HARARE-  Barely a few days after the dual listed Old Mutual Limited announced the suspension of its CE, which led to a subsequent share price depreciation on both the JSE and the ZSE, Zimbabwe’s political elites have sought to hammer the behemoth through unsubstantiated claims.

Chris Mutsvanga, who is a ZANU PF politburo member and former presidential advisor and cabinet minister, said last week that Old Mutual is perpetuating the parallel market through an unofficial reference exchange rate pricing, implied from its share price.

In a televised interview on national broadcaster ZBC, Chris Mutsvangwa, a key member of President Mnangwagwa’s inner circle, said Old Mutual was formenting parallel market activities through its dual listing.

“Old Mutual as the capitalist vulture, is responsible for abetting exchange parallel market activities because its implied rate often matches the black market. The fungibility which was aimed at increasing capital flows into the country, is now an avenue for abuse” he was quoted as saying on the live broadcast.

Fungibility refers to the ability to be traded in different markets. A fungible stock is therefore listed in at least 2 or more exchanges in different jurisdictions and can be moved from one of the exchanges to the other without restrictions.

For Old Mutual, it had at least 3 key listings up until June 2018, these being a primary listing on the LSE in London and secondary listings on the JSE in South Africa and ZSE in Zimbabwe. Its shares were therefore traded freely across these markets.

Now, following the hyperinflation of 2018 in Zimbabwe, traders devised a way to estimate a proxy market driven exchange rate, given that the official statistics were understating the rate and therefore unreliable.

The Old Mutual share price became the defacto proxy to a more reliable exchange rate given its presence in 2 more stable countries outside of Zimbabwe.

To calculate the implied rate, one would assume for example that if 1 share of Old Mutual costs 1 Great Britain Pound on the London Stock Exchange and the same share costs 3RTGS$ on the Zimbabwe stock Exchange. The implied RTGS$ to GDP exchange rate would be 1:3.

On Wednesday Old Mutula Ltd share price closed at RTGS$12.50 on the ZSE, while closing at USD1.39 (converted) on the JSE giving an implied exchange rate of about 1:9.

In 2008, this measure of exchange rate became more of a standard in the private sector and was popularized by international Economic scholars such as Prof Hanke, of the USA.

Implied exchange rates are therefore a common thing across the world and are a phenomena only experienced in Zimbabwe. Their reference however increases when respective economies experience currency failure.

It is also apparent to highlight that companies whose share prices are referenced for implied exchange rates, have no role to play at all in setting market prices. Once floated, a company’s share price is now subjected to market forces irrespective of its fungibility and it is individual buyers and sellers acting in each’s own interest, who set the price based on these forces.

So although from time to time Old Mutual may trade in its own shares, mainly through an exercise known as share buy-backs, these trades are typically guided by market average prices. For example, at an AGM company directors may authorize management to exercise discretion over the purchase of its shares in the ensuing year at a price which is not 5% more than its 30 day trailing average, up to a certain volume level. This therefore restricts a company’s efforts to manipulate share price.

It will be folly however to keep digging in this direction as its pursuit it follows an argument that the Ex ambassador does not appreciate the mechanics of stock markets, which is not true as he is an active participant on the ZSE, through proxy or otherwise.

This uncouth rant is as observed by one commentator a scapegoating, given how government has been stunned by markets with respect to the exchange rate and inflation.

Despite later revising their estimates to more conservative levels, both the Treasury and the Central Bank, have missed inflation as well as exchange rate targets.

While presenting his MPS in February, the Governor anticipated that the exchange rate will not go beyond 1:4 because there was no ready RTGS$ in the system to sustain that rate. His assertions were later repeated by Finance Permanent Secretary George Guvamatanga in a live interview with Financial Express.

On inflation, RBZ had initially targeted a year end inflation of 8% in 2018, which was later revised upwards while Minister Mthuli Ncube also projected an annual average inflation level of 4% for 2018 and 5% for 2019, estimates which may have since been overrun.

These misses gives an indication that government may indeed presently be stunned by markets which keep pushing the exchange rate while inflation follows. Mr Mutsvangwa’s statement therefore follows this lack of appreciation of rationale behavior by economic agents.

Finding someone or something to apportion blame for this unanticipated adverse market outcomes would therefore bring temporal comfort to government nomatter how irrational the blame apportionment may be.

EQUITY AXIS NEWS