Zimbabwe, known for its "money as paper" situation, has seen its stock market plummet by 99.95% after the introduction of a new currency pegged to gold.
On April 23rd, since the introduction of Zimbabwe's new gold-backed currency, the "Zimbabwe Gold Coin" (ZiG) on April 5th, the stock market has been severely impacted, with the Zimbabwe Stock Exchange's All Share Index plummeting by 99.95%.
Prior to the introduction of the new currency ZiG, Zimbabwe was using the Zimbabwean dollar, which has depreciated by 80% just this year. Moreover, in March, Zimbabwe's inflation rate reached a seven-month high of 55.3%.
Due to the instability of the local currency and high inflation rates, the stock market became a safe haven for investors, who bought up stocks in large quantities before the currency crisis in the hope of protection.
The Zimbabwe Stock Exchange was one of the few suitable investment options for countries in southern Africa.
Although a rise in the stock market is generally seen as a positive economic signal, in Zimbabwe, the surge in stocks has raised concerns because it may indicate the approach of the next currency crisis.
Advertisement
Therefore, on April 5th, Zimbabwe introduced the new gold-backed currency ZiG, with the aim of stabilizing the national economy and restoring confidence in the currency.
In theory, because gold has intrinsic value, ZiG should provide a more stable and reliable monetary base.
However, in practice, the lack of understanding of Zimbabwe's long-term economic stability and the market's comprehension of the new currency has caused a significant impact on the stock market following the introduction of ZiG, with a notable decrease in trading volume and transaction value, which has already had a negative effect on the stock market and brokerage businesses.
Data shows that in the two weeks before the currency conversion, the trading volume was 1,643 transactions, with stock transactions totaling 15.251 million shares, valued at approximately $2.387 million.Two weeks after the introduction of the ZiG, the number of transactions significantly decreased to 390, with the trading volume dropping to 1.877 million shares. The dollar value of the transactions also plummeted to $22.20 million.
In response to this, the Chief Executive Officer of the Zimbabwe Stock Exchange, Justin Bgoni, stated that a multitude of factors contributed to the poor performance of the exchange, with the primary issues stemming from two main aspects: the excessive time required for currency conversion and the tightness of market liquidity.
Currency conversion is a complex process that involves a significant amount of technical and administrative work. This delay impacts the operations of investors and financial institutions, as during the conversion period, cash flows and asset valuations are in a state of uncertainty, which directly affects trading behavior and investment decisions.
During a teleconference on Monday, he mentioned that the uncertainty of how to assess the value of assets denominated in ZiG was one of the reasons for the decline in trading volume. He said, "Generally, people are hesitant about the value of ZiG and do not truly understand its worth."
Lloyd Mlotshwa, the head of research at Harare brokerage firm IH Securities, stated, "The reduction in trading volume has led to a decrease in revenue for some brokerage firms by at least 50%, with most brokers' earnings taking a significant hit. For stockbrokers, the new currency has had a domino effect on the stockbroking industry, where the decline in average daily turnover reflects issues with market liquidity, which in turn affects the entire stockbroking sector."
Leave a Comment