Zimbabwe's Stock Market Finally Crashes - The Inside Story

The bubble has finally burst! Zimbabwe's stock exchange, a marvel the world over for its continued upward trajectory amidst the ruins of a devastated economic landscape, reacted to threats and measures put in place by Gideon Gono, the Central Bank Governor, by nosediving 50% in one day. That was the day before yesterday, on Tuesday.

The downward spiral continues still. Some counters fell more than 50% in a single day. Old Mutual shares, for example, which were trading at 500 quadrillion dollars a share on Monday, fell to 100 quadrillion dollars a share by Wednesday.

What the Central Bank governor discovered, and which the whole country knew all along, was that these fantastic figures were being generated to a massive extent by people and companies who had not a single penny in their bank accounts to buy these shares. What they did was this: most had connections within the increasingly rotten banking system. They would talk to their branch manager (who would be promised a cut in the proceeds), and get them to vouch for the fact that they had, say, a hundred sexitillion dollars in their bank account. With this, they would go to another bank, say a merchant bank, and ask for a bank cheque to the value of 10 sexitillion dollars. With this, they would go to the stock market and purchase shares in any counter.

The beauty of this was that most counters, especially the heavyweight ones with solid fundamentals, like Bindura, Old Mutual and RioZim, were rising by as much as 500 to 1000 percent per day. So Mr sexitillionaire would see his money rise five or ten fold very, very quickly. His 10 sexitillion dollars would be 50 or 100 sexitillion dollars by the close of business the day after he bought his shares. The day after that, he could sell half of those shares, realising 25 or 50 sexitillion dollars (because more suckers were coming onto the market daily) and deposit the money into his account.

So, as you can see, within two days, Mr sexitillionaire, with the connivance of his bank manager, would have made a profit of between 40 and 90 sexitillion dollars and could pay back his "loan" of ten sexitillion bucks without breaking a sweat. After that, his remaining shares continued to rise everyday and he could sell bit by bit and buy US dollars. Because he never worked for the money, he could bid any ridiculous amount for the US dollar without feeling any pain. This is how the US dollar has got to its current "transfer rate" level of about Z$50 quadrillion per US dollar. This is the rate used if you are buying US dollars used wire transfers as opposed to hard Zim dollar cash.

But, Gono has put a stop to this (temporary though this is), by making the CEOs of banks, and not branch managers, accountable for cheques and guarantees written against unfunded bank accounts. He threatens to take away the bank's licence and throw the CEO into jail. In addition, the Stock Brokers themselves, some of whom were buying shares without a cent to their names and then bumping up the prices within a day to make massive profits, have now been barred from doing this and also threatened with fire and brimstone from the Governator.

The Central Bank has additionally put measures in place to supervise the Stock market and made its management liable for any shenanigans on the Bourse.

But this is all in vain. There is absolutely nothing the government can do to the stock market to stop the speculation. The problem is that it is the only investment vehicle left in the country and, for a country in which business is accustomed to super profits, , the tendency to drive up share prices without regard to business fundamentals is all but unconquerable. The punters will be back. All that has happened now is people are temporarily staying their hands. In the last two days, trading has been very thin. Almost ALL the counters have people trying to sell and not a single buyer is in sight. The share prices will fall rapidly in the next week or so and the US dollar with it. And that will be the time to buy like crazy if you have the money.

Thing is, the market will rise again in a couple of days, a week on the outside, once the jitters have gone. There is a lot of idle money out there, which quickly loses value, and that money will keep pouring into the market, sending the prices of stocks and the US dollar soaring as usual. A lot of the dirty players will be weeded out through this latest round of Gonomics, but those who have money in their accounts will run to the stock market. There is simply nothing else to do with your quintillions, since Gono only allows less than a US dollar's worth to be withdrawn from your account in a single day.

Added to this, the collapse of the national payment system has also ensured that the money in your bank account is useless. No supplier accepts cheques or bank transfers anymore because that money is losing value by the day. All of them ask for US dollars.

The shops where most of us buy groceries now also accept only US dollars or hard cash, Zim dollars. The electronic payment system (visa and mastercard debit and credit cards) is now dead. You can not use them at even a single shop in ALL of Zimbabwe. The shops just pretend that the machines are dead or that "we have run out of paper for the thing." Another excuse is that there are, once again, so many zeroes in the prices that the machines are no longer able to cope. Bottom line: the money in your account can only go to the Stock Market, where cheques and electronic transfer systems are still accepted.

The only other entities accepting Zimdollar cheques and transfers are ZESA, the power utility, Zinwa (the Cholera Promotion Agency, which is supposed to be the Water Authority), ZIMRA, the revenue Authority and government departments.

While Gono is busy cleaning up other people's homes, his own house stinks to high heaven. There is a scam that has been going on for some time now, promoted by his own employees and his own policy of allowing a pitiful amount of cash to be withdrawn per day from the banks. This scam involves people connected to Central Bank employees applying for cash "to buy Aids drugs" or any other thing excepted by the Governor. They apply to withdraw their own money, say, 500 million dollars. Now, the cash rate for the US dollar is "only" around 1 million dollars per US dollar. The application is quickly approved. Still, when the approval comes through, the applicant is allowed to go back to the "pharmacy" and get an "updated" quote for the medication, since the Central Bank also "recognises" that prices are going up every day. The new quote would be for a billion Zim dollars, say. This money is withdrawn on the very day and used to buy, say, a thousand US dollars. Needless to say, most of the excuses given for the applications are utter rubbish, but they are still approved by insiders at the Central Bank.

This process is repeated several times and I personally know of people who have bought 2 cars from Japan through exploiting this loophole with relatives at the Reserve Bank. And that is just last week. Does the Central Bank governor do anything about this? Of course not. He turns a blind eye. And it is this double standard that promotes the avarice in Zimbabwe. People are not going to die of hunger or see their life's work reduced to nothing. They find means to beat the system, and they feel no guilt about it at all, since even the Central Bank is doing it and they can see them do it.

Another issue that also promotes corruption is the Reserve Bank habit of using its own cash to buy foreign currency on the black market. This has been denied by Gono, but he fails to answer the following simple question: How is it that, whenever new notes are printed, on the day that they come out, before even the banks have opened to dish out the new notes, these can be found at Roadport, the illicit market for US dollars in Harare. I have seen this with my own eyes twice. The first time was when the new Z$20 000 dollar note came out. The second time was with the introduction of the new Z$1 million note. The interesting thing is that there were bundles of the new million dollar note at Roadport by 7 a.m. Ordinary people only started getting the new money at 11 a.m. And, also consider that the individual account holder is allowed to withdraw $500 000 per day, only companies can access the 1 million dollars a day.

How does the Governor explain this? He has failed to do this. It is sad, because this man was highly acclaimed when he first came in and his measures even resulted in a drop in inflation to double figures from three figures.

Now, however, he is universally reviled by the population and his unpopularity is now even higher than Mugabe's own.

The advice then is that if you have the money, get into the stock market. It will rise again, and stupendously so. There is NOTHING Gono can do to stop this for the reasons explained above, short of closing down the bourse. And he would never dare do that.

The photo here was taken by one of my two favourite photographers in Zimbabwe, Tsvangirayi Mkwazhi. The other is Desmond.