Old Mutual share price implies devaluation

Old Mutual share price implies devaluation
Published: 24 August 2017
THE Old Mutual Plc share price has jumped by over 30 percent in the past few months on the Zimbabwe Stock Exchange (ZSE) market, widening the gap with the stock's Johannesburg and London prices and suggesting a devaluation of Zimbabwe's virtual currency.

Although the country is officially a United States dollar economy, with bank accounts denominated in the American currency, the majority of this money is no longer backed by real US dollars and represents money printing by government through the real time gross settlement system.

Government introduced bond notes in November, pegged at parity to the greenback, but the currency has been trading on the black market at a significant discount.

For the past six years, Old Mutual's ZSE listed shares traded almost at par to the London-listed shares, but this swung to a premium in May last year when Zimbabwe announced it would start printing its own bond notes.

Old Mutual closed at $4,01 on the ZSE on Monday, while trading at $2,64 and $2,61 on the LSE and JSE, 51,8 percent and 53,64 percent lower, respectively.

Equities analyst, Ranga Makwata, said investors were taking advantage of Old Mutual shares' fungibility to move funds stuck in local banks to either London or Johannesburg where they could easily access their money.

"There are a number of dynamic and fundamental issues that can result in an increase in share prices. But in this case, investors with real time gross settlement balances in Zimbabwe buy Old Mutual shares on the ZSE because of their fungibility and sell the shares in the United Kingdom and or South Africa for pounds and or rands," he said.

Zimbabwe is currently facing acute foreign currency shortages due to a huge import bills and alleged illicit financial outflows and runaway government expenditure, among other things.

The shortage is seriously affecting banks' capacity to finance local transactions and meet international obligations for both the private and public sectors.

Zimbabweans are also spending hours in bank queues waiting to withdraw money from banks, which have drastically reduced withdrawal limits due to cash scarcity.

Makwata noted that the high demand for Old Mutual shares on the local market was causing the insurance giant's share price to trade at a premium.

He added that the disparities between Old Mutual share prices on ZSE, London Stock Exchange and Johannesburg Stock Exchange was indicative of the depreciation of bond notes, which are officially pegged at par with the United States dollar.

The greenback is currently trading at a premium of 20-30 percent against bond notes and on the parallel market due to worsening bank note shortages.

During the hyper-inflationary crisis which ended with dollarisation in 2009, the Old Mutual share price discrepancy resulted in an Old Mutual Implied Rate an indication of the exchange rate of local unit against the United States dollar.

That rate became widely used by economic agents except government.

Reserve Bank of Zimbabwe governor John Mangudya has admitted that the emergence of the black market represented excess demand for foreign exchange, but rejected the view that it represented the depreciation of bond notes and cash in banks.

"It is therefore not the mediums of exchange US dollar cash, bond notes, plastic money or the real time gross settlement ― that cause premiums in the parallel markets or the multi-pricing system. It is the disequilibrium or mismatch between the domestic quantity of money and the supply of foreign exchange that cause cash shortages and, resultantly the scarcity premiums and the multi-pricing system," he said in his mid-term monetary policy statement.

"This means that the market views the intrinsic value of the dollar in Zimbabwe being lower than the foreign dollar," he added.

The central bank boss noted that in coming up with solutions to cash shortages focus should therefore be on the sources of money creation and its utilisation and not on the mediums of exchange.

"The lower supply of US dollars is attributable mainly to limited access to foreign finance, declining foreign investor confidence which has reduced capital flows and the indiscipline-induced leakages of foreign currency through illicit transactions and other nefarious activities that include rent seeking behaviour," Mangudya said.

"The root cause of excess demand for foreign currency, on the other hand, is emanating mainly from increases in money supply as a result of greater spending by government, money creation loans and overdrafts by banks. It is these external and domestic imperatives or fundamentals that need to be addressed to bring equilibrium and resolve the challenges besetting the economy," he added.

- fingaz
Tags: OldMutual,

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