The Suspension of Old Mutual Shares on the ZSE Pending Delisting

When you have diarrhea, you do not fix it by stitching the anus. — African Proverb

The comments by parliamentarian Temba Mliswa regarding the suspension of Old Mutual shares shows a common problem in Zimbabwe. The problem is that in Zimbabwe everyone feels they can speak on any matter even ones that they do not have expertise on or research on. Mliswa knows something about Old Mutual that the average man does not know. However, he (Mliswa) cannot express himself using proper economic jargon.

Why is Old Mutual taking shots? This is an area that needs some enlightenment. The Regime has gone bonkers. Their thinking is that the fungibility of Old Mutual shares is the main route that fuels exchange rate increases. Whilst it is true with respect to the route aspect, it is not true with respect to the cause aspect. The underlying cause of exchange rate increases is monetary expansion that is necessitated by budget deficits in real terms. In nominal terms, the Minister of Finance always claims to have a surplus. He is undefeated in this regard but defeated in real terms.

Old Mutual is accused of facilitating the externalization of foreign currency through the purchase of its shares on ZSE and selling in foreign markets like UK and JSE.

Old Mutual itself as an entity can also externalize currency in the same manner by buying its own shares in Zimbabwe and disposing them in UK via an issuance of new shares since the ones held in Zimbabwe will now be regarded as Treasury stock.

Whilst this is equivalent to externalization, the manner in which it is executed escapes any illegality. The entity will have to meet disclosure requirements for the share buybacks in Zimbabwe and as such the transaction would be in the public domain. The buyback and issuance transactions would be observed by ZSE and ZIA. Old Mutual would face compliance issues. It is highly unlikely that the company could have done this otherwise it would have been cited as part of the allegations.

Dual listing and fungibility enabled anyone with massive RTGS balances to participate. The SI instrument giving rise to the three-month vesting period intended to slow down the rate but it turned out to be merely stitching the anus. The market simply added a three-month liquidity premium on the OMIR rate.

Could this be pay-back for Pension “Frauds”?

Another line of thought would suggest that this is just pay-back for other alleged wrongs that Old Mutual committed in Zimbabwe. Pension ‘fraud’ is an issue raised by Tendai Biti. The issue is very real. The former Minister of Finance had a case against First Mutual on the same basis. The challenge staged is that pensioners contributed real US dollars and now they are being told that payouts will be in ZWL at the rate of 1:1.

Most of the insurance firms invested in buildings and other assets which did not erode because of the rate. For prescribed assets such as Treasury Bills, they would have suffered losses. However, for the bulk of their assets they would not have suffered losses. Thus they should pass on the preserved value to pensioners. Surely 1:1 is a fraud of the highest order. Old Mutual invested in many properties that are generating USD revenues or revenues that are hedged to the USD.

Biti was paid out a figure around USD 196 which, of course, is a microdot compared to the real value of his contributions.

The counterargument is that insurance companies are discouraged from investing in real assets like property that preserve value because they do not meet the prescribed asset status. These assets are predominantly Treasury Bills, which turned out to be phantom USD.

However, given that most pension funds were predominantly defined contribution funds, the investment risk should have been carried by the funds. The losses should be absorbed by the fund managers and not passed on to pensioners.

The whole issue is a concoction of a toxic operating environment, fraudulent fund operations and dysfunctional regulation.

Though there is public bitterness regarding the pension issues, it does not seem to be an issue that bothers the Zanu PF led government, who are the masters that created this mess in the first place.

Liquidity premium

The OMIR rate was pacing ahead of the street parallel market rate. The allegation is that the OMIR rate was dragging parallel market rates upward. However, a direct comparison of the OMIR rate on a specific date to other rates on the same date can be nullified when we consider the liquidity premium on the shares. A premium is required because of the inability to dispose the shares immediately after purchase. A direct comparison of daily rates is fundamentally bogus.

The OMIR rate calculation should be revised so that the three-month vesting period is taken into consideration. The published OMIR rate is actually a rate that is expected to prevail three months from now, when the shares become disposable. The rate we have today should be discounted back by 3 months to get the actual OMIR rate. This discounted OMIR rate can then be compared with other rates prevailing today.

The price of a share in UK versus one in Zimbabwe should be different based on the three-month liquidity premium. The market calculation of the rate being quoted by several providers is wrong because it does not factor in the time value of the two instruments. The liquidity premium is so significant that it cannot be ignored.

The liquidity premium is over and above transaction costs and time differences between the two markets which should also be factored in the OMIR calculations in order to get a clean rate. What we learn from this is that the people calculating this rate do not know what they are doing and its unfortunate that the generality of the populace and the clueless regulators latched on to the rate and fixated on it without doing proper calculations in the first place. Maybe if the proper Professor at the high table, Mthuli Ncube, had time and care, he would calculate a proper rate and government would formulate its opinions and policy positions correctly.

Zimbabwe has high transaction costs and high interest rates. The discounted OMIR rate might actually be lower than other comparison rates. If the authorities knew this, the policy response could have been different.

Exchange Rate Drivers

There is a broad lie engulfing Zimbabwe that conventional economics do not work in Zimbabwe. The statement is usually voiced by those who are not aware of the laws of economics and what happens when the laws have been violated. They cite that Zimbabwe is a strange land where all laws of economics do not work. The statement is motivated by sheer ignorance, a subliminal desire to be unique and an insidious search for exceptionalism mixed together with the inability to explain economic phenomenon

Exchange rates can be very predictable. If the Reserve Bank of Zimbabwe goes onto the market buying US dollars for whatever reason, the exchange rate goes up. If the treasury does not have money but keeps increasing civil servant salaries inexplicably, the rate goes up. When most goods and services, including government services are levied in USD, the rate goes up. When the government increases its own licensing fees and charges exponentially, the rate goes up exponentially.

The major drivers of the exchange rate in Zimbabwe are:

• Monetized Budget deficits
• Excessive money supply
• Lack of confidence in the current government, especially the President, the Minister of Finance, and the Governor of the Central Bank
• Increasing premiums for Expected Inflation
• Insufficient export revenues to offset imports and domestic FX liquidity

OMIR being used in the Pricing of Goods

The accusation is that it was wrong for retailers and every other company to price goods using the OMIR. Using the OMIR rate for pricing of goods does not make sense because the rate was driven more by ultimate profiteering rather than value retention though it is apparent that the problem goes beyond this. If we had a truly-liberalized rate, we would still be having these issues.

The argument is that the existence of that rate was never good for us since it was driving aggressive pricing not based on costs of production or market value of goods and services. Blocking the existence of the implied rate will not cure Zimbabwe’s problems but in the short term it puts a check on aggressive pricing.

Zimbabwe’s problems have deeper fundamentals which we all know but surely the way the implied rate was behaving was driven more by speculation rather than market forces. Even auditors were now insisting on the use of this rate as an active rate, which is ridiculous.

The existence of the rate became toxic as it was not related to a willing-buyer, willing-seller for trade/production purposes.

The above argument can be rebuffed by the fact that in the absence of reliable information market players will speculate and hedge. By and large, speculation and market forces are pretty much the same thing. Speculation is a special type of a market force that only exists under conditions of a certain level of uncertainty and information asymmetry.

Ordinarily, the strength of a currency is determined by interest rates, money supply, balance of trade, etc. The problem in Zimbabwe is that the government conceals information about how much money they have printed/created, or they give an outright lie about the money in circulation. This is the true source of speculative pricing.

Stitching the Anus

It is ridiculous to delist Old Mutual because of its dual listing status. Every single dual listed share has an implied rate. Is the government going to delist all dual-listed shares? The silly move only makes the entire country look like idiots. Who is next? Is it PPC?

It is absurd to slaughter Old Mutual because people are using the price of its shares in local currency and compare it to a hard currency price to gauge the exchange rate. The Reserve Bank of Zimbabwe, the entity that created this mess is to blame. If the central bank is desperate to put the blame on someone, the next layer of blame would be the people using the rate, not Old Mutual. Old Mutual is in fact a victim of the circumstances.

The issue of stitching the anus makes the Zanu PF government see enemies everywhere. Yesterday, it was Ecocash because it simply facilitates transactions. Today, it is Old Mutual Zimbabwe because people use it as a bellwether rate.

The insanity is equivalent to another country blaming the LIBOR for their economic ills. The existence of the OMIR rate (though I have reservations on how it is calculated) is not wrong. It is there as a signifier of the real value of Old Mutual shares.

Externalization of foreign currency is a mess that was created by the government. It cannot be fixed by stitching the anus. The only real solution is the one the cures the diarrhea.

Delisting of Old Mutual does not address the root causes. It does not contain money supply, it does not balance the budget, and it does not accelerate foreign currency inflows into the country. Delisting Old Mutual achieves nothing, the exchange rate will still gravitate towards wherever it’s supposed to be using another way.