Local bourse mired in official exchange rate, blended CPI


DELTA Corporation management, in their latest briefing, alluded to the persistent challenges brought on by International Accounting Standard 21 (IAS21) and further headaches courtesy of IAS29 and Statutory Instrument (SI) 27 of 2023.

Issues related to compliance with IAS21 have been pervasive among Zimbabwe Stock Exchange (ZSE)-listed companies because it mandates the use of an exchange rate that is not reflective of the actual rates that businesses — listed or not — observe especially when it comes to the operating expenses that they incur.

Lately, these challenges have been compounded by the introduction of an inflation statistic, called blended inflation, that is divorced from the reality on the ground.

ZSE-listed companies, such as Dairibord, Delta, and FBC Holdings lamented the inadequacy of blended inflation and some companies have reverted to issuing trading updates in historical cost accounting numbers.

In our opinion, blended inflation and the interbank rate have played a key role in undoing the efforts of stakeholders to develop the local capital markets over the years.

IAS21 and IAS29 are standard meant to address the effects of changes in foreign exchange rates and inflation, respectively. However, these accounting standards work hand-in-hand with exchange rates and inflation figures that are accurate effectively in use.

However, official figures in Zimbabwe continue to be divorced from reality as authorities continue to try to beat the respective statistics into submission without success.

The official exchange rate is currently at ZW$1 378 to the US dollar while parallel market rates recently breached the ZW$2 500/USD mark in the last couple of weeks. Calls have been made by the International Monetary Fund (IMF) to liberalise the exchange rate but to no avail.

Without getting into the nitty gritty, using the official rate to convert US dollar transactions understates the Zimbabwean dollar equivalent of sales or income earned in US dollars.

Given that many businesses have seen US dollar sales outweigh the contribution of Zimbabwean dollar sales, US dollar sales reported in Zimdollar at the official rate will be grossly understated.

We also add that businesses incur operating expenses whose Zimdollar equivalent is largely influenced by parallel market rates and the currency rates mismatch between revenue and costs results in downward pressures on margins, at least on paper.

However, Victoria Falls Stock Exchange (VFEX)-listed companies will report Zimdollar sales using the interbank and this will overstate total sales in US dollars considering that market rates are at a c.130% premium to the official rate.

The introduction of blended CPI takes away the relevance of inflation-adjusted financial statements. We illustrate by looking at the February 2023’s year-on-year blended inflation rate and compare it with loose proxies of the actual Zimdollar inflation rate obtained from different sources.

As shown in the graphic, the official inflation rate looks understated in comparison to an estimate obtained using regression, Steve Hanke’s inflation calculation, and the year-on-year change in Zimbabwe’s poverty datum line (PDL).

We pin this disparity on the use of multiple currencies in calculating changes in CPI, and this also marks a move away from the globally accepted modified Laspeyres method of calculating inflation.

We add that this undermines the credibility of official inflation figures and, subsequently, confidence in published numbers.

An understated inflation figure also understates the conversion factor used in compiling inflation-adjusted financial statements, and this distorts the true performance of listed companies.

The publication of financial statements using official CPI and exchange rate figures will likely push more companies to list on the VFEX in a bid to circumvent the challenges inherent in reporting financial statements in Zimdollars.

Many of them now receive the bulk of their sales in US dollars, after all. In the case that this prompts more companies to move to the VFEX, this will further affect liquidity in local capital markets.

We observe that companies that move to the VFEX trade, on average, less volumes daily than when they were on the ZSE, save for Seed Co International, which rides on restored fungibility. 

In the absence of statistics that aptly reflect what is on the ground, financial results from 2023 onwards will be taken with a pinch of salt, whether they belong to companies on VFEX or ZSE. This is crucial considering that the VFEX is also meant pull international investors in a capital market that is already mired in high country risk.

Mtutu is a research analyst at Morgan & Co. — [email protected] or +263 774 795 854.


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