Thursday, February 26, 2009

A 25-Minute Work Week on Zimbabwe's Stock Exchange

By Jerry Guo and Alaina Varvaloucas Thursday, Feb. 26, 2009
The intensity with which the spiffily attired investment brokers of the African Banking Corporation stare at their computer screens is misleading: A closer look reveals that they're either fiddling with iTunes, or playing solitaire. Still, their boss, Seti Shumba, who moonlights as chairman of the Zimbabwe Stock Exchange, offers them smiles and pats on the back — he's just glad they showed up to work.

These men would have once spent their days barking out orders for shares on the trading floor (actually an u-shaped conference table in a nondescript downtown office) of the Harare bourse, but Zimbabwe's central bank forced the exchange to shut down last November amidst allegations of fraud and rampant speculation — allegations deemed spurious by Zimbabwe's small investment broker community. To be sure, the exchange was producing annual nominal returns of 23 sextillion percent, but Zimbabwe's inflation rate is even higher, rendering the bourse's real return close to -35%. Still, the government was taking no chances. "People took every shortcut to get instant riches," Gideon Gono, Zimbabwe's central bank governor, tells TIME. "We were protecting the innocent." (See pictures of Zimbabweans go to The polls.)
What Gono didn't mention is that the government has been one of the largest investors in the market, in which the lag between the implied currency exchange rate on the floor and the black market rate on the streets still creates opportunities for quick gains. Other big players include local investment banks and wealthy individuals. The 80 stocks listed on the exchange range from the country's most popular cellular phone carrier to Zimplow, which manufactures "animal-drawn farming implements," and includes companies producing a cross-section of commodities such as timber, wine, nickel, tobacco, even bacon.
The government's move led Munyaradzi Ruzvidzo, one of the 38 licensed stock brokers on the exchange, with little to do. Where once he enjoyed the frenetic lifestyle of a much-sought-after banker, he has spent most of the past three months working "about five minutes" a day. He would show up at the exchange to post sell orders, but there were never any buyers — the hostile political climate has scared off even the most battle-worn investors. "It's only procedural," he says. "I come into the office, and there's just nothing going on."
Still, the traders are lucky to even have jobs in a country where four out of five people are unemployed, and seven out of ten eat one meal per day or less. Governor Gono's incessant printing of Zimbabwean dollars has deepened the country's economic woes, turning what was once the breadbasket of Africa into a financial basket-case. Just last month, he unveiled a series of trillion-dollar notes. The Cato Institute estimates the country's hyperinflation, one of the worst in history, exceeds 89 sextillion percent, or roughly a doubling of prices every 24 hours. Rather than admit to economic mismanagement and corruption, government officials are scapegoating the stock exchange. "There have been attempts to blame 'speculators' and 'rogue traders' for a sharp depreciation in the Zimbabwe dollar and rising inflationary expectations," says Shumba.
Gono insists that he "had hardly printed money, yet the growth in the money supply was phenomenal," blaming stockbrokers for generating inflation. He went on to describe a covert mission last November, in which he used secret agents to buy stocks that he then demanded to be converted into cash. When the stockbrokers couldn't produce the sextillion Zimbabwean dollars, he shut down the whole thing.
Trading on Zimbabwe's volatile stock market made Wall Street's dubious derivatives look like Treasury bills. With an economy locked out of the global financial system, daring foreign hedge funds and institutional investors saw this obscure market — much like emerging investment funds in wine and fine art — as an opportunity to diversify, or seek "exotic beta" in finance parlance. Though real returns may occasionally hit the high double digits, says Shumba, investing here can seem like playing Russian roulette: the exchange is highly fickle and illiquid, with a total market capitalization that has fluctuated ten-fold in the last year, and a trading volume less than one-hundredth the size of the Johannesburg exchange (itself a modest operation by global standards). And then there's the risk that the government could simply confiscate your money. "It's one of the riskiest stock exchanges in the world," Shumba admits.
As dire as their situation has been, the brokers of the African Banking Corporation and their peers are hoping that better times are just around the corner. A new power-sharing agreement between the opposition and President Robert Mugabe's ZANU-PF party could see progress on restarting Zimbabwe's moribund economy. And, it's rumored, Gono's job may be on the chopping block. Foreign investors are eager to dive back into the fray, sensing major opportunities in an economy that will have to be rebuilt almost from scratch. One client of African Banking Corporation is ready to multiply its investments by a factor of 20 once the dire political situation stabilizes. Others remain cautious: "When we see a solid set of reform processes with realistic objectives put into play by the government, then we'll be encouraged to increase our exposure," says Jamar Evans, who manages a Chilean hedge fund with investments in the Zimbabwean exchange.
Last Thursday, the Zimbabwean exchange reopened with a massive sell-off. It remains to be seen whether the new government can restart Zimbabwe's economy, but the effects of their efforts are being felt among Harare's stockbrokers. The 25-minute working week may finally be over.

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