Evaluating the VFEX

 

Batanai Matsika

2020 was indeed a roller-coaster year, particularly for stock market participants on Zimbabwean capital markets.

It was marked by changes in policies, Covid-19 and the launch of a new exchange; the Victoria Falls Stock Exchange (VFEX).

The new bourse is a subsidiary of the Zimbabwe Stock Exchange (ZSE) and was established to kick-start the Offshore Financial Services Centre in the tourism destination.

That said, many questions have been raised on the attractiveness of the exchange to both issuers and investors, bearing in mind the limited trading activity on the bourse.

We note that the whole VFEX idea is hinged on the fact that rules in offshore financial services centres are different from those that are in place in mainland zones. This means that the VFEX operates independently, using a set of rules of trading that are different from the mainland zone. Securities listed on the VFEX are tradable and settled solely in United States Dollars or a convertible currency.

The fact that the VFEX allows for transactions in foreign currency means that it is a way to encourage foreign investors to come through and invest in Zimbabwe.

The country has been facing several constraints including, amongst others (i) foreign-currency shortages; and (ii) limited foreign direct investment flows. Therefore, there is a strategic logic of setting up a securities exchange that attracts critical offshore capital to the economy as this helps local companies raise capital in foreign currency.

The concerns from market participants;

  1. Country-Specific Risk

A major area of concern that has been raised by market participants on the ability of the VFEX to attract international capital is centred on the broader country-specific risks.

Zimbabwe already ranks poorly in terms of political transformation and governance as per important indicators such as the Bertelsmann Stiftung’s Transformation Index (BTI). The BTI assesses the transformation toward democracy and a market economy as well as the quality of political management. Consequently, the risk profile of the country has made it difficult for the country to attract long term investment capital.

An area of concern amongst international investors has been the repatriation risk that has for some time been associated with the Zimbabwe Stock Exchange (ZSE). For example, companies listed on ZSE such as BAT Zimbabwe and Delta Corporation have struggled to remit dividends to foreign shareholders. However, the story being pitched here is that the new exchange has been structured in a way that mitigates this key risk.

  1. Policy Inconsistencies in the Broader Economy

There has been a wave of policy changes and inconsistencies in Zimbabwe, particularly when it comes to issues around the currency regime. Most investors contend that policymakers will have to demonstrate that Zimbabwe will adhere to the laws and regulations that is has put in place to give participants on the VFEX some form of insurance. Several statutory instruments that have been pushed through also signal there has been lots of disruptive experiments. This makes VFEX a hard-sell, particularly to foreign investors that are concerned about the instability and the prevailing macro-economic risks in the country.

III. The absence of a Technical Partner on the VFEX

The ZSE has indicated on different forums that it plans to rope in a technical partner for the VFEX in the form of an international exchange, fund manager or global bank.

While the authorities have indicated that there has been interest from several international investment banks to support the VFEX, no concrete deal has been clinched. We maintain that securing a reputable international partner will be key in terms of boosting confidence within the global emerging market investor community.

An interesting case study of a similar global investment platform that has been successful is Nasdaq Dubai. We recall that the Dubai International Financial Exchange (DIFX) opened for trading for the first time on 26 September 2005.

It has since been rebranded as Nasdaq Dubai after Nasdaq OMX acquired a one-third stake in the exchange in 2008. Like VFEX, the DIFX was launched in the city’s financial free zone with the aim of becoming the leading securities market between Western Europe and East Asia. The idea was to become the gateway for global financial investment in the region. Today, Nasdaq Dubai provides both investors and issuers with a larger and more liquid securities market than currently exists elsewhere in the region.

  1. The Reserve Bank of Zimbabwe (RBZ) is in the Clearing and Settlement Equation. We highlight that there are indeed several offshore financial centres around the world that have been structured in ways that attract foreign investment flows.

These jurisdictions (often countries) have made a conscious effort to attract offshore banking business and non-resident foreign currency denominated business by allowing relatively free entry and by adopting a flexible attitude where taxes, levies and regulations are concerned. The concern with the VFEX is that the RBZ is involved in the clearing and settlement process in as far as actual trades are concerned.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com/batanai@piggybankadvisor.com

 

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