The state of Zim Capital Markets!

Capital markets are a platform that allows the flow of capital from the excess economic units to the deficit economic units, as the former takes risk and expects compensation for that risk. Essentially, we are talking about both stock exchanges and over-the-counter markets where corporates and the government borrow money and attract capital thereby creating financial securities which are held and sometimes traded by the investors.

These markets are essential for economic development, and there is a school of thought that says that the more sophisticated the capital markets of a country are, the higher the chances of economic stability. Less interference by the government except just as a regulator, makes capital markets attractive for the participants.

In Zimbabwe, Capital Markets are regulated by the Securities & Exchange Commission of Zimbabwe (SECZ) which also administers the Securities Act Chapter 24:25, the Collective Investment Schemes Act Chapter 24:19 and the Asset Management Act Chapter 24:26. Collectively these formulate the basis on which the capital markets are regulated in the country. SECZ is an associate member of the International Organization of Securities Commissions (IOSCO), which is an international body of securities regulators which seeks to protect investors.

Currently, the capital markets industry has 222 regulated players broken down into 22 securities dealing firms, 65 financial advisors, 32 asset managers, 2 central securities depositories, 6 securities trustees, 7 securities custodians, 3 transfer secretaries, and 4 securities exchange, of which three are operational and 81 collective investment schemes, according to the regulator.

Collective Investments, which allow pooling of capital from the public for the purpose of investing it in a certain investment, are an integral part of our capital markets. They are guided by the Collective Investment Scheme Act and do not only limit exposure to financial securities but even real estate, commodities etc. However, investors need to be careful of pyramid schemes and should always check with the regulator before investing in a scheme.

Zimbabwe went through a dematerialisation process, which essentially means moving from the paper share certificates to the electronic ones. The shares are kept in a central securities depository (CSD) and shareholders have a CSD number allocated to them. The two depositories are Chengetedzai Depository and ZSE Depository.

The market capitalisation of the three exchanges including the exchange-traded funds (ETFs) and Real Estate Investment Trust (REITs) is roughly under US$ 4 billion depending on the exchange rate one uses. This translates to a stock market capitalisation to GDP ratio of about 20% if you maintain a US$20 billion GDP. The stock market capitalisation is less than the peak of what the Zimbabwe Stock Exchange witnessed during the first dollarisation era. The assets under management in Zimbabwe are somewhere under US$3 billion, also subject to the exchange rate used.

The ZSE, which is the oldest and biggest exchange in the country currently has 47 listed equities of which 5 are suspended from trading, it also has 5 ETFs and 2 REITs. The Victoria Falls Stock Exchange (VFEX), which is a US-dollar-denominated exchange has 13 listings and most of the listings have been migrated from the ZSE. The FinSec has one listing, which is the Zimbabwean arm of Old Mutual.? Fungibility of shares, which refers to the movement of shares across exchanges was banned in Zim.

The ZSE is currently exploring innovative ways to attract new listings on their exchanges. They recently launched the prospective issuers training and mentorship, which is aimed at assisting companies that might want to list on the exchange but are not sure of what it will take to do so. Retail participation in the capital markets has improved in the last decade and has been made easier by the introduction of remote platforms like the C-trade and the ZSE direct.

The fixed-income market, which deals with the issuance and trading of debt instruments and securities has not been the most vibrant, mainly due to the high inflation environment. Presenting before the Portfolio Committee for Budget, Finance and Investment Promotion, SECZ appealed to the government to bring some of their Treasury Bonds to the market and also other viable state-owned enterprises. Currently, there is only one fixed-income instrument on the VFEX, which is the Karo Mining bond.

A Depository Receipt (DR) is a security that represents exposure to another foreign company, and currently, there is a Nedbank ZDR on the VFEX. Exchange-traded funds are a security that is backed by a basket of underlying assets, and they are also part and parcel of our markets. REITs, which are a new product as far as our markets are concerned is gaining popularity due to its tax-efficient structure and the hybrid attributes of both an equity and fixed-income investment. Zimbabwe now also has the REITs board, which is a positive step in deepening the markets.

Activity in our capital markets, mainly the stock market, hasn’t been the best of late. The authorities have made it clear that they want to curb speculative behaviour by putting taxes through S.I. 103A of 2022. Any investor who buys marketable securities and disposes of them before 270 days attracts an additional two percentage point capital gains withholding tax. ?Exchange-traded derivatives like futures and options are a key feature of the financial markets in other jurisdictions but not here. The Finsec launched derivatives trading a few years ago but it hasn’t gotten much traction from the market.

Acknowledging that a lot of work has been put into developing the capital markets, there are still some gaps that need to be filled if Zimbabwe can match with other emerging markets. The government intervention needs to be limited to allow the markets to operate freely, things like suspension of counters based on allegations without proper research do not inspire confidence amongst the market participants.

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