FY07 and investment lessons from ‘Black Friday'
The stock market subsequently crashed, wiping away 46% from the value of shares as investors scrambled out of the Zimbabwe Dollar. Debates are inconclusive on the real cause of Black Friday.
Depending on who is doing the analysis, the crash is attributed to a number of factors such as government policies (Gopinant, 1998). The failure of the IMF's structural adjustment programmes (SAPs) has also been cited as possible contributory cause (Mambondiani, 2006). Some studies have concluded that the crisis was mainly driven by controversial government policies ranging from unbudgeted expenditure on war veterans, to the controversial land reform and involvement in an unbudgeted regional warfare in the DRC (Moore, 2003).
Whatever the cause, the economy has failed to recover from this collapse with all macroeconomic indicators worsening. Annual Inflation in 1997 was averaging 25%. The previous year, GDP growth rate had averaged 8% in 1996. It all seems like a story from ‘a long time ago, in a far away country'. Compare that to current inflation at 7,982% and negative growth rates going back many years.
The Zimbabwean version of ‘Black Friday' was probably named after the Wall Street stock market crash of 1929. On Thursday, 24 October 1929, stock prices fell on that day and continued to fall for a full month. Prices dropped precipitously as more and more investors tried to sell their holdings. By end of the day, the New York Stock Exchange had lost US$4 billion dollars. By the following Monday, the realisation of what had happened began to sink in, and a full-blown panic ensued. Thousands of investors scrambled to sell off their shares. Many were financially ruined. By the end of the year, stock values had dropped by fifteen billion dollars. Markets can suffer a splutter in a single moment.
Zimbabwean markets have an inexplicable history of internal shock absorbing mechanisms. Companies have been holding on amidst deteriorating macroeconomic conditions, policy gyrations and international isolation. Price controls introduced on 25 June 2007 caused the market to go on a nosedive with 62% of the counters trading in the red on the day due to panic induced selling.
After a ten-year recession, lessons have been few and choices limited. The selling mood triggered by the government's directive to manufacturers, wholesalers and retailers to slash prices by 50% resulted in the industrial index retreating by 17.3% as the market fell to a 23 day low on the back of increased selling pressure. Even within this economic contraction, the stock market has broken records not achieved during periods of the country's sustained economic growth.
The current price war has seen most businesses booking losses and others recording squeezed gross margins of below 10%, compared to monthly inflation which averaging 40%. Businesses are therefore faced with reduced revenues without a corresponding reduction in cost structures.
The shops may still be empty but the market has since forgotten the devastating impacts of black Thursday and the price controls introduced 10 years later. Black Friday changed the Zimbabwean financial landscape, influencing economic directions for more than a decade. It is worth a minute of silence at least on the Zimbabwe Stock Exchange.
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