Lenders, investors face huge losses
LENDERS and investors may suffer huge losses if Zimbabwe dollar debt and fixed income investments priced at the deposed local currency inflation rates are converted without access to ZIG inflation data, Fincent Securities has warned.
This comes after the introduction of Zimbabwe Gold (ZIG), which replaced the Zimbabwe dollar.
As such, all Zimbabwe dollar (ZWL) balances — including debt and fixed-income investments — should be converted to ZIG.
“Currency conversions, as witnessed in Zimbabwe in 2008 and 2019, often have unanticipated consequences in the short, medium, and long term,” Fincent Securities said in its latest report.
“While the conversion of balance balances into ZIG may be manageable, converting ZWL debt and fixed income investments priced at ZWL inflation rates may prove challenging.
“Repricing such assets solely based on the RBZ'S bank rate, without ZIG inflation information, may result in significant losses for lenders and investors. It may be necessary for the authorities to guide the repricing of such assets to minimise potential losses for both parties.”
The firm noted that uncertainties were looming over the conversion of existing ZWL loans and investments contracted during hyperinflation, posing challenges for borrowers.
Additionally, it said new sub-accounts may need to be created for ZIG pension contributions to avoid intergenerational wealth transfer due to currency changes.
The researchers noted that the current reserves backing the ZIG, approximately 12% of the total money supply, may limit its immediate impact on economic activity. The Reserve Bank of Zimbabwe (RBZ) plans to grow its foreign currency reserves through market purchases from the 25% surrender requirements and the sale of precious metals received from royalties.
“The acceptability and survival of ZIG in the market may depend on its convertibility to foreign currency. It remains unclear whether ZIG will be accepted for commodities such as fuel or passports, which will demonstrate confidence in the currency and its convertibility,” the report reads in part.
“The initial months after introducing a new currency in Zimbabwe are typically subject to speculative attacks, requiring aggressive intervention by the RBZ to defend the currency.”
Continued challenges for Zimbabwe include economic policy inconsistencies, lack of monetary policy discipline, exchange rate management issues, inconsistent exporter surrender requirements, and off-balance sheet activities. Negative real interest rates and the absence of a United States dollar consumer price index inflation also hinder saving and investing in local currency fixed interest securities.
Addressing these challenges is crucial for the survival and confidence-building of ZIG.
“The introduction of ZIG, the new structured currency, has been met with both anticipation and scrutiny within Zimbabwe's economic landscape,” it said.
“While hailed as a crucial step towards fostering a stable and vibrant local currency to support economic growth aspirations, several concerns have arisen regarding its implementation.
“The fast-tracking of Zig's introduction may have overlooked critical factors. Firstly, the reserves base of ZIG fell below market expectations, raising doubts about its stability.”
Fincent said Zig's foreign currency reserves only cover a portion of the total money supply, potentially hindering full convertibility. Insufficient awareness and education on ZIG among businesses and households could impact its acceptability in the market, compounded by a complicated conversion process for average citizens, the report noted.
“Despite these concerns, stakeholders express cautious optimism, monitoring Zig's implementation while extending well wishes to the new governor. Notably, the economy's gradual shift towards full dollarisation, with over 80% of transactions conducted in US dollars, reflects waning confidence in the ZWL,” it said.
“Businesses predominantly fund themselves in foreign currency, underlining the importance of maintaining stability amidst ongoing economic challenges.”
The report indicated that the emergence of a parallel market remains a possibility, particularly among the unbanked population.
It noted that the impact of ZIG extends to the Zimbabwe Stock Exchange, where policy shifts significantly influence investor sentiment and trading patterns. The rebasing of indices signifies a new era, affecting long-term technical analysis and potentially leading to biased valuations.
Rational investors were advised to lean towards defensive stocks with strong dividend policies amidst ongoing uncertainty.
The researchers stressed that, while Zig's introduction marks a significant milestone, its success hinges on effective implementation and ongoing monitoring to address existing challenges and maintain stability across the economy and financial markets.