By Tafara Mtutu
The announcement of a surge in US dollar / Zimbabwe dollar parallel market rates has caused a stir in recent days on social media despite the central bank’s crackdown on parallel market traders. Zimbabwe’s parallel market has been a thorn in the side of the economy since the country lost confidence in the parity between the bonds and the US dollar in 2016. The resurrection of the Zimdollar in 2019 and the introduction of the system of Interbank auctions in 2020 were all part of the currency market formalization measures, but the disparity between parallel market rates and the official exchange rate continues to affect businesses and industry.
Despite a Special Drawing Rights (SDR) allocation of US $ 961 million by the International Monetary Fund (IMF), parallel market rates have fallen from ZW $ 140 to the greenback in recent weeks against an official market rate of ZW $ 88.55. The ensuing uproar sparked a meeting between the Reserve Bank of Zimbabwe, the Ministry of Finance and leaders of the local business community, held on October 11.
Following the meeting, the government pledged to continue supporting the foreign exchange auction system, while the central bank decided to prevent further currency arrears on the auction system and create attractive money market instruments as an alternative investment route for local currency as opposed to holding US dollars, among other deliberations.
In addition, the Zimbabwe Bankers Association has decided to improve the facilitation of letters of credit, ongoing due diligence on all bids placed on the auction system and the manufacturing sector is committed to responsible pricing. and to comply with Statutory Instrument 127 of 2020, among other commitments.
The fair exchange rate of the Zimbabwean currency has been the subject of endless debate and methods of finding the true value of the Zimdollar against other currencies still lack foolproof solutions. Unlike the valuation of stocks and fixed income instruments, the application of fundamental analysis on currency valuations is very limited and technical analysis has been widely accepted in this asset class compared to the fundamental analysis.
However, the economic theory of real exchange rates offers the closest guide to determining the fair value of a currency. The concept of real exchange rate integrates the price of the same basket of goods in different countries to get an informed idea of ââwhether a currency is overvalued or undervalued. It also forms the backbone of the Big Mac or Burgernomics index, which is used to assess the value of currencies in certain countries around the world.
The index uses the US dollar as the base currency and calculates the exchange rate of other currencies based on the price of McDonald’s Big Mac Burger in each country. The Big Mac Index recently incorporated the South African Rand and changes in GDP per capita, and the real value of the Rand in July 2021 was pegged at 10.32 per US dollar. At this exchange rate, the index suggests that the rand was undervalued by around 30% at the time. However, the exodus of high net worth individuals from South Africa, the ripple effect of China’s Evergrande debt problems in emerging markets, and many other challenges unique to each country have kept the exchange rate going. of the country above R14 against the US dollar, an ode to deficits. of the index.
McDonald’s does not have a presence in Zimbabwe, which limits the application of the Big Mac Index in the Zimbabwean context. However, a close alternative to the Big Mac index is the Colanomics indicator from Morgan & Co Research. The methodology behind this indicator uses the rand as the base currency and the price of the two-liter PET bottle of Coca Cola in the economies of Southern Africa. It further incorporates the concepts of real exchange rates and cross exchange rates to estimate the effective USD / ZW $ exchange rate. An implicit rate of ZW $ 176.28 per US dollar is what you get if you use this methodology. However, these methods are not without flaws, such as using a single product instead of a basket of goods.
Much of the disparity has negative implications for an economy from a macroeconomic perspective. The ubiquity of the parallel market in the country implies widespread smuggling and informal market activity in the country, where foreign currencies are bought on the black market to import or purchase goods without any regulatory and tax burdens. In addition, the disparity between the parallel market and official market rates has also constrained companies that sell their products on the basis of the official rate, while incurring parallel market induced costs.
We note the efforts of the government and the central bank to curb the depreciation of the local currency in the black market, such as the elimination of the backlog of the auction system, the designation and shame of the black market dealers. and taking punitive action against abuse of the auction system.
In addition, the outcome of the meeting between the central bank and business leaders should bring stability, if all parties fully commit to the resolutions. However, we maintain that there is still a long way to go to close the gap between the two exchange rates.
In the meantime, we note the Zimbabwe Stock Exchange (ZSE) and Finsec as alternatives to preserving value by buying US dollars on the parallel market. Empirical studies have shown that the depreciation of the local currency often leads to an appreciation of stocks in the ZSE. The stock market offers alternative hedging opportunities against local macroeconomic risks such as inflation and currency depreciation.
Blue-chip stocks such as Delta, OK Zimbabwe, Innscor and Seed Co Limited have proven to be good investments for holders of Zimdollar balances looking to hedge against Zimdollar depreciation. The process has also been simplified for investors with as little as ZW $ 500 through ZSE Direct and offers a much less risky way to store value compared to âmattress banksâ which are susceptible to theft and the elements.
Other alternatives include purchasing real assets such as real estate and land, provided the sellers are willing to transact using the Zimdollar.
- Mtutu is a Research Analyst at Morgan & Co. – [email protected] or +263 774 795 854.