Haunted by OMIR: Ban on fungible stock shows Treasury’s currency paranoia

Zimbabwe stock exchange

Government’s decision to suspend the transfer of shares in dual-listed shares shows Treasury’s unease at what it sees as manipulation of the exchange rate.

Investors will not be able to transfer shares in Old Mutual, PPC and SeedCo International across borders for 12 months, under new measures announced Sunday.

In a Statutory Instrument, Finance Minister Mthuli Ncube said he was suspending “every authority, directive or order granted by any exchange control authority allowing the fungibility of shares” in the three counters.  

Treasury said Sunday that the move is “part of broad and bold measures to weed out some of the visible sources of currency instability”.

Apart from authorities’ panic over growing pressure on the Zimdollar, the move also appears to have been driven by claims of fraud by brokers handling fungible shares, plus the Government’s paranoia over the influence that Old Mutual share prices have on the sentiment driving the exchange rate.

There is a sense of déjà vu; the last time the Zimbabwe government did this, back in May 2008, the Zimbabwe dollar had fallen from Z$275 million to Z$430 million to one US dollar in one week. This time, the recently reintroduced Zimbabwe Dollar is under pressure yet again, forcing authorities to go back in time to retrieve the same measure.  

Until this new move, an investor could buy Old Mutual, PPC or SeedCo shares in Zimbabwe, using Zimdollars, and then sell them outside the country for US dollars or Rand. This was one way in which foreign investors could take their money out of Zimbabwe, given the forex crisis.

A total of 51% of the company’s listed shares must be retained on the ZSE, under listing rules.

If there had been no forex shortages, an investor would be able to sell their shares on the ZSE, use the proceeds to buy US dollars, and then repatriate their earnings outside the country. However, with just US$1.5 billion having been traded on the interbank market by December 2019, investors have no access to the forex they need.

This has driven demand for Old Mutual shares by foreign investors looking for an exit from the Zimbabwe market.

Authorities, however, believe that this fungibility of the shares was creating speculation and adding pressure on the local dollar. Hoping to slow demand, in June 2019, RBZ issued exchange control directive RU102/2019, advising that fungible stock could only be sold 90 days after an investor had bought them.

This has not stopped the demand; as at Friday, Old Mutual shares were up 48.5% from the start of the year, and 634.8% year-on-year.

Broker manipulation?

Officials also believe there is fraud in the market involving fungible stock.

Earlier this month, it was reported the Securities and Exchange Commission (SecZim), which governs the financial markets, said it had started an investigation into possible collusion by brokers and transfer secretaries to fraudulently switch dates on transactions to make them appear as if they had happened earlier than their actual dates. This way, their clients could sell quicker than the required 90-day waiting period.

However, no further details were given on the claims.

Fungible shares such as Old Mutual were popular with investors now just as they were over a decade ago, when hyperinflation and forex shortages peaked. Then, local companies that had foreign debts would buy dual listed shares in Zimbabwe and sell them in South Africa to earn the forex they needed to pay off creditors. At that time, even power utility ZESA reportedly used Old Mutual stock to pay off Eskom.

In May 2008, then RBZ governor Gideon Gono banned the fungibility of shares, saying they were being used for speculative purposes against the currency. Hit by hyperinflation, the stock exchange shut down soon after. Following resumption of the ZSE after the introduction of multi-currencies in early 2009, fungibility was restored in March 2009.

OMIR paranoia

Old Mutual’s fungibility is also an annoyance to authorities, as it is used as a measure of the exchange rate, which Government is failing to stabilise despite a raft of currency reforms.

Traders often use a comparison of the price one Old Mutual share on the ZSE, with the price of an Old Mutual share on other exchanges, such as the Johannesburg Stock Exchange. This comparison produces the Old Mutual Implied Rate (OMIR), which gained popularity as an exchange rate gauge in the 2000s.

As at Friday, the implied USD:Zimdollar rate using Old Mutual shares was around 1:60. Reflecting where the market believed the rate would go in the short term, the OMIR is higher than the official rate of 1:18 and is also higher than last week’s rates on the parallel market of around 1:40.

Officials believe the OMIR influences market sentiment, and with it the black market rate.

Old Mutual, the company, has no role in the OMIR. The rate is only determined independently by market watchers using the share prices. However, this has not stopped Government officials and pro-government critics from accusing the company of manipulation.

“Old Mutual as the capitalist vulture, is responsible for abetting exchange parallel market activities because its implied rate often matches the black market. The fungibility which was aimed at increasing capital flows into the country, is now an avenue for abuse,” ZANU PF official and former Presidential advisor Chris Mutsvangwa said recently.  

This conspiracy was repeated Sunday on Twitter by an account run by Presidential spokesman George Charamba.

The ban of fungibility is a further knock for the ZSE, which is up 127% since January.

Portfolio investments, which includes investment in shares, dropped from US$54.7 million in 2018 to US$3.7 million in 2019. According to RBZ, “the decline in both FDI and portfolio investment was, in large part, due to heightened perceived country risk”.