Bulls n Bears Entrepreneurship Zone :: Business trip to Zimbabwe: Searching for investment opportunities

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Zimbabwe is in a mess … this is not surprising, nor is it the first time.
Since October 2018, things in Zimbabwe have been heading in the wrong
direction. Between booking our flights and landing in Harare, Zimbabwe’s
official exchange rate changed from US$1 equalling one “electronic” dollar
to US$1 buying 2.50 electronic dollars. While most companies or people do
not access US dollars at the old parity rate, the change still does have big
implications for accounting results.

>From discussions with companies’ management and our colleagues at Old
Mutual Zimbabwe, very little currency is actually clearing at the new rate.
This is to be expected as both the parallel rates on the street and Old
Mutual’s “implied” rates are well north of 2.50 electronic dollars.

Zimbabweans have been through this before and it’s going to take a far
greater devaluation to get them to part with any hard currency they might
have or for us (as a foreign investor) to come into the country.


Hallmarks of managed currencies


As is usually the case with managed African currencies, the devaluation (as
mentioned above) is not a surprise. In these instances, the surprises are
typically the timing of the decision, the magnitude of the devaluation and
then the implementation. In the case of Zimbabwe, the timing was less of a
surprise to us than it would have been a year ago, as there have been a few
clues in recent months.

I did start writing down some of the reasons why the situation has arisen,
but it basically comes down to the government running out money and having,
over the past two years, figured out a way to “print” new cash. This is
effectively being done through issuing electronic money to pay public sector
workers and suppliers. The electronic money has the very cumbersome name of
real-time gross settlement (RTGS) dollars. I hope it gets a more manageable
name soon.


Opportunity lies in every crisis


We have not travelled to Zimbabwe in four years, as our investment process
has ranked the country as very unappealing. Basically, if we can’t get money
out of a country through official channels (or if we expect that a country
is heading in that direction), we avoid investing there. For the past three
years, foreign investors in Zimbabwe have had repatriation problems.

However, our experience shows that there are standout potential returns
around the time of currency volatility … both to the up and the down. For
this reason, we started monitoring Zimbabwe more closely in October last
year, even though it continues to screen poorly as an investment
destination.


So where is Zimbabwe today?


Reported inflation has gone from being negative in mid-2018 to close on 60%
in January – and is likely to go higher. Zimbabwean companies tell us that
costs have actually risen more than this rate, some saying up to 80%. They
expect this number to rise further still.

Fuel is in short supply. We saw long lines at fuel stations as customers
waited for fuel to be delivered. Only the connected fuel importers seem to
have fuel.


What does this mean for the listed companies?


– Banks have been rescued, as deposits have been devalued.
– Companies with cash balances have seen value destroyed. It seems the
government is saying that all deposits are now RTGS dollars, regardless of
whether they were deposited as US dollars or not.
– Those with debt are smiling … in hard currency terms, they owe far less.
– Consumer spending has been strong. Zimbabweans have seen this before and
know that the best response is to spend their cash. After beer volumes
declining for around four years, the local beer monopoly Delta reported
lager beer volumes up nearly 50% for the period from April to September
2018. Local fast food company Simbisa reported revenue up more than 40% for
the period to the end of June 2018. People have been stocking up on
expensive drinks, air tickets and shares on the stock exchange. (It reminds
me of a story I heard during the hyperinflation of 2009 where golfers would
buy their halfway refreshments before teeing off as the prices would double
if they waited the two hours.) Now that prices have moved up sharply,
consumer spending will slow.

The listed companies that we would invest in, were things different, will
get through the impending tough times. Zimbabwe has some of the better
management teams on the continent. How bad the situation gets will depend on
how much new money is printed. The government has, at least in the short
term, found another way to get cash. It has introduced a 2% tax on all
electronic transactions. Given that virtually no cash is in circulation, the
government is collecting 2% of the value of all transactions, including
money transfers between people. While this will hurt the consumer even
further, it will provide the government with some revenue. The irony here is
that the dominant mobile phone company, Econet, which has always had a
feisty relationship with the government, has effectively become the new
revenue collection authority!

We went to Zimbabwe to see if there is an investment opportunity to make a
positive return. For now, we will wait.—Howwemadeitinafrica 



Harare, Zimbabwe

By Cavan Osborne, Portfolio Manager, Old Mutual Equities

 

 

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