Global Courant
Zimbabwe’s economy is a regular in the mainstream media these days. Not many African countries get the amount of coverage it does. And every time it’s reported on, two forces have remained constant: hyperinflation and a weakening local currency. Every major policy and event has a link to these two. The mentioned implications usually point to losses for the common man. But no one foresaw that they would lead to the world’s largest stock market rally in 2023.
Share prices on the Zimbabwe stock exchange have risen so fast this year that the stock increased the maximum allowable movement in one day. Profits are made very quickly: 5%, 10% and even 20% in a single session. Add them up and the market is up a breathtaking 800% over the year.
But it’s not exactly cause for celebration. This strong rally is only happening as investors brace for an inflationary spiral and seek a hedge to protect the value of their money. The country’s inhabitants are no strangers to hyperinflation, and the same script is playing out before their eyes again. Consumer prices are rising by more than 100% annually.
Zimbabwe has a small stock market with a total capitalization of only $1.8 billion. That’s just a tiny fraction of the $1.3 trillion stock market that neighboring South Africa controls. However, this size makes it more accessible for the local population to invest. And now they are using the stock market as a haven from hyperinflation.
Zimbabweans are used to living in a world with two currencies: the US dollar and the Zimbabwean dollar. The former is relatively stable and reliable, while the latter is volatile and has little value. Most people prefer to use the dollar for everything from buying groceries to paying rent. According to the central bank, 75% of Zimbabwean transactions are done in the US dollar. The Zimbabwean dollar plummeted almost daily, depreciating 60% against the dollar in May alone. However, dollars are becoming scarcer for residents by the day.
That is the same reason why the Central Bank announced a gold-backed digital currency in April to stabilize the markets. But not much progress has been made since then. It too raised its reference rate – already the world’s highest – from 140% in May to 150%, in an effort to slow inflation. But now inflation is back in the triple digits as the mixed consumer price index rose from 86.5% in May to 175.8% in June.
So it comes as no surprise that the Confederation of Zimbabwe Industries, the country’s largest industry association, has a gloomy outlook on the national target of 1-3%. “The ability to meet mixed inflation targets is now under serious threat,” the union said.
However, this gigantic increase in share prices does not attract foreign investors. Foreigners have largely left the Zimbabwean stock market and now account for only 15% of trading. The reason is obvious: investors want stability and Zimbabwe has failed to provide it properly. Aside from the tailwinds surrounding the economy, regulatory risks are not out of sight. In 2020, the Permanent Secretary of Zimbabwe announced the closure from the stock market for five weeks, complaining that speculation in foreign-listed stocks was undermining the Zimbabwean dollar. So no one knows when the lights would go out at this party, or who would stake it out between investors and the government.
