Zimbabwe's stock market plunged 99.95% after the introduction of a new currency pegged to gold.
On April 23, the stock market was hit hard since Zimbabwe launched its new gold-backed currency, Zimbabwe Gold Coin (ZiG), on April 5, with the Zimbabwe Stock Exchange's all-stock index plummeting 99.95%, erasing the stock market's gains of more than 330% this year, and investors were hit hard.
What is the new currency, ZiG?
According to CCTV financial reports, the Central Bank of Zimbabwe issued a statement on the 5th, saying that Zimbabwe is replacing the current local currency, the new Zimbabwean dollar, with a new currency (ZiG) backed by gold and foreign currencies in response to inflation and the rapid depreciation of the local currency. The new Zimbabwean dollar, which was introduced in 2019, has lost nearly three-quarters of its value so far this year.
According to a statement from the Central Bank of Zimbabwe, the new currency is called a "structured" currency and will be "based on, among other things, foreign currencies held by the central bank and reserves of precious metals such as gold". The report also said that Zimbabwe's central bank said it currently has $100 million in cash and about 2.5 tons of gold reserves.
Why the introduction of a new currency, ZiG? The stock market carnival has raised fears of a currency crisis
Prior to the introduction of the new currency, ZiG, Zimbabwe used the Zimbabwean dollar, but this year alone the currency has lost 80% of its value. And in March, Zimbabwe's inflation hit a seven-month high of 55.3 per cent.
Due to the instability of the local currency and the high inflation rate, the stock market became a safe haven for investors, who bought stocks in large quantities before the currency crisis in the hope of protection. The Zimbabwe Stock Exchange is one of the few suitable investment options in southern African countries.
While the rise in the stock market is often seen as a positive economic signal, in Zimbabwe, the surge in equities has raised concerns as it could signal the next currency crisis approaching.
As a result, on April 5, Zimbabwe launched a new gold-backed currency, ZiG, with the aim of stabilizing the country's economy and restoring confidence in the currency. Theoretically, since gold has intrinsic value, ZiG should provide a more stable and reliable monetary base.
As a result, the stock market was hit hard
However, in practice, investors' perception of the long-term stability of Zimbabwe's economy and the market's lack of understanding of the new currency has caused a sharp impact on the stock market, with a significant decline in trading volume and transaction value, which has had a negative impact on the stock market and brokerage business.
According to the data, in the two weeks before the currency conversion, the trading volume was 1,643, and the stock trading volume was 15.251 million shares, with a value of about $2.387 million. Two weeks after the introduction of ZiG, the number of transactions decreased significantly to 390, and the volume of transactions fell to 1.877 million shares. The dollar value of the trade also dropped significantly to $22.20.
In this regard, Justin Bgoni, CEO of the Zimbabwe Stock Exchange, said that a variety of factors contributed to the poor performance of the exchange, and the main problems stemmed from two aspects: the long time required for the conversion of currency conversions and the tight liquidity in the market.
Currency conversion is a complex process that involves a lot of technical and administrative work. This delay affects the operations of investors and financial institutions, as both the flow of funds and the valuation of assets are in a state of uncertainty during the conversion, which directly affects trading behavior and investment decisions.
He mentioned in Monday's conference call that people's uncertainty about how to assess the value of assets expressed in ZiG is one of the reasons for the decline in trading volume. "Often, people are hesitant about the value of ZiG and don't really understand its value," he said. ”
Lloyd Mlotshwa, head of research at IH Securities, a brokerage firm in Harare, said: "The reduction in trading volume has already led to a drop in revenue of at least 50% for some brokerage firms, and most brokers have taken a big hit to their earnings, and for stockbrokers, the new currency has had a domino effect on the stockbroking industry, that is, the decline in average daily turnover reflects the problem of market liquidity, which in turn affects the stockbroking industry as a whole." ”
"Use money as paper", Zimbabwe is notoriously hyperinflationary
Zimbabwe, a landlocked country in southern Africa, is perhaps the most famous negative lesson in the history of finance. At the beginning of this century, the Zimbabwean government's aggressive land reform policies caused the country's economy to plummet and inflation soared.
How severe was hyperinflation at that time?
In July 2008, Zimbabwe's inflation rate reached 231 million. In 2009, the Central Bank of Zimbabwe issued 100 trillion Zimbabwe dollar banknotes, making it the world's largest number of "zero" banknotes. But the 100 trillion yuan note was equivalent to just over 40 cents at the time. As a result, Jinyuan was nicknamed "the only currency in the world that can compete with Tiandi Bank" by Chinese netizens.
There was a famous slogan in Zimbabwe that used to describe the Zimbabwean currency: "Please do not use banknotes instead of toilet paper when you go to the toilet".
In the wake of this hyperinflation, which has taken the global financial community by surprise, Zimbabwe has turned away from its own currency and adopted foreign currencies such as the US dollar as its currency in order to stabilize the economy.
However, Zimbabwe continues to face a severe cash shortage due to the ongoing economic downturn. In 2016. The Zimbabwean government began issuing bond currencies pegged to the US dollar, but was still unable to ensure market liquidity. In 2019, the government began reissuing the Zimbab and announced that it would no longer allow foreign currencies such as the US dollar to circulate.
But the fundamentals of the economy have not improved, and the inflation situation in Zimbabwe has worsened since the pandemic. In 2022, the Zimbabwean government announced the use of the US dollar again.
In March last year, the Wall Street Journal reported that businesses had begun printing their own "money" — handwritten numbers on shredded paper — handwritten numbers on scraps of paper that customers could use to pay for future purchases, as Zimbabwe's currency was dysfunctional and cash was short. There are also merchants who make change in the form of physical objects, such as juice boxes, pens or cheese slices.
In early May last year, the small African country announced plans to issue a digital currency backed by gold reserves as legal tender. Two weeks later, Zimbabwe's central bank announced the completion of the first round of gold-standard digital currency issuance: it had received subscriptions worth 14 billion Zimbabwean dollars ($12 million), equivalent to about 140 kilograms of gold. Zimbabwe's issuance of a gold-standard digital currency is mainly to curb the depreciation of Zimbabwe's yuan.
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Is it all the fault of the new currency?