The Closure of Zimbabwe Stock Exchange: Any Potential Implications?

Know Your Exchange

The Zimbabwe Stock Exchange Ltd (ZSE) is a licensed securities exchange in Zimbabwe regulated by the Securities Exchange Commission of Zimbabwe (SECZ). Efforts are underway to adopt a self-regulation structure. Founded in 1894, the ZSE facilitates the listing and trading of ordinary shares, preference shares, depository receipts, debt securities (like debentures, notes and bonds), and exchange traded funds (ETFs). The bourse currently has 63 listings and a settlement cycle of T+3, meaning that a trade that takes place on Monday is settled on Thursday.

Zimbabwean Currency
Source: newszimbabwe.com

In the Headlines

“Economically bankrupt. That is the diagnostic, should anyone care to know.” I quote the words of a random commentary on the news of panicky investors demanding answers after the Zimbabwe Stock Exchange shut down.

Stockbrokers in Zimbabwe attempted to disclose to investors what had befallen their cash after the government shut down the trading at the bourse.

The Zimbabwe Stock Exchange declared that it had suspended trading to abide by an order given by the Information Ministry on 26th June 2020 that the stock exchange close. It’s the most recent in a string of measures the administration has executed to attempt to stabilize the nation’s currency. Among the various measures economies would propose to stabilize a nation’s currency, namely selling foreign exchange assets and raising interest rates, closing an exchange does not seem to appear in the list. In fact, closing down a bourse scares investors, both domestic and foreign, and this does not usually augur well with currency stabilization efforts.

Dealers were bogged down in calls from “appalled and worried” investors on the morning of 29th June 2020, Thedias Kasaira, managing director at Imara Edwards Securities, said by telephone from the capital, Harare.

“Clients are asking and we don’t know what to tell them,” he said. “They want an explanation, but we haven’t been able to give one as we also don’t know the reason.”

Zimbabwe’s benchmark industrial index has risen more than sevenfold this year to a record. Investors have utilized the local bourse as a safe house from the nation’s collapsing currency and inflation of 786% — the highest rate in 10 years.

Investors with cash in Zimbabwe prefer to buy shares to avoid their money losing value. Movements in domestic stock prices track the parallel currency markets on the streets of Harare, where the Zimbabwe dollar changes hands at about 100 per U.S. dollar, compared with the official rate of 57.35.

“People are looking at a hedge against inflation; that’s why they are switching from Zimbabwe dollars to equities,” said Lloyd Mlotshwa, head of equities at Harare-based IH Securities. “The stock exchange serves as a proxy to parallel market rates.”

ZSE Chief Executive Officer Justin Bgoni said he wasn’t ready to give any remarks when reached by telephone.

The Zimbabwe Stock Exchange (ZSE) formerly notified its stakeholders of the suspension in trading following a ban by the central bank after recent allegations of economic sabotage by authorities. This falls under the new series of measures which include the suspension of monetary transactions on phone-based mobile money platforms to facilitate extensive investigations leading to the arrest and prosecution of offenders.

But how wise was the decision to suspend trading at ZSE? Let’s dig into history to find out when exchanges across the world have been shut down, why the move has been taken before, as well as the good and the bad that has come out of it.

First, the move to close a bourse was rarely taken in history.

Most countries followed suit during the two world wars and the several closures were necessitated by very desperate circumstances.

Picking from a book by Noble H.G.S (2009), The New York Stock Exchange in The Crisis of 1914, “A similar object lesson was furnished in the case of the Stock Exchanges. They were all closed, and for a few weeks some profound thinkers in the radical press stated that the country was showing its ability to dispense with them. When the time for their reopening came, however, there was no agitation to prevent it. On the contrary, it was hailed as a sign of the resumption of normal financial conditions in the United States.”.

Notable Stock Market Halts in the NYSE and Closures through History

There was a week-long break from trading in 1865 following the assassination of the 16th US President Abraham Lincoln.

 In 1873, a Philadelphia banking firm, Jay Cooke & Company went under due to decreased demand for its railroad bonds. Being one of the largest underwriters of treasuries, it caused such a panic that the exchange was closed for 10 days.

1914 is probably the most historic. World War I broke out and the bourse was shut down for 4 months. Militarism, alliances, imperialism and nationalism were the four major causes of WW1; in summary, the European nations were in conflict. Many of these countries had large amounts of US securities, which could be sold off to create capital for war. The closure was preventing a “run” for the market.

Following the 1987 crash, circuit breakers were implemented, and they were the cause for the 1997 shutdown. The setup was a 30-minute shutdown if the Dow plunged by 350 points. A second trigger with an extra 200-points loss would lead to market closure for the day.

The NYSE did not open on the morning of the 9/11 attacks, and this closure extended to September 17th.

In 2008, the exchange was halted for big selloffs. The housing crisis that would land the US into a recession was happening. Financial institutions were liquidated.

2015 saw a technical glitch that caused the exchange to be down for a few hours. Typical technology mishaps, possibly unavoidable.

Finally, the most recent was the morning halt on March 9, 2020 (and another three days later) due to a slow burn over the past weeks as the coronavirus pandemic gained momentum. There were concerns as to what the spread of the virus could mean for the economy.

So…

While most economists recognize that stock markets can and should be closed in extraordinary moments, most argue for keeping the practice a rarity rather than an acceptable tactic. How so? It’s almost always far better to let buyers and sellers try and figure out where the market is going; the real risk being that a government mandated shutdown may cause more panic than is already existent. An issue of causing more panic whilst preventing more panic.

In a recent working paper published by Enriques Luca and Pagano Marco (2020), Emergency Measures for Equity Trading: The Case Against Short-Selling Bans and Stock Exchange Shutdowns, some noteworthy research and thoughts are shared. “The trading halt of all stock market negotiations … would be a decision that would switch off the price indicator without removing the causes, generating market problems that are not easy to solve in the immediate future.” An even more interesting analogy is revealed. “in other words: a stock exchange shutdown is the financial equivalent of getting rid of the thermometer when it signals fever: the only outcome is that it becomes even more difficult to understand how serious the flu is and how it is evolving.”

The bigger question that arises is “Where does ZSE’s closure fall?” amidst all this back and forth discussion. History has said its fair share, for the West, but for Africa too because bourses work under the same financial foundations anyway. Experts warn that closing to investigate might not be sensible as it attracts unnecessary attention on the ZSE which may be difficult to restore. The investors are panicking, for their money’s sake; but mostly because the bourse just won’t be the same after this unprecedented shutdown.

Dear Zimbabwe,

About suspending trading on your exchange. It needed more thought. I stand to be corrected.