BSR: Why is ZANU PF so scared of the markets?


Zimbabwe is open for no business

When President Emmerson Mnangagwa took over following the coup in November 2017, he presented himself as a business-friendly leader. “Zimbabwe is Open for Business” became the main slogan of the new regime. If it was not calling itself the “Second Republic”, it was selling the idea that it was the “New Dispensation”. However, the regime’s conduct could not be more removed from its rhetoric. The anti-business stance has taken a turn for the worse in recent months.

The first few months held a flicker of promise, especially with the amendments to the controversial indigenisation laws, enacted during the reign of President Mugabe. Indigenisation laws required foreign investors to give up a controlling stake of their assets to indigenous people. They were highly unpopular among foreign investors and their presence was seen as an impediment to investment. The change was welcome. However, the season of promise and goodwill did not last.

A distinctly anti-business wind has intensified in recent months. It was evident when the government restricted the fungibility of Old Mutual shares and followed by an outright ban. Two weeks ago, the regime shut down the Zimbabwe Stock Exchange (ZSE) where shares in listed companies are traded. On the same day, it banned mobile money payments. This was after suspending agents of EcoCash, the biggest mobile money provider with 94% of the mobile money market. Last week, the ruling party ZANU PF backed what it called the “ejection” of Old Mutual from the financial system.

Between them, Old Mutual and Econet are corporate giants that control a large sector of the formal market and contribute immensely to employment and tax revenues. Old Mutual is Zimbabwe’s largest financial services group with interests in insurance, banking, investments, property development and a significant investor in other companies on the ZSE. Econet is the leading mobile network operator with interests in banking, insurance, mobile money, internet and mobile data services apart from its core business in mobile telecommunications. Both share common characteristics: key parts of their businesses are under serious attack from their government.

A concerted assault by the regime on these entities is an unedifying spectacle which communicates an unpleasant message to investors. How can Zimbabwe be open for business when it is busy strangling existing business? The Zimbabwe Investment Development Agency (ZIDA) was launched amid great fanfare a few months ago. But with government policies that show no regard for property rights, ZIDA faces a near-impossible task before it even begins to crawl. The ZSE is one of the few sites where there has been persistent foreign interest even during the on-going economic difficulties. Now the regime has shut it down.

But why is the regime behaving so counter-intuitively?


One reason is that the government relies on scapegoating as a strategy to deflect criticism for its failures. The latest scapegoat is big business, hence the targeting of Old Mutual and EcoCash. But these companies are not the problem. Take, for example, the charge against Old Mutual; the government thinks the Old Mutual Implied Rate (OMIR) is causing the crash of the beleaguered Zimbabwe Dollar, which was re-introduced ill-advisedly last year. But the OMIR simply tracks the price difference in Old Mutual’s shares, which are listed on more than one exchange. A stock market is a market for shares, just like the vegetable market is a market for vegetables. The price of shares responds to conditions in the economic environment. These conditions include exchange rates. Movements in the share price are, therefore, a reflection of these conditions, not the cause as the government seems to think.

The fallacy of the regime’s argument

The fallacy of the regime’s argument is evident when one considers that Old Mutual’s shares are also listed on the Malawi and Namibia stock markets. Still, these countries do not have the same problems concerning OMIR. So why does the OMIR exist concerning Old Mutual’s shares in Zimbabwe but not in Malawi or Namibia? And even if it existed in Malawi and Namibia, why is it not regarded as a problem warranting a ban of fungibility of shares, closure of the stock market and a threat to expel Old Mutual as is the case in Zimbabwe?

The reason is that the OMIR is simply a reflection of the market’s mistrust of the Zimbabwean regime’s unreasonable attempts to control and manipulate the foreign currency exchange rates. The market is resisting this because it does not believe what the government is doing is reasonable and justifiable. The OMIR is a measure by the market which says the price of an Old Mutual share in Zimbabwe should be no different from the same stock in South Africa. It’s a problem in Zimbabwe but not in Malawi or Namibia because the Zimbabwean government is bent on irrationally controlling and manipulating the exchange rate even under the Foreign Currency Auction system. By contrast, the market has more trust in the measures taken by Malawian and Namibian authorities.

The OMIR is a measure used by investors to arrive at a fair and accurate price of the shares in which they are investing. The Zimbabwean regime erroneously thinks Old Mutual generates the OMIR. This is not Old Mutual’s doing. In reality, the government is fighting market forces. It’s a fight to control the market. What the government does not realise is that if the Old Mutual share didn’t exist, any other standardised product which is sold in more than one country would take its place. The OMIR is not an issue in Malawi or Namibia because their governments are not trying to control exchange rates in an unreasonable manner or at gross variance with market expectations. But it will become an issue if they interfere unreasonably and disproportionately in the foreign currency exchange markets.

Bullying pension funds and insurance companies

The ZANU PF government’s fear of and desire to control market forces is also behind the closure of the ZSE. The reason is that the government wants to force pension funds and insurance companies to invest in its instruments, such as Treasury Bills instead of investing in the stock market. The government believes pension funds and insurance companies are cash-rich, and it wants a share of the money. The government is always envious of a group that it considers is cash-rich. Its instinct is to demand a percentage, as foreign currency account holders have discovered in the past or tobacco farmers discover each year. This year it has gone after exporters, demanding that they liquidate their FCAs within 30 days and now it is going after pension funds and insurance companies.

The government thinks these institutional investors are preferring to invest in shares on the ZSE, avoiding its securities. The reason pension funds may be unwilling to invest in government securities is because they have lost their attractiveness. Investing in shares on the ZSE or property is considered smarter and safer. The government feels snubbed and is angry, hence the aggression and vindictiveness. Industry insiders say the perception that pension funds and insurance have abundant liquidity is misplaced. They point out that due to the long-term character of such institutions, their investments are locked in long-term and illiquid assets. Blaming institutional investors for speculation on the stock market is misplaced because, by nature, they are patient, long-term investors which try as much as possible to preserve value for their members and policy-holders.

But the fact that these investors prefer the ZSE over government securities should worry the government because it means there is something that’s gone fundamentally wrong. The world over, government-backed instruments such as TBs are considered safe and reliable. When investors are shunning them, it means something is rotten at the core of the government. The problem, industry insiders say, is that the value of TBs is eroded very quickly due to hyperinflation. Some within the state know this, which is why the RBZ has been considering issuing inflation-linked bonds and also US Dollar-denominated bonds. Instead of addressing the deficiencies, the government has taken a nuclear approach. It could have been more creative. It has adopted the behaviour of a man who burns down the house to kill a rat.

This is no more than a show of raw and unrestrained power by the government. It is reminding pension funds and other institutional investors of who wields power. The regime wants to bully these investors into buying its weak instruments against market sense and sound judgment. The command and control approach is yet another instance of the government going nuclear on the markets. It’s counter-productive. The losers are the listed companies which can’t access funds now locked up in the stock market. It also affects policy-holders and members of pension funds – essentially, the workers. A problem that seems to affect the corporate sector is there a challenge for the ordinary person.

A method in the madness?

It may also be argued that the closure of the stock market is designed to force down the value of companies. There is reason to fear that the continued closure of the ZSE will lead to a collapse in share prices which will make listed companies cheaper. There is a Politically Exposed Person (PEP) who has been busy snapping up mines and businesses in the financial services sector through Landela Investments, Kuda Tagwirei’s investment vehicle. This is why it is not outlandish to imagine that there is a method in the madness of closing the stock market. It will present easy pickings. But closing the stock market is self-defeating. It locks up value for companies when they are supposed to carry on business in a tough economy. Why would a pro-business government stifle existing firms in this way?

Unwinnable battles

The regime is fighting battles which it cannot win because it is always identifying the wrong enemies. The enemy is within. It is incompetence, corruption and an unwillingness to resolve the political logjam at the heart of the country’s persistent and long-standing challenges. It also betrays severe ignorance among political actors making these decisions which means they do not understand how stock markets.

What is happening is typical of authoritarian regimes. They are obsessed with control and manipulation. Anything that they do not control is viewed with suspicion. It must, therefore, be brought under control. This is why ZANU PF is scared of markets. They have a mind of their own. This explains the hostility towards the OMIR – a measure of how the market values the Zimbabwe Dollar, which is very different from how the government’s way.

What the government fails to appreciate is that the OMIR is like a scale which measures weight. The scale does not manufacture figures. It merely measures and tells your weight. If you do not like the statistics, the problem is not fixed by changing or discarding the scale but by managing what you eat and your lifestyle. You have to go to the root of the problem. Banning the fungibility of the Old Mutual share did not eliminate the problem; neither will shutting down the ZSE. Delisting Old Mutual shares will not solve the problem because other products will simply be used to identify an implied exchange rate. Ejecting Old Mutual from the financial markets, as ZANU PF has threatened will be suicidal considering the extent to which the financial services giant is invested in the Zimbabwean economy.

Networks of cooperation

However, business organisations must come together and speak with one voice. It is shocking that with all this madness on show, industry bodies that usually have spoken on behalf of business are either silent or lukewarm in their approach. However, what seems to be a problem for Econet and Old Mutual are a sign of a broader problem for all corporations. Authoritarian regimes are like predators; they use a strategy of isolating targets. Yesterday it was EcoCash, today it’s Old Mutual, and tomorrow it will be another company.

They have watched this happening in the political space and probably thought opposition politicians aren’t smart enough. There is strength in networks of cooperation, and the sooner corporate organisations rediscover the power in numbers, the better for them and the economy. November 2017 is less than 3 years ago, but it already seems like a long time back. Speeches of Zimbabwe is Open for Business are received with bemused looks and muffled laughter. No foreign investor can take you seriously when you can’t even look after your own; when property rights are insecure and when capital is locked in the stock market by government decree.