IH Securities optimistic ZiG tax payments will shore up demand

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By Alois Vinga

LEADING Research firm, IH Securities is optimistic that the policy directive to pay taxes in the Zimbabwe Gold (ZiG) currency will shore up the unit’s demand but warned that past downside risks remain a reality.

A recent analysis of the Monetary Policy Statement (MPS) delivered last month contends that supportive measures in place will encourage wide acceptance and demand for the local currency.

“The requirement for 50% of QPD payments to be in ZiG creates steady demand for ZiG, which should theoretically strengthen it. We therefore expect a relatively stable USD: ZiG rate for as long as ZiG remains anchored,” IH Securities said.

The cited policy measure follows the government’s position to the effect that companies can pay at least 50% of their tax obligations in the local currency unit.

Considering that the levels of local currency hover at a ratio of 15: 85 against the US$, such a measure is likely to go a long way towards giving companies motivation to generate ZiG sales.

The firm also contends that local businesses are predominantly funding themselves in foreign currency, evidenced by the high proportion of foreign-currency-denominated loans in the banking sector.

“In our view, these new measures reflect efforts to preserve the current status quo in terms of the multi-currency regime and are unlikely to interfere with the functioning of other currencies as they affect roughly 20% of the money supply.

“The lack of further interference with foreign currency retention ratios for exporters is critical given the vulnerabilities posed by the ongoing drought and falling commodity prices,” said IH Securities.

The firm projects that the economy will likely remain pseudo-dollarized in the short-to-medium term, which is vital for stability, with the extent of migration to ZiG based on confidence.

IH Securities has however remained optimistic that downside risks of the alternative market remain on the path.

“It is likely however that some form of parallel market will emerge as a significant portion of the population remains unbanked and it is yet to be seen what level the parallel rate will settle at.

“The Bank did note recovery of foreign currency inflows during the first two months of 2024, suggesting healthy growth of reserves. Whilst an anchored currency theoretically restricts money supply growth thereby arresting inflation, key downside risks remain discipline in maintaining tight money supply and vulnerabilities to fluctuations in gold prices and supply,” the firm’s analysis reads in part.

In addition, the research firm said the currency is inflexible, which may affect the ability to finance the 25% surrender portions or large infrastructure projects.

It contends that entities carrying local currency obligations will however lose the hyperinflationary reprieve that erodes the real value of their obligations with this crystallization of loan values, possibly exerting pressure on them.

The Zimbabwe Stock Exchange (ZSE) was urged to rebase to the new currency, which may result in initial distortions in valuations.

“The uncertainty around the performance of ZiG compels us to lean more towards defensive stocks with strong dividend policies in case valuations remain distorted, impacting capital gains. In our IH Universe, presenting high dividend yields are Delta (6.7%), Simbisa (5.2%) and Axia (11.2%),” added IH.