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VFEX derailed by forex dynamics

Respect Gwenzi Financial ANALYST

In three months’ time, the Victoria Falls Stock Exchange (VFEX) will turn one year. Indications are that the much-touted bourse will retain only its currenttwo listings, with a few others remaining in the pipeline while a bigger fraction of potential listings will continue to assess the economic environment and the potential benefits that may arise from the listing.

Given the current slow uptake of the offer, the VFEX ranks low as the bourse which took the longest time to gain traction in history, if ever it recovers from the current slumber.

Our view is that the idealisation and structural make-up of the VFEX is appealing but the prevailing economic fundamentals in Zimbabwe do not favour its immediate takeoff.

The VFEX presently has two listed counters, which are Seed Co International and Padenga Holdings. Seed Co International is primary listed on the Botswana Stock Exchange (BSE). It is involved in the production and marketing of mainly maize and sorghum seed and has operations in over eight countries.

The company was set up in Zimbabwe and through new investments by shareholders, has spread its wings to the rest of Africa. It primarily was secondary listed on the ZSE before switching to the VFEX, as its first listing at the end of 2020.

Six months later, Padenga hopped onto the VFEX. The company is involved in the production of crocodile skin and gold. It operates one gold mine, but aims to open a new mine, which is presently being resuscitated.

The future of Padenga is certainly in mining, which is capital intensive and in its formative years of contributing to revenue and profitability. Since its listing on the VFEX, Padenga has shed over 50% on its opening price over two trading sessions.

Seed Co International has barely moved since its listing. In its formative trades, the counter closed lower at US$0,18 from an initial asking price of US$0,215.

While the counter is presently trading at US$0,25 which on paper would appear as selling at a premium to the BSE price, the price is a gross discount to the BSE, a factor which is a basis of our piece.

Is US$0,01 traded on the VFEX (Zimbabwe, the same as US$0,01 traded on the BSE (Botswana). This analogy is consequential because it highlights a fundamental aspect of the Zimbabwe’s current economic status, which in turn impacts investment and prospects of the VFEX as a new bourse.

The impact as we will see depends on whether one is a foreign investor or a local investor. In the case of a local investor to participate on the VFEX, there is need to operate a USD bank account which then transfers money to a broker for share purchase.

Now assuming the USD invested have been purchased on the streets (parallel market) or earned formally but in cash it means their value at the point of depositing is automatically devalued to the interbank rate. The impact of this move is realised at the point of share disposal.

Once a local investor disposes the shares purchased on the VFEX and the credit is transferred to their bank account, the real value of their balances depends on their intended use. Primarily it cannot be withdrawn into cash, just like any other locally generated USDs. Secondly, if required for use in ZWL, the conversion is the interbank rate, which presently is 55% lower than the parallel rate.

Since this money cannot settle international transactions, conversion to ZWL (RTGS) is the most likely option. A local investor intending to participate on the VFEX with hard cash immediately loses at least 50% of their money, given the opportunity cost of the black-market rate.

So suppose an investor is aiming at 30% return, the net, adjusted for exchange rate premium between markets is a loss of 20%.

In the case highlighted above where the SeedCo international share is trading US$0,01 on the VFEX ahead of BSE peer on paper, the revelation above shows that the real value of the SeedCo share on the VFEX with respect to local investors is in essence trading at half the BSE price, which is even way lower than its closing price in its first trades on the VFEX.

For foreign investors, the present system appears to be in their favour, given that there is no exchange loss, if primary currency brought onto the VFEX is USD.

Foreigners can therefore benefit on portfolio remittances to respective countries without suffering the effect of exchange rate variance, but there is one hurdle which foreigners will have to hop over.

Presently there is a US$200 million backlog in clearance of interbank funds. This is equivalent to 47% of the country’s monthly exports.

The RBZ is quickly losing grip on market as demand for forex surges.

In the latest auction, demand shot up to the highest level since the beginning of the auction system in 2019. For perspective, the total amount of forex allocated since the beginning of the year is now at US$1,1 bilthe lion, which gives an average of US$38 million per week.

Rising weekly allocations further pushes the clearing backlog to levels above US$200 million, which gives rise to opportunity cost of money and time value, which reduces the value of funds.

For the companies evaluating the proposal to list on the VFEX, forex challenges also reduced the allure.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

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2021-07-30T07:00:00.0000000Z

2021-07-30T07:00:00.0000000Z

https://digital.alphamedia.co.zw/article/281736977490469

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