US embassy cable - 03HARARE763

UNCLAS HARARE 000763 
 
SIPDIS 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR FLORIZELLE LISER 
TREASURY FOR ED BARBER AND C WILKINSON 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: EFIN, ECON, ETRD, ZI 
SUBJECT: Zimbabwe's Stock Market: Illusory Gains 
 
1. Comment:  Even though headlines boast of huge 
windfalls for equity investors, share prices on the 
Zimbabwe Stock Exchange (ZSE) have sunk in real terms 
since 1998.  Apparently, the country's high inflation and 
macroeconomic distortions have duped wishful traders. 
End comment. 
 
ZSE in Nominal Terms 
-------------------- 
2. In local currency (and nominal) terms, the ZSE's 
industrial index appears to have risen sharply over the 
past five years: 
 
1/98 -      7,896 
1/99 -      7,068 
1/00 -     16,774 
1/01 -     26,354 
1/02 -     46,149 
1/03 -    134,416 
 
. . . and more recently: 
 
4/03 -    187,000 
 
ZSE in Real Terms 
----------------- 
3. Conversely, the index has shed 20 percent since 1998 
in inflation-adjusted Zimdollars.  Yet Zimbabwe's 
Consumer Price Index is a conservative inflation measure. 
It reflects products unavailable at controlled prices as 
well as subsidized fuel, food and energy.  Therefore, we 
consider dollarization a more dependable deflator. By 
converting the index into U.S. dollars at the above 
intervals, we see that its value has fluctuated wildly, 
but fallen: 
 
1/98 -    471 
1/99 -    191 
1/00 -    409 
1/01 -    374 
1/02 -    134 
1/03 -     84 
 
4/03 -    138 
 
Both rising revenue projections for exporters (the 
official rate has devalued from 55 to 824:1) and a 
Zimdollar recovery (from 1605 to 1360:1 since Jan. 1) 
seem to have triggered recent bullish sentiment, pushing 
the index up this month. 
 
Comment 
------- 
4. As we have often argued, high inflation and 
macroeconomic distortions play tricks on Zimbabweans, 
making them feel less impoverished than objective 
analysis would suggest.  Equity investors are no 
exception. (Many Zimbabweans also believe their 
automobiles are gaining value, a similar illusion.) 
 
5. Undoubtedly, fortunes have been made in the ZSE.  With 
daily fluctuations reaching 20 percent, it's a day- 
trader's paradise.  But it has not been a reliable haven 
for buy-and-hold investors.  Many would have done better 
hoarding U.S. dollars.  Of course, it is unsurprising 
that listed companies have lost value while the economy 
has retracted 30-40 percent.  In a "normal" economy, 
Zimbabwean blue chips might tempt value-oriented 
investors (with price/earnings ratios often around 4-8). 
But in an economy plummeting by over a percent each 
month, the ZSE remains a speculator's play. 
 
Sullivan