Of the ZSE and the exchange rate, chasing the wind

ON Monday this week, I found myself without any local Zimbabwe dollars to my name. No cash in hand, no money in the bank, and no money in my mobile wallet.

You could say I was broke. At least in local Zimbabwe dollar terms.

This sort of circumstance was of no concern to me anyway. I had no use for the Zimbabwe dollars anyway.

However, from across town, I received a distress call from one of my nieces. She was short of $850 to make an important payment. She had no means to get to where I was to collect the money and I was not willing to leave the house to take the money to her.

The option was to send her the money, electronically. But as I have said above, I did not have any local dollars.

The only option was to find someone with electronic Zimbabwe dollars to send her the money in exchange for US dollars.

I called a friend in town and asked how many local dollars he could give me for my US$10.

I will give you $1 300 he said. We proceeded to make the transfer.

A few days later, I called him again and told him I now wanted to replace the US$10 that I had sold him. He said he could sell it to me at $1 600, a $300 or 23 percent difference from a few days ago.

Now, this was a huge jump in a space of three days.

It did not come as a shock though to me. Most of us are now accustomed to such exchange rate volatility in our day-to-day transactions.

A few days ago my wife alerted me to a promotion in a certain retail outlet. One of my children’s favourite cereals was on promotion at $229. We bought some.

A few days later I went to the same outlet and the same product was now priced at $299. I could not understand because they still had the promotion stickers on the products.

On asking the shop assistant whether there was a mistake in the price, the answer was that while the product was still on promotion, the exchange rate had moved and prices had to be readjusted.

If it was not for the promotion, the price would have been much higher than this, he said.

These developments reminded me of what we are experiencing on the stock market.

We are in a situation where despite the Zimbabwe Stock Exchange trading at record levels, movements in the parallel market exchange rate could mean the value of the stock market is actually falling.

So we have a situation where the stock market is rallying in nominal terms, but reversing in real terms.

This is a known phenomenon. Shocks in exchange rate markets create volatility in the stock market.

In real terms, the value of the stock market can appreciate or depreciate in line with fluctuations in foreign exchange markets.

However, our analysis of the impact of exchange rate volatility on stock markets should not be restricted to how share prices reacted and the subsequent movement in valuations. We also need to look at how the underlying stocks are affected.

Exporting companies, for example, can benefit from the local currency depreciation due to higher export competitiveness.

Unfortunately for Zimbabwe, use of the US dollar means instead of benefiting from a weakening Zimbabwe dollar, we would benefit from a weakening US dollar against major currencies.

A weak US dollar would mean exports to, say, South Africa, become competitive.

South Africans will find Zimbabwean products cheaper.

A weakening local currency should affect importers as they now have to pay higher prices for imported goods, thus determining a company’s cash flow and market value.

Once again Zimbabwe is a special case because the US dollar is arguably our largest transacting currency and when it comes to cross-border trades, the US dollar’s movement determines whether imported products become expensive or not.

A weak dollar means importers from, say, South Africa, now require more US dollars for similar transactions.

But let’s try and use the exchange rate between the Zimbabwe dollar and the greenback. What impact will its movement have on listed company performance?

Exporters are supposed to be benefiting from a weakening local currency. A US dollar earned through exports would get the exporter more local dollars.

Unfortunately, in Zimbabwe, the local dollar value the exporter gets on the formal market is at a huge discount to the local dollar value that one gets at the parallel market exchange rate. But the idea here is that a weak local currency will benefit exporters.

For importers, a weak currency is not a good thing. It means one needs more local dollars to get the greenback unless of course, the importer has access to the auction system where the local dollar is weakening at a much slower rate than on the parallel market.

On the other hand, if a country’s exports depend mainly on foreign inputs, the resulting relationship between equity and exchange rates may be insignificant.

Since Zimbabwe is a net importer of goods and services, potentially, the depreciation of the Zimbabwe dollar will cause the value of shares to fall.

The relationship between stock prices and exchange rates has been extensively studied by many researchers.

Some find positive association between the two. Others discover negative relations and even no relationship at all.