The Zimbabwe Stock Exchange announced through a press release that the circuit breaker bands will be reduced from +/-20% to +/-15% for counters priced over $1 and +/-100% to +/-20% for those priced below $1. They also instituted a trading halt where the All Share Index moves more than 10% (either way) in one trading session. The timing is telling after the ZSE has gone on an unexpected bull run that has seen the ASI gain a remarkable 168.21% for the year up to the 29th of April 2022. Let’s look a little deeper into this announcement and what caused it, what its intentions are and what it means.
Who let the bulls out?
The ZSE has been a stellar performer over the last couple of years but this year’s performance so far may just upgrade it to a supernova. Gaining 168.21% in 4 months compared to a total of 311.60% for the whole of 2021 the bulls are certainly on a rampage. The rampage is of course symptomatic of other conditions in the market particularly the devaluation of the Zimbabwean dollar due to money supply growth. And this is what would’ve caught the attention of those in charge. Even after releasing a contractionary midterm monetary policy statement and additional measures from their monetary policy committee the RBZ has failed to preserve the value of the Zimbabwean dollar. The ZSE bosses moved to preempt action being taken against them as has happened in the past.
A walk down memory lane
In 2008, at the height of hyperinflation, the ZSE caught the attention of the government because of the reliance of people looking for a real exchange on the Old Mutual Implied Rate. Old Mutual, which is currently suspended, traded on multiple exchanges which meant you could compare prices on those exchanges to imply an exchange rate. The ZSE was eventually closed only to reopen in 2009 after dollarisation. In an episode of history repeating itself, the ZSE again was closed in 2020 for surprisingly the same reasons. Old Mutual along with the other fungible shares PPC and SeedCo International took the blame for exchange rate manipulation. The ZSE closed for just under a month due to this. And now as we face a resurgence in inflation it is right for the ZSE to be looking inward.
Circuit breakers are measures instituted in markets to contain the movement of prices. They can be seen as offering protection to investors, especially in public capital markets. By capping the maximum movement in any direction it gives certainty that losses or gains are contained within a daily limit. The idea is once a price hits the circuit breaker trading is halted. Zimbabwe, while a capital market like any other also tweaks the rules a little bit and what we have seen is the market participants using circuit breakers as a binding floor and ceiling, meaning they intentionally keep all trades between the circuit breaker limit to avoid the attention and panic that comes with a trading halt.
So… Will it work?
Well as we noted above the circuit breakers in Zimbabwe are used as guidance before an act rather than a measure after an act so this will certainly slow down individual counters on the market. As for the blanket +/- 10% circuit breaker, it is a very generous range but that’s the advantage of self-policing. However, we must be honest and remember that action on the ZSE is symptomatic of causes in the monetary space. A stitch in time saves nine but not all problems can be solved by stitching.