Asset management companies welcomed the partial dollarisation introduced in January 2009 but said they still faced problems because contributions were still in Zimbabwe dollars while their costs were in United States dollars.
Zvomunoda Chizura, the Managing Director of Old Mutual Asset Management Company, said that asset managers earned their income from commissions from managing clients’ assets that included shares on the Zimbabwe Stock Exchange, properties and pension funds.
The suspension of trading on the Zimbabwe Stock Exchange on November 20, 2008 had devastated asset managers’ incomes as most asset management companies held large proportions of their clients’ assets in the form of shares.
Deeply negative real interest rates made money market investments unattractive.
Chizura said that asset managers still faced challenges despite the benefits from partial dollarisation of the economy, because most of their costs were denominated in foreign exchange whereas their income in Zimbabwe dollar terms had not grown sufficiently to cover the costs.
Chizura said that pension funds that had been operating in a net negative position, with contributions insufficient to cover payouts due to the hyperinflationary environment.
Viewing cable 09HARARE159, ZIMBABWE’S EQUITY TRADERS WELCOME DOLLARIZATION,
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ZNR UUUUU ZZH
R 251447Z FEB 09
FM AMEMBASSY HARARE
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INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
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AF/S FOR B. WALCH
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COMMERCE FOR ROBERT TELCHIN
TREASURY FOR D. PETERS AND T. RAND
NSC FOR SENIOR AFRICA DIRECTOR
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
E.O. 12958: N/A
SUBJECT: ZIMBABWE’S EQUITY TRADERS WELCOME DOLLARIZATION,
RE-OPENING OF STOCK EXCHANGE
¶1. (SBU) Zimbabwe’s financial sector welcomed dollarization of the
economy and the foreign currency income that asset managers, the
Zimbabwe Stock Exchange (ZSE), and stock brokers can now earn. But
they do not expect a sudden return to profitability, as trading only
re-opened on the ZSE last week after a three month suspension.
Asset managers are also concerned whether thereturns on new
hard-currency denominated prescribed assets will be market
determined. In addition, liquidity constraints arising from foreign
currency shortages will likely dampen trading volume. Privatization
of state assets using the ZSE could provide liquidity to the market
in the short-term. In the meantime, more reforms are needed to
attract foreign investment and support economic recovery. END
Partial Dollarization Welcomed
¶2. (SBU) Although asset management firms welcomed partial
dollarization introduced in the January 2009 Monetary Policy
Statement (MPS), they also expressed some concerns. Zvomunoda
Chizura, the Managing Director of Old Mutual Asset Management
Company (OMAM) explained to economic specialist on February 10 that
asset managers earned their income from commissions from managing
clients’ assets that include shares on the Zimbabwe Stock Exchange,
properties and pension funds. The suspension of trading on the
Zimbabwe Stock Exchange (ZSE) on November 20, 2008 had devastated
asset managers’ incomes as most asset management companies held
large proportions of their clients’ assets in the form of shares;
deeply negative real interest rates made money market investments
unattractive. Farai Manjokota, Head of ZB Asset Management Company,
told economic specialist on February 18 that the Association of
Asset Managers had written to the RBZ to protest the US$1,000/month
licensing fee for trading in foreign exchange, stating that it would
lead to the collapse of many asset managers. To the relief of the
players, the RBZ suspended the fee on February 13.
¶3. (SBU) ZSE CEO Emmanuel Munyukwi told us that the ZSE was in
deficit largely due to the suspension of share trading last year.
ZSE income comprised annual levies on registered companies and a
proportion of trading income. Munyukwi foresaw the situation
improving with the resumption of trading in U.S. dollars on February
19, 2009. Although the first day of trading witnessed a mere 3,000
shares in one company changing hands at 1 U.S. cent per share, by
the third day activity had picked up substantially with the number
of counters traded increasing to 13 and turnover rising to over
Costs in Foreign Currency
¶4. (SBU) Chizura and Manjokota agreed that asset managers still
faced challenges despite the benefits from partial dollarization of
the economy, since most of their costs (including labor) were
denominated in foreign exchange whereas their income in Zimbabwe
dollar terms had not grown sufficiently to cover the costs. Chizura
told us that pension funds that had been operating in a net negative
Qtold us that pension funds that had been operating in a net negative
position, with contributions insufficient to cover payouts due to
the hyperinflationary environment, welcomed the decision to allow
them to trade in hard currencies. The benefits, however, would not
be immediate. Chizura said that the sector could not meet
pensioners’ expectations to be paid out in foreign exchange as soon
as contributions were paid in foreign exchange.
Prescribed Assets Still a Problem
¶5. (SBU) Chizura welcomed the reduction in the prescribed asset
ratio for insurance companies from 35 percent in Zimbabwe dollar
terms to 5 percent for short-term and 7 percent for long-term
policies and to 10 percent for pension funds in foreign currency.
However, he said the industry lacked confidence that the instruments
that the government will introduce to enable players to comply with
these statutory requirements would pay positive real returns.
Chizura also said that it was not clear from the monetary policy
statement whether the rates applied to the stock of assets or to the
increase in stocks of assets. If it applied to the stock, then
Chizura believed no player could remain profitable given the low
returns associated with most prescribed assets.
Capital Requirement Too High
¶6. (SBU) Neither Chizura nor Manjokota saw the need for minimum
capital as high as the present US$2.5 million minimum requirement.
Chizura told us that even though Old Mutual Asset Manager was backed
by a wealthy parent company, in light of the low risk involved it
was not prepared to tie up as much as US$2.5 million in capital.
Lack of Liquidity Constrains Trading
¶7. (SBU) Munyukwi told us that the main problem facing the ZSE was
lack of U.S. dollar liquidity. Both Munyukwi and Chibaya said that
the amount of U.S. dollars in circulation in Zimbabwe was very small
relative to the country’s needs. Munyukwi added that most companies
were in desperate need of re-capitalization. He believed money
would flow in once the economy had stabilized and foreign lines of
credit were restored. In the short term, he proposed the
privatization of state assets as the only way of quickly injecting
liquidity into the market, particularly if the process is open to
foreigners through the ZSE. Manjokota added that the restoration of
fungibility status on counters that have a dual listing would boost
New Finance Minister Drops Levies And Charges
¶8. (SBU) Munyukwi told economic specialist that new Finance
Minister Tendai Biti, with effect from February 19 and to the relief
of the equity market, had dropped onerous levies and charges
introduced by RBZ Governor Gono in his January 2009 Monetary Policy
Statement. Gono had introduced a 1.5 percent financial sector
stability levy, payable to the RBZ, and directed that 3.5 percent of
proceeds be paid by the seller of shares to the RBZ.
¶9. (SBU) Asset management firms, the ZSE, and stock brokers all
agree that dollarization will restore viability to the financial
sector. However, in the short-term, liquidity is a constraint. As
donor funding is unlikely to fill the gap quickly, Munyukwi’s
suggestion of privatizing state assets using the ZSE merits further
study. Finance Minister Biti’s removal of some taxes introduced
less than a month ago by RBZ Governor Gono on share trading will
help lower transaction costs and boost activity on the ZSE. Biti’s
Qhelp lower transaction costs and boost activity on the ZSE. Biti’s
action also bodes well politically, as he re-asserts for the Finance
Ministry authority usurped by Gono over recent years, but more
reforms are needed to attract foreign investment and support
economic recovery. END COMMENT.