Murerwa sparked stampede from stock market

Finance Minister Herbert Murerwa caused a stampede from the Zimbabwe Stock Exchange when he announced a 10 percent withholding tax two weeks before it became effective.

Murerwa announced the tax in his 16-August 2005 mid-term fiscal policy review but said it would be effective on 1 September.

The tax was in addition to existing taxes such as a 10 percent capital gains tax, two percent stamp duty, and a 20percent tax on dividends.

Investors immediately started shifting their shares out of the market into treasury bills.

The treasury bill yield shot up from 191 percent to 265 percent beating inflation of 254.8 percent.

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Viewing cable 05HARARE1175, ZIMBABWE STOCK MARKET PARALYZED

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This record is a partial extract of the original cable. The full text of the original cable is not available.

241532Z Aug 05

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 001175

SIPDIS

AF/S FOR BNEULING

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

USDOC FOR ROBERT TELCHIN

TREASURY FOR JOHN RALYEA

PASS USTR FOR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

E.O. 12958: DECL: 12/31/2009

TAGS: ECON EFIN PGOV ZI

SUBJECT: ZIMBABWE STOCK MARKET PARALYZED

REF: HARARE 1158

Classified By: Charge d’affaires Eric T. Schultz a.i. for reason 1.4 b/

d

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Summary

——–

¶1. (C) The Zimbabwe Stock Exchange (ZSE) has virtually ground

to a halt in reaction to GOZ stopgap measures to help close

the budget shortfall and finance the burgeoning domestic

debt. The introduction of a withholding tax on the sale of

securities, and stricter enforcement of requirements for

institutional investors to buy government securities sparked

a selling frenzy. A sharp increase in short-term T-bill

rates further spurred the rush to unload stocks in a market

without buyers, thus paralyzing the Exchange. The ZSE, which

quickly entered into talks with the Ministry of Finance,

expects that trading, once it resumes, will be very thin,

whatever the outcome of discussions. The state,s

heavy-handed measures to bring the budget under control

without addressing fundamental economic reform are taking a

toll on the investment climate and the economy in general.

End Summary

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A New Witholding Tax on Securities Sales…

——————————————-

¶2. (SBU) In his August 16 Mid-Term Fiscal Policy Review

(reftel), Finance Minister Herbert Murerwa announced that,

effective September 2005, the GOZ would assess a ten percent

withholding tax on the sale of securities in addition to the

pre-existing ten percent capital gains tax, two percent stamp

duty, and 20 percent taxation of dividends. Following the

announcement, and with the subsequent upward revision of the

official inflation rate to 254.8 percent, the 91-day Treasury

bill yield shot to 265 percent from 191 percent.

——————–

…Triggers Sell-Off

——————–

¶3. (SBU) Investors immediately began shifting their shares

out of the market and into Treasury bills to take profits and

to avoid the withholding tax. The stock market had been one

of the few legally available investments in Zimbabwe that

could compete with inflation. By announcing the withholding

tax two weeks prior to its implementation, the GOZ created an

incentive for an immediate sell off. The measures brought

the ZSE,s bull run (260 percent nominal increase in value

since January 2005) to an end and are threatening to cause a

stock market crash. The key industrial index closed on

August 19 down 12.64 percent on the previous week; the mining

index closed down 21.94 percent.

——————————————— ——-

Institutional Investors Compelled to Buy Government

Securities…

——————————————— ——-

¶4. (SBU) The supplemental budget also signaled stricter

enforcement of the prescribed proportion of pension and

insurance funds to be allocated to GOZ securities. Until

now, fund managers and the National Social Security

Authority, which make up 90 percent of the market, had

ignored the requirement to allocate fixed percentages of

their portfolios to government securities. The allocation

requirement for short-term and long-term insurance

investments is 25 percent and 30 percent respectively; for

private pension funds and for the National Social Security

Authority it is 35 percent. Furthermore, insurance and

pension funds previously had valued their assets at their

original purchase price rather than at the current market

value, as is now required under the supplemental budget.

——————————–

…to Finance the Budget Deficit

——————————–

¶5. (SBU) According to one leading analyst, the GOZ had not

enforced the 35 percent prescribed asset ratio until now for

lack of treasury bills on the market. The GOZ,s failure to

attract foreign financing of public debt, however, has

compelled the Reserve Bank to issue more paper, and the GOZ

to enforce the higher asset allocation requirement to ensure

a market. With Murerwa,s statement, fund managers began

unloading securities (which had increased in value much

faster than the prescribed assets) to meet the 35 percent

requirement. The announcements fuelled the rush to sell in a

market lacking buyers, exacerbating the market,s paralysis.

—————————————-

GOZ/Zimbabwe Stock Exchange Negotiations

—————————————-

¶6. (SBU) The ZSE, in hastily convened talks with the Ministry

of Finance over the new rules, does not predict a market

crash, but expects trading, once it resumes, to be very thin,

whatever the outcome of discussions. A well-placed broker

told PolAsst that these negotiations centered on combining

the announced withholding tax and the pre-existing capital

gains tax into a new ten percent capital gains tax taken at

the point of sale either by the stock brokerage or by the

Zimbabwe Revenue Authority (ZIMRA). In the past, individual

taxpayers were left to declare their stock market profits in

their tax returns, which many investors failed to do.

——–

Comment

——–

¶7. (C) The end effect of the GOZ,s heavy hand on the

securities market will likely be to reduce rather than

increase tax revenue as the market becomes increasingly thin

and shallow. Murerwa,s fiscal measures are the latest in a

long line of GOZ attempts to avoid fundamental economic

reform and maintain the government,s vise-grip on the

economy. Like all those that have gone before, they will

also fail to stem the country,s accelerating economic

decline.

SCHULTZ

(19 VIEWS)