pivotal moment, aimed at curbing hyperinflation and stabilising the economy. This move was crucial for the ZSE, as it helped mitigate the volatility associated with the ZWL.
- Debt Resolution Efforts: Zimbabwe’s efforts to return to international capital markets, including a $331 million compensation package for white farmers, aimed to improve relations with creditors and attract foreign investment. These efforts are vital for long-term economic stability and market confidence.
3.Global Economic Trends: Internationally, the global economic environment remained volatile, with fluctuating commodity prices and geopolitical tensions affecting investor sentiment. The VFEX, being USD-denominated, was somewhat insulated from local currency issues but still faced global market pressures.
Zimbabwe Stock Exchange challenges
- Declining value propositions for listed entities
The attractiveness of listing on the Zimbabwe Stock Exchange (ZSE) has diminished due to economic instability, regulatory hurdles, and limited access to capital. Companies may find the costs and complexities of maintaining a public listing outweigh the benefits, leading to fewer new listings and potentially delistings. This reduces the diversity and vibrancy of the market, limiting investment opportunities.
- Inactive debt market
The debt market in Zimbabwe is underdeveloped, with limited issuance and trading of corporate and government bonds. This inactivity restricts companies’ ability to raise capital through debt instruments and limits investors’ options for fixed-income investments. A vibrant debt market is crucial for providing liquidity and stability to the financial system.
- Low investor confidence
Investor confidence in the ZSE is low due to economic volatility, political instability, and past instances of market manipulation or corporate governance failures. This lack of confidence discourages both local and foreign investors from participating in the market, reducing overall market activity and liquidity.
- Low liquidity levels
Low liquidity on the ZSE means that it is difficult for investors to buy or sell shares without significantly impacting the market price. This can lead to higher volatility and increased transaction costs, making the market less attractive to institutional investors who require the ability to enter and exit positions efficiently.
- Increased transaction and regulatory costs
High transaction costs, including brokerage fees, taxes, and regulatory charges, make trading on the ZSE less attractive. These costs reduce potential profits and discourage frequent trading, leading to lower market activity. Regulatory costs can also create barriers to entry for new market participants. We must however commend the government for reducing the capital gains tax.
- Increased Regulatory
Environment
A stringent regulatory environment can create challenges for companies and investors. While regulations are necessary for market integrity, overly burdensome requirements can stifle innovation, increase compliance costs, and deter new listings and investments.
- Unstable Macro
Economic Environment
Economic instability, characterised by fluctuating exchange rates, high inflation, and inconsistent economic policies, creates an uncertain environment for investors. This instability makes it difficult for companies to plan and for investors to make long-term investment decisions.
- Perceived Policy Inconsistency
Inconsistent Government policies can create uncertainty and deter investment. Frequent changes in regulations, tax policies, and economic strategies can make it difficult for businesses to operate and for investors to predict future market conditions.
- Inflationary Pressures
High inflation erodes the real value of investment returns, making it less attractive for investors to hold assets in the local currency. This discourages both local and foreign investment and can lead to capital flight.
- Currency Risk
The volatility of the Zimbabwean dollar poses a significant risk to investors. Currency fluctuations can lead to substantial losses for foreign investors and reduce the attractiveness of the ZSE as an investment destination. This has however been stabilized by the introduction of the ZiG but investor perception remains negative and there is need for increased road shows.
- Long Settlement Cycle of T+3
The T+3 settlement cycle delays the availability of funds or shares for three business days after a trade. This reduces capital efficiency and makes the market less appealing, especially to institutional investors who require quick access to funds.
12.Continued Suspension of PPC and Old Mutual
The suspension of major companies like PPC and Old Mutual from trading on the ZSE creates uncertainty and reduces investor confidence. These suspensions diminish market capitalisation and liquidity, making the ZSE less attractive.
- Minimal Participation by Banks on ZSE IPOs
Banks play a crucial role in underwriting IPOs and providing liquidity. Minimal participation by banks in ZSE IPOs limits the availability of new capital for companies and reduces market dynamism.
- Less Sophisticated Investor Base
A less sophisticated investor base can lead to lower market participation and higher volatility. Limited financial literacy and investment knowledge among the general population can reduce the effectiveness of the market.
Strategies for stimulating the capital market in 2025
To stimulate Zimbabwe’s capital markets in 2025, several strategic initiatives can be implemented:
- Lobbying the Government
Engaging with government officials to advocate for favourable policies and regulatory reforms can help create a more conducive environment for capital market growth. This includes reducing transaction costs, streamlining regulatory processes, and ensuring policy consistency.
- Aggressive client engagements
Proactively engaging with potential and existing investors through seminars, workshops, and personalized consultations can help build trust and confidence in the market. Providing clear and transparent information about market opportunities and risks is crucial.
- Listing of Government debt securities
Encouraging the government to issue more debt securities on the ZSE can help develop the debt market, provide more investment options, and increase overall market liquidity.
- Promoting public-private partnerships
Collaborating with private sector entities to develop infrastructure and other projects can attract investment and stimulate economic growth. Public-private partnerships (PPPs) can also help mitigate risks and share resources. Many of these projects require substantial financing, which can be raised through listing bonds or equity on the ZSE, increasing activity on the exchange and bringing in new investors.
- Migration towards T+0 settlement cycle over the next 2 years
Moving towards a T+0 settlement cycle, where transactions are settled on the same day, can significantly improve capital efficiency and make the market more attractive to investors. This requires upgrading market infrastructure and ensuring regulatory support.
- Collaboration with commercial banking representatives
Working closely with commercial banks to encourage their participation in IPOs and other market activities can help increase liquidity and market depth. Banks can provide underwriting services, liquidity support, and investment products.
- Massive investor education campaigns
Implementing widespread investor education programmes to improve financial literacy and investment knowledge among the general population can help build a more sophisticated investor base. This can lead to increased market participation and stability.
- Enhancing liquidity
Both the ZSE and VFEX need to improve liquidity. This can be achieved by introducing more financial instruments, such as derivatives, exchange-traded funds (ETFs), and Real Estate Investment Trusts (REITs), to attract a broader range of investors. Additionally, policies that encourage savings and investment in the capital markets should be prioritised.
- Regulatory reforms
Streamlining regulatory processes and ensuring consistent and transparent policies will build investor confidence. The approval process for new listings and financial instruments should be expedited to reduce delays and encourage market participation.
- Incentivising institutional investors
Providing incentives for institutional investors, such as pension funds and insurance companies, to invest in the capital markets can significantly boost market activity. This includes offering tax breaks or other benefits for investments in prescribed assets.
- Leveraging technology
Continuing the digital transformation of the ZSE and VFEX will enhance efficiency and accessibility. Implementing advanced trading platforms and ensuring robust cybersecurity measures will attract tech-savvy investors and improve overall market operations including reducing system down times.
- Promoting sustainable investments
Encouraging investments in sectors such as renewable energy, women-run businesses, and environmental projects can attract socially responsible investors. These sectors not only offer growth potential but also align with global sustainability trends.
- Multi-currency settlement on the ZSE
Introducing multi-currency settlement options would broaden the pool of settlement options and enhance trade activity, addressing the limitation of available funds for trading on the ZSE.
- Migration towards T+1 settlement
Cycle shortening the settlement cycle to T+1 reduces the time capital is tied up, enabling faster reinvestment and improved market liquidity. Investors can quickly recycle their funds into new opportunities.
Other Proposed Market Development Solutions
- Tax Breaks for Listed Companies
Offering tax incentives to companies that list on the ZSE can encourage more businesses to go public, increasing market diversity and investment opportunities. For example, Rwanda has implemented tax incentives to attract junior mining companies, which focus on exploration and then sell their assets after making discoveries. Similarly, Ireland offers a low corporate tax rate of 12.5% to attract multinational companies.
- Incentives for secondary listings on the ZSE
Encouraging companies already listed on other exchanges to list on the ZSE can attract foreign investment and enhance market liquidity. The Johannesburg Stock Exchange (JSE) in South Africa has successfully implemented a fast-track listing process for companies already listed on major stock exchanges, allowing them to place a secondary listing on the JSE’s Main Board or AltX. This approach has diversified the investor base and improved brand recognition for companies.
- Incentives for independent power producers (IPPs)
Providing incentives for IPPs can help address energy shortages and support economic growth. In Africa, countries like Kenya and South Africa have successfully attracted IPPs through favorable policies and regulatory frameworks. For instance, South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has attracted significant private investment in renewable energy projects. These incentives include long-term power purchase agreements (PPAs) and government guarantees.
- Incentives for mining and exploring companies
Offering tax breaks and other incentives to mining and exploration companies can attract investment in the natural resources sector. Nigeria, for example, provides tax holidays and other incentives to encourage mining exploration. Similarly, British Columbia in Canada has made permanent two existing mining tax credits to support exploration activities.
- Remove taxes for properties moving into REITs
Eliminating taxes on properties transferred into Real Estate Investment Trusts (REITs) can promote the development of the real estate market and provide more investment options. In Europe, countries like the UK and Germany have introduced REIT regimes to meet the growing demand for tax-efficient real estate investment vehicles. These regimes offer tax advantages that make REITs an attractive option for property investment.
- Encouraging Foreign Direct Investment (FDI)
Creating a favourable environment for FDI through policy stability, tax incentives, and streamlined regulatory processes can attract international capital and expertise. The European Union (EU) has emphasized the importance of sustainable investments in Africa, promoting partnerships to attract investors and boost regional integration. Additionally, initiatives like the US-Africa Summit have resulted in significant commitments to expand trade and investment in Africa.
- Crafting of a Green Financing Framework
Developing a framework for green financing can attract investment in sustainable projects and support environmental goals. The European Green Deal, for example, aims to make Europe the first climate-neutral continent by 2050 and includes a green bond standard to finance climate change adaptation and mitigation projects. In Africa, green finance is seen as key to unlocking the continent’s potential in renewable energy and carbon sequestration.
Conclusion
The year 2024 has been a period of significant change and adaptation for Zimbabwe’s capital markets. While challenges such as economic instability, low liquidity, and regulatory hurdles remain, the steps taken towards currency stabilisation and debt resolution are promising. The introduction of the Zimbabwe Gold (ZiG) and efforts to improve relations with international creditors have laid a foundation for future growth.
To stimulate Zimbabwe’s capital markets in 2025, a strategic and comprehensive approach is essential. Key strategies include enhancing liquidity through the introduction of new financial instruments, streamlining regulatory processes, and implementing widespread investor education programmes. Encouraging institutional investors with tax incentives and leveraging technology to improve market efficiency are also crucial steps.
Promoting sustainable investments and developing a green financing framework can attract socially responsible investors and align with global sustainability trends. Additionally, fostering public-private partnerships and encouraging foreign direct investment through policy stability and tax incentives will be vital for long-term growth.
By focusing on these strategies and addressing the challenges, Zimbabwe can create a more vibrant and resilient capital market. The Zimbabwe Stock Exchange (ZSE) and the Victoria Falls Stock Exchange (VFEX) have the potential to become robust platforms for investment, contributing significantly to the overall economic development of the country. With continued efforts and strategic initiatives, Zimbabwe’s capital markets can drive economic growth and attract both domestic and international investors in the coming years.
