Academics and market practitioners often agree that, in the long run, a country’s equity market tends to reflect its broader macroeconomic conditions. When Zimbabwe formally dollarised its economy in 2009, the economy and the stock market soared.

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By Neville Mandimika

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Neville Mandimika

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Between 2009 and 2012 real GDP growth averaged 10.5 per cent a year; in like fashion, the equity market went up by an annual average of 13 per cent.

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The euphoria quickly wore off as Zimbabwe’s poor macroeconomic conditions became apparent.

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As can be seen from the chart below, deposit accumulation has been slowing down. More worrying is the fact that the bulk of the deposits have remained relatively short-term.

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In part, this is indicative of a lack of trust in the banking system that has resulted in more and more people choosing to use informal channels to manage and move their money. It is currently estimated that over $3bn circulates outside the formal banking system.

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Post-dollarisation, firms were left with the need to modernise their equipment in order to compete with increasing imports from South Africa and China. As the demand for loanable funds increased relative to supply, interest rates rose astronomically. Corporates are left with no choice but to borrow at rates that are close to 15 per cent a year. Very few businesses can afford to borrow at such rates, especially in US dollars. Such increases in the cost of capital mean that local industry is unable to compete with relatively cheap imports. It is estimated that, since 2011, more than 4,500 companies have shut down, adding over 50,000 workers to the unemployment line.

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Listed companies have felt this pinch and we have seen 15 companies delisted from the local bourse since dollarisation. By all indications, this number is set to grow.

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The culmination of these conditions has resulted in the equity market taking a severe knock, especially from foreign institutional investors who had been strong buyers between 2009 and 2012 and who have now turned net-sellers.

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As the chart above shows, the share of foreign sales relative to the total value traded has been on the rise, which is indicative of the fact that foreigners are selling Zimbabwean stocks in favour of other African frontier markets.

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The reality is that Zimbabwe is losing momentum at a time when neighbouring nations are taking advantage of foreign investors hunting for yield. Across the continent many economies are seeking to enter the eurobond market and most new issues are oversubscribed, while their markets continue to tick up. When the US Federal Reserve eventually pulls the trigger and raises interest rates, many emerging and frontier markets are likely to feel the effects of capital outflows. Given the current downward trajectory, holders of Zimbabwe equities may have to brace themselves for more pain.

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Neville Mandimika is African macroeconomic equity strategist at Atria Africa, an asset management and corporate advisory firm focused on sub-Saharan Africa. This article was first published by the Financial Times