via Incentives needed for listed firms | The Financial Gazette by Phillimon Mhlanga 26 Sep 2013
AS real returns plunge to unsustainable levels in the traditionally safe-haven market, the Zimbabwe Stock Exchange (ZSE), experts have urged the country’s only capital market to lobby the new government to introduce incentives related to investments associated with the equities market.
For the past few years, only the truly brave have been seeking fortunes on the local bourse.
Analysts say in an effort to promote growth of the capital market, regulators should introduce incentives such as tax reduction for listed corporates to attract new listings.
The government could simply take advantage of a new tax bill expected to become operational in January 2014.
The ZSE is relatively large and ranks among top five stock exchanges in Africa in terms of listings but does not rank that high in terms of market capitalisation and traded values.
The ZSE has its origins in Bulawayo, where the Rhodesian Stock Exchange opened in 1946.
A second floor opened in Harare in 1951 and the current rules of exchange date from the Rhodesia Stock Exchange Act of 1974 and the ZSE Act of 1996.
It only became a significant capital market in the 1990s, after the introduction of market reforms in the form of Economic Structural Adjustment Programme (ESAP), adopted in 1991.
The most important boost of the ZSE came with the opening of the stock exchange to foreign investors in May 1993, alongside with a major relaxation of exchange controls.
Since then the ZSE has grown immensely to become one of Africa’s leading equity exchanges and leading provider of services that facilitate capital raising and trading of shares.
It provides the platform and means for raising capital for both Zimbabwean and international companies through the issuance of equity, debentures and depository receipts.
While there are more than 70 listed companies on the stock exchange, there is an expectation that a handful of other entities will list in the near future.
Companies floating on the exchange would enjoy a profit tax rate reduction and with this they would have greater access to capital raising avenues.
Most of the companies listed on the local bourse are struggling due to lack of working capital and inability to meet obligations.
A serious dearth of liquidity is a stumbling block in the way of Zimbabwe’s recovery. The country has no lender of last resort and the government uses a commercial bank for its operations.
The market has also been affected for some time because of the indigenisation law which has brought about a lot of uncertainty since a number of investors were no longer keen to invest in the country.
Analysts say the indigenisation policy is an elephant in the room scaring off investors, who would otherwise be streaming into the country.
The weak performance of the ZSE in particular in the mining sector, is attributable to this uncertainty.
The other reason is that price earnings ratios in most companies are quite low but with the recovery in the economy the stock market has a future.
In a recent investment report, Netherlands based Amstel Securities said that ZSE is the most underperforming market in Africa due to low returns.
It also emphasised the need for government to introduce tax incentives for listed companies as is the trend in most countries.
According to the report, the ZSE suffered a 7,5 percent drop and this compared unfavourable with other African markets such as Kenya and Uganda that have delivered returns of over 40 percent.
“The country needs to exploit its mineral resources in order to see growth. However, liquidity remains an issue with weekly volumes averaging between US$1,3 million and US$2 million,” an analyst with Imara Securities who preferred anonymity told The Financial Gazette’s In-Depth.
“The only way to get meaningful exposure is for these mines to participate in initial public offers and secondary offerings. The major driver of growth will be the exploitation of the country’s mineral wealth because Zimbabwe’s recovery potential is large,” said the analyst.
“But ZSE needs to lobby for the new government to introduce tax reduction incentives to attract listings on the local bourse,” he said.
The country has a wealth of natural resources, with about 30 different mineral deposits spread across the country.
A stock exchange is important in the development of a country as it reflects the growth of the economy.
Former finance minister Tendai Biti revised downwards the country’s economic growth figures three times during 2012.
Having forecast 9,4 percent at the release of the 2012 National Budget in November 2011, he lowered his forecast to 5,6 percent when he released the mid-term fiscal policy review in July 2012 and then to 4,4 percent when the 2013 National Budget was released in November 2012.
Stock exchanges have established themselves as promoters of disclosure standards and corporate governance for listed companies.
Regulators, the Securities Commission of Zimbabwe, are currently pushing for more disclosures when companies publish their financial statements.
Though the exchange has the potential for growth in the multicurrency regime, investors remain averse to trading on the ZSE amid concerns over policies by President Robert Mugabe’s new government following his victory in July elections.
Political and economic developments seem to have a bearing on the ZSE performance.
Traders have been jittery over the possible re-introduction of the Zimbabwe dollar, replaced in February 2009 by the multicurrency regime. But Gideon Gono, the Reserve Bank of Zimbabwe (RBZ) governor has reassured investors that a return of the Zimbabwe dollar was not a near-term plan by government.
Foreign investors on the local equities market are also expected to continue selling off their holdings, at least for now.
The ZSE is still lagging behind in terms of automation of trading and settlement systems. However, it recently engaged a Mauritian company, the Central Depository & Settlement Co, to assist the local bourse roll out the automated trading system in the first quarter of next year.
The ZSE initially had plans to roll out the project by year-end but has been pushed to next year due to funding constraints.
It has been working on the automation project since 2010.
Chengetedzai Depository Company, which won the tender for the project, would also play a crucial role in the setting up of the ATS.
Chirume said the ZSE market capitalisation would be close to US$6 billion by year-end as the economy stabilises in the post election-period.
The setting up of an ATS comes at a time when the exchange in June announced that it was currently recruiting an automated trading system consultant tasked with improving efficiency of the exchange to catch up with regional peers.
The consultant, according to the ZSE chief executive officer, Alban Chirume, would review business processes on the bourse which include tailor-making the system running the alternative trading systems (ATS).
The automation, according to Chirume, would see the ZSE extending its trading hours to eight from the current one and a half hours.
Regional bourses that have already automated include Zambia, Namibia, and South Africa in the southern African region.
Chirume said indeed government should work on incentives to entice more investors on the stock exchange.
He also said the government should clarify issues related to the country’s indigenisation and empowerment law and allay concerns from foreign investors.
Under the current empowerment regulations, foreign-owned firms should sell, cede or donate 51 percent stakes to locals.
In the past two years, de-listings rocked the ZSE in a sign of industrial turmoil to hit the country since dollarisation in 2009.
In June this year, the ZSE announced the de-listing of several counters which failed to meet listing requirements.
The de-listed counters included Apex Corporation, Gulliver Consolidated Limited, Steelnet, Tractive Power Holdings and Lifestyle Holdings Limited.
Steelnet was suspended from trading in 2011 after being placed under judicial management and has since gone into liquidation while Apex was in breach of its continuing obligations in terms of the listing rules and it applied for a voluntary suspension.
Tractive Power was suspended in February this year and de-listed in March following Zimplow’s successful takeover of the group.
Gulliver was suspended from trading in 2012 for failing to produce financial statements in the required period. It last reported full year results for the period to September 2010.
Lifestyle Holdings proposed to delist and seek a home offshore while pharmaceutical giant, CAPS Holdings, and food producer, Cairns, have also delisted in the past two years.