US embassy cable - 05HARARE1175

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 001175 
 
SIPDIS 
 
AF/S FOR BNEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR JOHN RALYEA 
PASS USTR FOR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E.O. 12958: DECL: 12/31/2009 
TAGS: ECON, EFIN, PGOV, ZI, Economic Situation 
SUBJECT: ZIMBABWE STOCK MARKET PARALYZED 
 
REF: HARARE 1158 
 
Classified By: Charge d'affaires Eric T. Schultz a.i. for reason 1.4 b/ 
d 
 
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Summary 
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1. (C) The Zimbabwe Stock Exchange (ZSE) has virtually ground 
to a halt in reaction to GOZ stopgap measures to help close 
the budget shortfall and finance the burgeoning domestic 
debt.  The introduction of a withholding tax on the sale of 
securities, and stricter enforcement of requirements for 
institutional investors to buy government securities sparked 
a selling frenzy.  A sharp increase in short-term T-bill 
rates further spurred the rush to unload stocks in a market 
without buyers, thus paralyzing the Exchange.  The ZSE, which 
quickly entered into talks with the Ministry of Finance, 
expects that trading, once it resumes, will be very thin, 
whatever the outcome of discussions.  The state,s 
heavy-handed measures to bring the budget under control 
without addressing fundamental economic reform are taking a 
toll on the investment climate and the economy in general. 
End Summary 
 
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A New Witholding Tax on Securities Sales... 
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2. (SBU) In his August 16 Mid-Term Fiscal Policy Review 
(reftel), Finance Minister Herbert Murerwa announced that, 
effective September 2005, the GOZ would assess a ten percent 
withholding tax on the sale of securities in addition to the 
pre-existing ten percent capital gains tax, two percent stamp 
duty, and 20 percent taxation of dividends.  Following the 
announcement, and with the subsequent upward revision of the 
official inflation rate to 254.8 percent, the 91-day Treasury 
bill yield shot to 265 percent from 191 percent. 
 
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...Triggers Sell-Off 
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3. (SBU) Investors immediately began shifting their shares 
out of the market and into Treasury bills to take profits and 
to avoid the withholding tax.  The stock market had been one 
of the few legally available investments in Zimbabwe that 
could compete with inflation.  By announcing the withholding 
tax two weeks prior to its implementation, the GOZ created an 
incentive for an immediate sell off.  The measures brought 
the ZSE,s bull run (260 percent nominal increase in value 
since January 2005) to an end and are threatening to cause a 
stock market crash.  The key industrial index closed on 
August 19 down 12.64 percent on the previous week; the mining 
index closed down 21.94 percent. 
 
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Institutional Investors Compelled to Buy Government 
Securities... 
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4. (SBU) The supplemental budget also signaled stricter 
enforcement of the prescribed proportion of pension and 
insurance funds to be allocated to GOZ securities.  Until 
now, fund managers and the National Social Security 
Authority, which make up 90 percent of the market, had 
ignored the requirement to allocate fixed percentages of 
their portfolios to government securities.  The allocation 
requirement for short-term and long-term insurance 
investments is 25 percent and 30 percent respectively; for 
private pension funds and for the National Social Security 
Authority it is 35 percent.  Furthermore, insurance and 
pension funds previously had valued their assets at their 
original purchase price rather than at the current market 
value, as is now required under the supplemental budget. 
 
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...to Finance the Budget Deficit 
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5. (SBU) According to one leading analyst, the GOZ had not 
enforced the 35 percent prescribed asset ratio until now for 
lack of treasury bills on the market.  The GOZ,s failure to 
attract foreign financing of public debt, however, has 
compelled the Reserve Bank to issue more paper, and the GOZ 
to enforce the higher asset allocation requirement to ensure 
a market.  With Murerwa,s statement, fund managers began 
unloading securities (which had increased in value much 
faster than the prescribed assets) to meet the 35 percent 
requirement.  The announcements fuelled the rush to sell in a 
market lacking buyers, exacerbating the market,s paralysis. 
 
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GOZ/Zimbabwe Stock Exchange Negotiations 
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6. (SBU) The ZSE, in hastily convened talks with the Ministry 
of Finance over the new rules, does not predict a market 
crash, but expects trading, once it resumes, to be very thin, 
whatever the outcome of discussions.  A well-placed broker 
told PolAsst that these negotiations centered on combining 
the announced withholding tax and the pre-existing capital 
gains tax into a new ten percent capital gains tax taken at 
the point of sale either by the stock brokerage or by the 
Zimbabwe Revenue Authority (ZIMRA).  In the past, individual 
taxpayers were left to declare their stock market profits in 
their tax returns, which many investors failed to do. 
 
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Comment 
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7. (C) The end effect of the GOZ,s heavy hand on the 
securities market will likely be to reduce rather than 
increase tax revenue as the market becomes increasingly thin 
and shallow. Murerwa,s fiscal measures are the latest in a 
long line of GOZ attempts to avoid fundamental economic 
reform and maintain the government,s vise-grip on the 
economy.  Like all those that have gone before, they will 
also fail to stem the country,s accelerating economic 
decline. 
SCHULTZ