ZSE plunges into the red

LIVINGSTONE MARUFU / CLOUDINE MATOLA

The Zimbabwe Stock Exchange (ZSE) is facing significant challenges due to a severe liquidity shortage, with investors experiencing considerable losses as share prices remain undervalued, Business Times can report.

All-Share Index, which ended 2024 at 228.37 points, dropped to 216.90 points this week due to liquidity constraints. Additionally, the share prices of several blue-chip companies have fallen by nearly 50%, resulting in investor losses.

Tafara Mtutu, an investment analyst at Morgan & Co, explains that a liquidity crunch causes shares to trade without the necessary price support, leading to sharp declines in value.

“When liquidity is tight, stocks don’t trade at their optimal prices. For instance, Delta, which typically trades between USc60 and USc70 per share, is now trading around USc35. This results in losses for investors who purchased shares at higher prices,” Mtutu said.

“However, this presents an opportunity for investors buying now, as they could see significant gains once liquidity returns to the market. Since December 27, ZSE performance has been on a downward trend.”

In its Zimbabwe Economic Outlook & Equity Strategy Report, Morgan & Co noted that the tight monetary policy is hindering economic recovery.

“The ZSE continues to struggle under low liquidity, starting the year with losses. The current restrictive monetary policy, characterized by limited Zimbabwe Gold [ZWG] and US dollar liquidity, along with high ZWG interest rates, has reduced the number of loans issued by the banking sector. This will affect the availability of bridging finance to address cashflow gaps in the private sector,” the report stated.

“Seasonal businesses with government contracts will feel the pressure, and this will likely affect overall demand in 2025.”

The report also mentioned that the introduction of the Targeted Finance Facility is expected to alleviate some of the liquidity pressure by providing short-term, collateralized loans to productive sectors in the economy.

Despite these measures, the liquidity crisis has led to a narrowing of the gap between the official exchange rate and the parallel market rate.

 According to Morgan & Co, weak demand for US dollars in the parallel market has caused exchange rates to stabilize at ZWG$34/US$ to ZWG$36/US$ over the past few months.

The research firm believes that the authorities may ease liquidity restrictions to settle outstanding obligations. “We anticipate that fiscal authorities will likely settle outstanding debts using debt instruments or a combination of ZWG and US dollar payments, with a preference for US dollars to support central bank policies. However, we also expect occasional bursts of fiscal indiscipline, which could disrupt the parallel market rates and, consequently, ZWG inflation,” the report stated.

Morgan & Co predicts that ZWG money supply will remain tight throughout the year as monetary policymakers aim to control parallel market rates.

Nevertheless, there may be periodic liquidity bursts as fiscal obligations become overdue, potentially impacting the stock market.

The firm also highlighted a reduction in the capital gains withholding tax from 2% to 1%, which is expected to boost trading activity and increase volatility on the ZSE.