Traders express concern over Zimbabwe’s 28% stock surge and weakening ZiG

Zimbabwe’s stock market is soaring, but it’s not for the usual reasons. Investors are flocking to equities as a safe haven from the rapidly deteriorating Zimbabwe Gold (ZiG)-backed currency.

Since August 28, the Zimbabwe Stock Exchange’s (ZSE) All Share Index has surged 28%, spurred by a sharp and relentless decline in the ZiG against the US dollar.

Remarkably, since the currency’s introduction in April, the index has skyrocketed by an astounding 160%.

Yet, amid this rally, there’s little reason to celebrate.

According to a Bloomberg report, many traders view the stock market’s meteoric rise as a troubling sign of deeper financial instability in the country.

Rather than reflecting genuine economic optimism, the local stock market—trading entirely in Zimbabwean currency—appears to be mirroring the chaos in currency markets, casting a shadow over any real confidence in the economy.

Zimbabwe stock market surge spurs currency volatility fears

Lloyd Mlotshwa, head of research at IH Securities, voiced his concerns over the current market trend, pointing out the stock market’s close ties to the fluctuations in the parallel currency market.

“The stock market has largely mirrored movements in the parallel market and the influx of ZiG liquidity,” Mlotshwa explained in a Bloomberg report, likening the situation to “the same song on repeat.”

Zimbabwe’s currency, the ZiG, was introduced in April 2023 with the aim of boosting confidence in the local monetary system.

But optimism quickly faded. After starting at an exchange rate of 13.56 per US dollar, the ZiG has since nosedived to 26 per dollar on the parallel market—a 17-day losing streak, the longest since the currency’s launch.

Meanwhile, the official exchange rate has remained somewhat steadier, hovering at 13.97 per dollar.

Zimbabwe stock market: a hedge against inflation

This latest surge in the stock market is seen by investors as a hedge against surging inflation and currency depreciation, phenomena that have plagued Zimbabwe’s economy for over a decade.

The adoption of ZiG was Zimbabwe’s sixth attempt to stabilize its currency in just 15 years, following the dramatic failure of the Zimbabwean dollar, which lost over 80% of its value against the US dollar earlier this year.

However, the ZiG’s continued devaluation has made it clear that confidence in the local currency remains elusive.

Mlotshwa highlighted that a significant portion of this liquidity is concentrated in major companies such as Econet Wireless Ltd., the country’s largest telecommunications company, and Delta Corp Ltd., a leading beverage producer.

These stocks are the preferred choices for investors looking to protect their assets from the currency’s instability.

Zimbabwe central bank struggles to stabilize currency

To address the currency’s rapid decline, Zimbabwe’s central bank has taken steps to bolster the economy.

Governor John Mushayavanhu announced on Thursday that the bank has injected $64 million into the market this month.

This move aims to “effectively mop-up significant liquidity in the market,” in an effort to stabilize the value of the ZiG.

Additionally, authorities have cracked down on street traders, a key component of the black market that exacerbates currency fluctuations.

Despite these efforts, the currency crisis continues to push investors toward stocks as a safer alternative.

Mlotshwa remains cautious, pointing out that while stocks offer some protection against inflation, the underlying issues of currency volatility and economic instability persist.

Economic challenges weigh on Zimbabwe

Zimbabwe’s broader economic struggles are further complicating the situation.

The country is grappling with the effects of a prolonged drought, which has worsened the food security crisis and forced the government to take drastic measures, such as the controversial decision to cull 200 elephants to feed the population.

The drought has also impacted key agricultural sectors, including the tobacco industry, which is a major source of US dollar inflows.

With the possibility of a weak tobacco harvest, concerns about Zimbabwe’s economy are growing.

Despite these economic challenges, there is a glimmer of hope in the form of rising global gold prices.

Zimbabwe, a major gold producer, stands to benefit from the surge in gold prices, which recently reached an all-time high.

The nation’s reliance on gold exports has been a lifeline for its economy, and analysts expect that the Federal Reserve’s interest rate cuts could further boost gold prices in the near term.

As Zimbabwe navigates its latest currency crisis, the surge in its stock market offers both a temporary haven for investors and a worrying indication of deeper economic instability.

While the central bank’s interventions may provide short-term relief, the country’s long-term recovery will depend on addressing the fundamental challenges of inflation, currency depreciation, and agricultural output.

For now, investors will continue to look to the stock market as a buffer against the country’s volatile currency and uncertain economic future.

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