By Cavan Osborne, Portfolio Manager, Old Mutual Equities
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.
This article was first published by Old Mutual Equities. The original can be downloaded here.