THE global economy and financial markets have been severely shaken in the last two weeks following the intensifying widespread of the coronavirus pandemic which emerged in China in December 2019.
The virus has so far infected almost two hundred thousand people while claiming more than seven thousand lives globally. Physicians are yet to come up with neither cure nor vaccine, a fact that raises numerous uncertainties as to how long shall the stand-still last.
Vaccine trials on humans have begun in the U.S but will take at least three months to determine decisive results. We leave the race to the cure and vaccine to health experts and hope for the best. The virus has disrupted manufacturing, global supply chains, and distorted international trade while order of the day is travel bans and cities lockdown.
Airlines are cancelling flights and laying down workers and lots of businesses are either put on hold or shut down altogether. The direct impact is a slowdown in the global economic growth, even risking a global economic recession. Bloomberg estimates a total of US$ 2.7 trillion of lost output in an extreme scenario.
The situation worsened with the OPEC+ “disagreement” to cut oil production in order to curb oil prices which fell as corona weighed on global oil demand. The disagreement risks a full blown price war between Saudi Arabia and Russia. Saudi has already cut prices and promised to increase production to historical highs in April.
Oil prices have dropped more than 30 per cent since the disagreement less than two weeks ago, down to levels last seen in 2003. Dropping oil prices stresses national budgets of oil dependent countries such as Nigeria and Angola.
Also risks a shutdown of high drilling cost American shale companies which have a significant credit exposure, risking the stability of the financial system. Factoring in the pandemic and oil prices instability, financial markets have severely reacted as indices turn bearish, wiping out the accumulated capital gain since May 2017 in three weeks.
Major indices in the U.S have dropped by almost 30 per cent since late February while European and Asian indices follow suit. The New York Stock Exchange (NYSE) triggered a Level 1 circuit breaker thrice in a six business days.
A Level 1 circuit breaker halts trading for 15 minutes in case the market falls more than 7 per cent in a single session. S&P Futures bid and offer imbalance resembled that of NMB and VODA during the weekend of mid-March, triggering a Limit Down as prices went down more than 5 per cent.
An estimate of $20trn, and counting, has been wiped out from global stock markets in three weeks. Global financial regulators and central banks are reacting to the crisis by stimulus packages and financial easing. The U.S Fed has dropped its benchmark rate by 100bps to almost zero and lowered the reserve requirement ratio to zero percent.
Other central banks are preparing stimulus packages with similar generosity. The move leaves central banks with limited ammo in case the crisis deepens. Despite all the stimuli, stocks are still tanking and investors still focusing on safe assets forcing Treasuries to negative yields.
All African markets, except for three, are on a negative territory year to date. Largest markets are the most hit. The Egyptian stock exchange hit a circuit breaker twice in two weeks while the Nairobi Securities Exchange (NSE) did the same on Friday 13th March.
The Nigerian Stock Exchange dropped 18 per cent in a month, highly correlated to the price of oil. The Johannesburg Exchange is down almost 30 per cent after a massive sell-off hit an already fragile economy. Johannesburg, Namibia and Egypt all wiped out a third of their capitalisation in a month.
Kenya and Uganda are both down 17 per cent since mid- February while Rwanda has climbed 10.8 per cent. Although the Dar’s All Share Index (DSEI) dropped 10.5 per cent during the meltdown, it is mostly dragged by the six cross listed equities from Nairobi.
The Tanzania Share Index (TSI) which tracks only domestic equities climbed 1.86 per cent, mostly from movements on DSE and CRDB which was significantly undervalued, and still is, for the most part of 2019.
On face value the Dar bourse may seem stable, but the reason the market is inverse to the rest of the region and world is the price determination rules that limit price movement especially on the downside.
What does all this mean to the Tanzanian economy and financial markets? With three reported cases until Wednesday this week, this means very cheap capital available to global investors looking for the most return when the market eventually stabilizes.
Provided that domestic corona cases remain minimal, such low interest rates in developed economies raises appetite of assets in emerging markets. When all the dust finally settles and investors begin the shift of cheap funds fetching high returns in emerging markets, Dar es Salaam Stock Exchange shall be unattractive and most likely left out on the most part.
Bear with me; Emerging markets, especially African, have gone through a rough patch since the tightening policy by the U.S in 2018. Some recovery was seen during the end of 2019 and beginning of 2020 but all of the gains have been wiped out in the current meltdown.
The Tanzanian market has been rigid during all this period, recording minimal mixed movement of the domestic index. It must be remembered that the Tanzanian market was highly inflated during 2014/15 following a partial open of the capital account in September 2014, which gave foreign investors full access to listed equities.
The market has been since struggling to deflate prices but stringent trading rules never allowed the correction to fully take place. During the 2018 African markets’ deceleration, same rules held Tanzanian equities high above fair and relative values.
Counters like NMB and TCC have been stuck on half way correction since their alltime highs in 2015. Currently all four counters with capitalization above TZS 1trn are dull.
The most active counter is CRDB which climbed to above TZS 1trn capitalisation in 2015 and successfully corrected over time and currently appreciated by more than 60 per cent since the beginning of the year, advantages of free movement.
As a result of overpriced stocks and unattractive multiples, equity turnovers were continuously declining throughout 2018 and 2019. A short-lived revival was seen in August 2019 when trading rules were amended and required transaction values for eligible off-market transactions were lowered.
Most of the selling pressure clout from institutional investors was shifted to off-market block transactions without changing official trading prices. Thus the market maintained similarly overpriced stocks, trading in blocks off the market, at discounts of more than 25 per cent.
Off-market transactions require a minimum transaction value of TZS 200mln thus locking out retail investors who are mostly local. Since the amended rules became effective during August 2019, at least 98 per cent of the entire turnover realised on DSE was through off-market transactions compared to an estimated less than 50 per cent before the new rules.
Since August 2019, almost all off market transactions were executed at more than 25 per cent discount from official market closing prices. It is important to note that execution prices in all off-market transactions are supported by independent valuation reports as a regulatory requirement.
On top of sidelining retail investors, the new rules have worsen the market price determination mechanism. Although disastrous, as global financial markets meltdown, it is high time regulators of the Dar es Salaam Stock Exchange re-visit the price determination rules that cause intense rigidity on equity prices.
It is known that equities on DSE are already overvalued and needed correction even without the ongoing global crisis. The impact of maintaining the current rigidity and overpricing is that when the current frenzy ends and markets stabilise, there shall be with global investors having abundant funds in hand, chasing the highest returns, the DSE shall be far from consideration.
Similar situation was seen in 2019 when the U.S dropped interest rates and investors turned to emerging markets, open markets like Nairobi and Johannesburg saw upswings while DSE was still under immense selling pressure.
On that light, it is important to note that declining capitalisation is only a threat to a market if it is caused by specific country’s economic fundamentals rather than external factors such as cases in 2018 and the current global crisis.
Tanzania’s economic fundamentals have been increasingly stable over the years and would be hardly reflected by 21 domestic companies listed on the stock exchange. On the other hand, declining transaction turnover is a serious threat to any market and should cause grave concern to stakeholders.
As for the current situation, considering global developments, we expect a gloomy market with minimal turnover in the next few weeks or months until the virus is containable and its total global impact fully assessed. Due to rigid price determination rules we do not expect a deterioration of the domestic capitalization, rather a significant fall of activities.
Few counters such as DSE, TPCC and CRDB remain slightly active. Increased activities are expected on CRDB counter if they stick to their calendar and announce dividends in mid-April. If equity prices were flexible in the midst of the on-going crisis, local investors would purchase cheap stocks from fleeing foreign investors.
Without price flexibility, domestic institutional investors should take advantage of the situation to shop from anxious foreign investors and take back ownership of domestic companies, through off-market transactions of course.
Apart from the Exchange, corona is expected to stress foreign currency inflows due to lowered exports and deceleration of tourism. Imports have also declined due to disrupted manufacturing patterns and global supply chain.
The shilling has been marginally gaining strength over the greenback for three straight weeks, suggesting a sharper drop in imports than exports. Imports of goods are expected to slightly strengthen in the coming weeks as China revives manufacturing after seemingly having contained the virus.
Increasing imports and stressed tourism inflows shall put pressure on the shilling. Inflation is expected to remain stable, subject to sufficient supply of food and lowering energy prices. Food accounts for 38.5 per cent of the consumer basket in Tanzania thus food security is crucial to the stability of headline inflation.
Food prices face risks from possible shortages in neighboring countries, specifically Kenya and South Sudan who are battling the outbreak of desert locusts, the reason prices of cereals have been rising since the last quarter of 2019.
The direct impact of corona and the on-going crisis to Tanzania is a decline in Foreign Direct Investment (FDI) and Foreign Portfolio Investments (FPI) as well as budget support grants from developed economies, especially Europe and the U.S. as they themselves struggle with the virus.
Tanzania’s FDI makes an average of 2.5 per cent of GDP in the last thirty years while the latest stats show that it was 1.82 per cent in 2018.
Budget support contributes about less than 8 per cent of the total budget thus its decline should not be a significant blow to economic activities. A combination of both stresses foreign inflows adding pressure to the shilling’s stability.
Mr Imani Muhingo Head of Market Research & Financial Analytics, Orbit Securities Co. Ltd Mob: +255 763 631 999 Email: firstname.lastname@example.org, research@ orbit.co.tz