Zimbabwe’s capital markets are likely to see a spike in US dollar-denominated assets after Government last year allowed insurance companies and pension funds to collect premiums and contributions in foreign currency.
And because these entities typically need to grow these funds and pay them back in the currency of collection, demand for foreign currency denominated investment assets in the country will rise.
Statutory Instrument 280 of 2020, which was promulgated last November, amended the Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) Regulations to allow insurance companies and pension funds to transact in foreign currency.
Association of Investment Managers of Zimbabwe chairman Mr Jubelah Magutakuona, said the move will boost the local capital markets.
“The markets are still developing. The question is there demand for US dollar-products? I believe that over time that demand will be able to create markets.
“As long as regulators have allowed for the collection of contributions in US dollars, there is going to be a demand for US dollar assets,” he told a Zimbabwe Association of Pension Funds (ZAPF) virtual meeting recently.
He said some of the possible US dollar denominated assets that insurers and pensions funds could consider include fixed income assets, the Reserve Bank of Zimbabwe (RBZ)’s US dollar savings bond, equities on the Victoria Falls Stock Exchange (VFEX), as well as investments in the energy and property sectors.
In developed economies, capital markets investments cover a wide range of products, but locally the capital market is not that well developed and is dominated by shares although retails investors can invest in collective investment schemes or unit trusts and other privately sold funds.
The anticipated growth of foreign currency denominated investment classes will likely broaden both local and foreign investor participation on the capital markets.
Zimbabwe’s fiscal and monetary authorities are driving financial inclusion, which is a key enabler to the achievement of the Sustainable Development Goals (SDGs).
The inclusion rates for retail investors on Zimbabwe’s capital markets currently stands at about 1 percent.
But with Zimbabwe currently using a dual currency system, there are a number of issues that need to be addressed to improve the efficiency of some these US dollar denominated assets in the country.
“The first investment class is in the fixed income space, which is ideally the safest and lowest risk asset class. In the present circumstances, the credit market infrastructure is in place, banks are able to take your money, they are able to extend credit to specific US dollar generating sectors like the mining sector or the tobacco sector, or the horticultural sector.
“But we see a bit of reluctance from the US dollar borrowers because of the impact of inflation on the Zimbabwe dollar, so people will be playing two currencies against each other,” said Mr Magutakuona.
“The exporter is actually generating US dollars and you would imagine that someone earning US dollars would be comfortable to borrow in US dollars, but they would rather borrow in Zimbabwe dollars and then convert it into US dollars to do their business and then hold Zimbabwe dollar obligations.
“But if you are borrowing on a fixed rate arrangement in Zimbabwe dollars and then there is currency depreciation, one tends to make huge profits just on playing currencies alone.
“Because of that reason, we have seen reluctance on the part of US dollar borrowers, which is hindering the fixed income space from generating traction although the infrastructure is already in place.”
In weeks following the promulgation of SI-280 of 2020, a number of players in the industry were lamenting the limited availability of appropriate assets to invest in.
The Insurance and Pensions Commission (IPEC) has said its role is to provide oversight, not instruct insurers or pension funds on where to invest their monies.
“It is not the role of IPEC to direct pension funds to where or how to invest their funds. It is up to Trustees to engage experts to guide them on the appropriate investments, and for them (Trustees) to exercise due diligence,” said IPEC pensions manager Tariro Mateisanwa.
Meanwhile, some investment advisors have indicated that there are significant opportunities in the private equity space, especially with regards to exporting companies.
ZAPF director general Sandra Musevenzo, said there is need for some level of regulation with regards to private equity investments.
“Although there is need for due diligence on the part of trustees, we have highlighted that the Securities and Exchange Commission of Zimbabwe (SECZ) should come up with some guidelines on investments into private equity, which is mostly done by pension funds.”