Implied exchange rates have nothing to do with a stock market

BATANAI MATSIKA

There has been a lot of “clatter and noise” about parallel market rates, the Old Mutual Implied Rate (OMIR) and suspension of trading activity on the Zimbabwe Stock Exchange (ZSE).

We have also been perplexed by claims purporting that the OMIR has served somewhat as a benchmark for the determination of parallel
foreign exchange market rates.

The crux of the matter is that the OMIR is a simple calculation that involves
comparing the Old Mutual Limited share price on the ZSE to that on the
JSE (Johannesburg Stock Exchange).

The point here is that implied exchange rates have nothing to do with a stock market since the concept can be applied on almost any standard product or item (such as a burger, boiled egg, TV or even a pint of beer)
that is priced across different markets. Early last year, Morgan & Co Research introduced the Cola-nomics Indicator and has been tracking the price of a CocaCola 2 litre PET in Southern African countries to come up
with implied exchange rates.

It is basically a variant of The Economist’s popular Burgernomics that evaluates purchasing power parity across various countries using
the price of a McDonald’s Big Macburger (The Big Mac Index).

Since Coca-Cola is a very common brand on the continent, our methodology
involves deriving implied exchange rates by dividing the price of a 2 litre Coca Cola PET bottle in the various countries by the average
price of a 2 litre Coca Cola PET bottle in South Africa.

Cola-nomics uses the South African Rand (ZAR) as a base currency.
The derived USDquoted implied rates are then compared to the actual
USD exchange rates and the difference between the comparable rates measures the degree of currency over/ undervaluation.

We have noted with interest that our latest Colanomics Implied Rate for the Zim dollar of 68.94 is in line with the official exchange rate of 65.88 as per the latest auction results.

There are two possible explanations for this; (1) that Delta Corporation
has been accessing most of its foreign currency requirements on the official market and (2) that there could be pricing pressures for Delta in
Zimbabwe owing to the low levels of disposable incomes.

Out of interest, we applied the same approach on the KFC Streetwise 3 and we came up with an implied exchange rate of 183.98 for the Zim dollar
against the greenback (note that the correct price of the KFC Streetwise 3 should be USD2.69 not USD5.50).

The big question in our minds is whether foodies would one day wake up to find that the KFC Streetwise 3 has been “banned or suspended from trading” whenever this implied rate becomes popular?

Food for Thought!

Batanai Matsika is the Head of Research at Morgan & Co. He can be contacted on +263 78 358 4745 or email:
batanai@morganzim.com