ACTIVITY on the stock market has been subdued for two weeks following new trading directives announced by the Reserve Bank. Business reporter Bernard Mpofu speaks to Zimbabwe Securities Commission chairperson, Willia Bonyongwe on the Commission’s role and events happening on the stock exchange.
Mpofu: (M) What has the commission achieved since its formation and when is it going to be fully operational?
Bonyongwe: (B) We have been meeting stakeholders, talking to the ZSE management committee. We are also working on putting structures to make sure that there is a secretariat. Right now, we are in transition and until we have a statutory instrument we are using the existing statutes. The ZSE management committee has set up a sub-committee which is dealing with the commission on a day-to-day basis to ensure that there is a smooth takeover.
We are also in the process of reviewing the rules and scouting for the secretariat which could be set up by January (2009). The commission is not a policeman – we want to strengthen the system to make sure that there is a separation between clients group and proprietary group.
(M): How does that make the commission more efficient?
(B): There have been allegations that stockbrokers were trading on their own and inflating share prices. If they are separated, you are actually able to tell whether they are arbitraged or not. We have advised them that we shall be re-registering all the stockbrokers.
(M):Is there merit in re-registering them.?
(B): It’s a requirement in the Act. We are in the process of developing criteria for this exercise. The commission was set-up to promote best practice and standards.
Investors need assurance that the local bourse is well-regulated. This ensures market confidence and stability.
(M): Was the market being driven by speculation before measures by the Reserve Bank?
(B): We had speculators because the people who were trading on the stock market were not traditional market players. It was an illusion, a bubble that was created by the speculators and it was bound to burst.
(M): Where was the Commission when the stock market was said to be getting out of control and what is it doing now?
(B): We are still discussing on that issue but if you listened to my speech two weeks ago, I spoke about how we had allowed hot money on the bourse despite having guidelines on money laundering in place. But it looked like we did not question transactions that were carried using this hot money.
Right now the market has collapsed, so we need some level of responsibility. I am not suggesting that we tampered with the pricing mechanism but if we suspect that the source of funds is suspicious we also question and limit that speculation.Â These irresponsible activities could have also resulted from the fact that the stock market was probably the only institution that was allowing payment through cheques.
(M):What is the commission’s view on fungiblity?
(B): It allows companies to raise funds on other markets giving investors, especially those who need a convenient exit route for their money. The problem that we have had with fungibility was nationally some investors have taken out money out of the country circumventing exchange control regulations.
There are no investments or funds coming to Zimbabwe by virtue of fungibility. I think Old Mutual should actually be doing more to raise money for distressed companies it has invested in. It is a major investor in most companies.
(M): Do you see Old Mutual’s fungibility being restored soon?
(B): I’m not quite sure why this fungibility was suspended. The company has not yet come to the commission to discuss the matter. But in my view when a company gets fungibility it should use it to mobilise funds to revamp the economy.
(M): What is your view of the Old Mutual Implied Rate?
(B): I question the authenticity or correctness of using the Old Mutual price as the exchange rate. So if you are using a wrong rate you would probably get a wrong conclusion because of the circular nature of deriving the value. The Old Mutual stock derives value from itself. Foreign currency rate should in my view be rational but the one that is being used by speculators is not credible.
(M): Researches by some stock broking firms revealed that investors lost real value on stocks despite the bullish thread that prevailed. In your view what does this say about the official exchange rate.
(B): This depends on what exchange rate has been used. What has been happening was that people have been using the Old Mutual Implied Rate as the exchange rate. Is this the true rate? People were driving the rate in order to get higher prices. What is interesting is that the dollar loses its purchasing power parity when compared to regional peers. I do not agree that they have been losing value, it is just that we are using different exchange rates. So the people who determine the parallel market rate need to look at a basket of items rather rely on one item to determine the exchange rate as a proxy. And funny enough, those people know that it has come down they do not want to use that value. If it was purely market determined, we should have seen prices going down. For Zimbabwe we have always had a managed exchange rate since independence but we have not seen the level of in discipline, which is going on.
(M):Â What is the prudent investment opportunity under the prevailing economic conditions?
(B): I think Zimbabweans have taken a short-term view of investment and the irony is that some people, for example South Africans are buying some productive companies here. But we are not doing so, we are waiting. We have taken a short-term view, this is why you find that most people are considering the stock market as the only option. I also think that we also have tended to put a lot of trust in consumption purposes or non productive investments.
(M): Documentation reveals that the equities market has been buoyant since mid February when interest rates on the money market became unattractive for most investors. This was then followed by a bull run amid credit creation by the central bank through concessionary funds such as ASPEF and Bacossi. In light of these factors, what impact has the Reserve Bank policies had on activities on the stock market?
(B): These are allegations that we have not proved that the market became buoyant in February when money markets rates became unattractive. There is usually that adverse relationship – this is a fundamental relationship between equities and money market.
This has a problem when that money is going to consumptive expenditure because it does create anything resulting in your classical definition of inflation – too much money chasing few goods.
Money supply growth by the central bank is manageable but that created through burning is not. In my view there was a lot of credit creation outside the banking sector, especially in the last few weeks.
(M): What part could the foreign exchange rate regime play on the bourse?
(B): I think it’s valid to say it’s not a secret that we need an injection of money into the economy.Â We have gone for about 10 years without balance of payment support and there has been very little foreign direct investment to income and at the same time we are a net importer of goods and services. Right now foreign currency inflows are low and when they arrive they circumvent the formal sector resulting in burning. I
think people were now irresponsible and at the end of the day it doesn’t help anybody. Its an illusion of profit.
(M): When is the Zimbabwe Stock Exchange demutualisation taking place?
(B): The last time I talked to the ZSE chief executive Mr (Emmanuel) Munyukwi we could see something concrete within two months, all things remaining equal.