Prosper Ndlovu, Business Editor
IN a bid to attract increased investment as part of the wider economic transformation agenda, Zimbabwe is establishing the Victoria Falls Stock Exchange (VFEX) to deepen capital investments by tapping into regional and global capital markets.

The Victoria Falls Special Economic Zone has created an opportunity to set up the VFEX as a first step towards establishment of the offshore financial service centre. As such, the VFEX will be operated from the central business district of Victoria Falls, after being issued with a licence a few weeks ago, and will seek to partner any exchanges or international investment banks. As regulators are finetuning the system and putting final touches ahead of approval for the initial trading, the move to establish VFEX has generated a lot of interest in business circles.

Finance and Economic Development Minister, Professor Mthuli Ncube, together with Zimbabwe Stock Exchange (ZSE) chief executive officer, Mr Justin Bgoni, had the opportunity to unpack the broader vision of the platform during a recent virtual market analyst dialogue. Below are some of the key highlights.

What is the thinking behind VFEX?

According to Prof Ncube there is a need for the creation of globally recognised stock exchanges in Africa, those that arise from environments that are devoid of any negative impact of exchange rate fluctuations.

Such exchanges arise from an environment, which is freer in terms of the ability to do business with investors being able to easily come in and out and so forth.

“We need an environment like that, Africa needs an environment like that,” said Prof Ncube. “As Government, working with the Zimbabwe Stock Exchange, we saw an opportunity to create this platform, a pan-African, if not global platform, for the trading of stocks on the African continent.”

Zimbabwe would, thus, seek to do it in a way that is promotive of foreign investment into the economy and also into the region. So, that is how the VFEX idea came about to say “let’s create a stock exchange in an enclave”, a financial services sector enclave. The minister said such a move was already enshrined in local legislation and what was needed was to harness the opportunity.

“We have all the legal instruments, legal boundaries and enabling environment to create such an exchange,” he said.

What benefits will VFEX bring to the economy?

There are high hopes that a platform like VFEX will be a conduit for portfolio investments as well as Foreign Direct Investments (FDI) into Zimbabwe. “We want it to be a platform for trading securities in Africa in hard currency, we also want it to be a platform for companies that seek to go international and use exchange as a conduit,” said Prof Ncube.

“As we know some companies come into the rest of Africa through destinations such as Dubai, Mauritius and any other jurisdictions and tax havens. So, why not a Zimbabwean jurisdiction or Victoria Falls jurisdiction.”

The other benefit, said Prof Ncube, is that VFEX creates a window for local pension funds in their quest to have part of their portfolios invested in foreign securities. Some of these foreign securities are securities that we could create ourselves as Zimbabwe on the VFEX, he said. The Treasury is already pushing a bill through Parliament that will allow pension funds to invest offshore, and VFEX is part of the game plan.

Given that VFEX will be physically housed in the resort town, there are high prospects the platform would have a huge impact on the Victoria Falls development masterplan and the surrounding areas in the Hwange District. Along with this are hopes for more job opportunities downstream and enhanced ease of doing business profile for the country. “The launch of VFEX is actually part of the solution, part of panacea for dealing with environment for doing business, we are trying to remove exchange rate risk from portfolio investment and also FDI investment but around the broader financial service centre concept,” said Prof Ncube

Huge economic window for mining, insurance sector

Given that Zimbabwe is stronger on the mining front, VFEX also presents a huge opportunity for the diversity of the extractive sector. The country virtually has every precious mineral deposit including oil and gas, which were discovered recently. The mining sector in terms of investment is a hard currency driven sector. Sourcing equipment and all that is needed to pull out the mineral requires forex and these companies would like to receive a reward that is protected, that is guaranteed and clarity on the sustainable internal rate of return. “This can only be guaranteed by an environment that has got this kind of flexibility that has got hard currency closing around it. So, the VFEX will offer that and will be a driver of investments into the mining sector,” said Prof Ncube.

The insurance companies that offer cover to the mining sector also stand to benefit immensely. At the moment insurance for the mining sector is foreign sourced because our own insurance companies cannot really offer insurance products in US-dollars or hard currency.

However, through this window, the sector can register subsidiaries in the offshore financial centre, not necessarily VFEX but in the broader centre, which will allow them to offer insurance products in US-dollars and therefore provide insurance cover to the mining sector and other sectors that desire such insurance, the minister explained. “You can see that is the thinking behind creating this exchange,” he said.

The VFEX operational structure, impact on ZSE

While the date for commencement of trading on VFEX is yet to be announced pending final touches with the regulator, some are wondering in what form it will operate and the impact the platform will have on the ZSE. VFEX is a wholly-owned subsidiary of the ZSE. According to Mr Bgoni, VFEX will be operationalised in three phases. The first phase entails the setting up with ZSE doing handholding since the bourse has experience. The second stage involves getting an equity partner. “We are looking for a partner, either a bank or another exchange and then the last phase is when it (VFEX) stands alone,” said Mr Bgoni.

Government is already in talks with international banks regarding the second stage and indications are that there is overwhelming investor interest, said Prof Ncube.

Mr Bgoni also allayed fears that VFEX would cannibalise or weaken ZSE as it was targeting a totally different market segment. “The aim for VFEX is largely with companies with no listings on ZSE. So, we are talking about start-ups or companies that are expanding, especially mining ones. We are looking at those mining companies that are listed elsewhere that are in Zimbabwe and would like to come to our capital market,” he said. “That is our main target. As far as companies on ZSE are concerned, they are allowed to invest up to 20 percent of their capital but there is a big catch, which is that it can’t be the same type of shares that are on ZSE. But still that is not our target market,” said Mr Bgoni.

How will investors repatriate their capital/dividends?

Every time when investment engagements are conducted, there is always a concern over lack of ease in terms of repatriating capital and dividends. Sub-Saharan Africa Renaissance Capital economist, Yvonne Mhango, said this is one of the major investor worries, especially since VFEX trading will be denominated in forex. Will investors be guaranteed of ease to repatriate their dividends unlike what is happening on ZSE now? The answer is “yes”, said Prof Ncube, who went on to explain steps being taken to address the matter. Soon the Reserve Bank of Zimbabwe will have to issue a directive that speaks to the desired settlement guarantees and a supporting framework. Over and above, the minister said the Apex Bank’s participation in VFEX, for a start, was meant to give adequate Government commitment but also that over time other banks with strong balance sheets and skills would also be involved. “What I can promise is that the Reserve bank has been very forthcoming, they understand this concern and the directive that will come will be very clear and I can promise it will make it easy for investors to come in and easy for them to repatriate funds,” added Mr Bgoni.

What do market experts expect?

Economic experts have roundly expressed optimism that VFEX would open a new economic chapter for Zimbabwe and place the country on the global spotlight in terms of offshore securities trading. They, however, urged the Government and ZSE to urgently iron out a few sticking issues to ensure a successful launch. “As far as our constituency is concerned, we are very excited by this idea, which we think will resolve the conundrum that we have seen on the dual listed stocks on the ZSE, it is our hope that whatever ills are there from dual listed stocks are not to be exported into VFEX,” stock market expert, Mr Jubelah Magutakuona, said.

“Also, there is an issue of transaction costs that is caused by transaction friction and trading costs. We look at the current trading framework and we think it’s extremely expensive to trade on ZSE.” He hoped VFEX would consider issues of competitiveness and compete with JSE on the dual listed stocks. Economist with North West University (SA), Mr Tinashe Nyamunda, urged the Government to remain consistent in policy signalling and keeping the cost of doing business under check to entice more investors.

Prof Ncube pledged that the Government will address the concerns and avail incentives to ensure impactful VFEX take off. Invictus Energy managing director, Mr Scott MacMillan, urged ZSE to quickly avail listing requirements describing VFEX as a “fantastic initiative that will inject a lot of confidence in investing in Zimbabwe” in the mining sector. Securities and Exchange Commission of Zimbabwe (SECZ) chief executive officer, Mr Tafadzwa Chinamo, said: “We were excited as a commission to have another exchange that is offering something different (VFEX)…they have ticked all the boxes we set for them.”