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The House of Cards

Anyone who has studied Physics would tell you that, “God does not roll a dice on Earth but instead governs it with the Laws of Physics. He has put in place structures, principles and rules for things to work on Earth. By doing that, it means that he is not playing “trial and error” or continuously carrying out experiments on Earth. This creates a sense of comfort and trust, particularly to the inhabitants of planet Earth. This is however a contrasting opposite to what monetary authorities and policy-makers in Zimbabwe have been or are doing. The level of policy tinkering has become unbearable not only for an ordinary person but also for households, businesses and industries.

Piggy has been reading a few history books on Zimbabwe. One interesting observation that comes up is in the meaning of the word “Zimbabwe”. It is derived from the Shona words dzimba dza mabwe, meaning “house of stone“.  A number of archaeologists and historians also believe that from the 13th to 15th centuries, Great Zimbabwe was the capital of a large area in southern Africa. This is an ancient city in the south-eastern hills of Zimbabwe near Lake Mutirikwe and the town of Masvingo. It is a striking feature that has walls as high as 11metres extending approximately 250 metres. It is one of the largest ancient structure south of the Sahara Desert and it is built purely on stones with no mortar joining them.

The Great Zimbabwe Monument

Source: Exploring Africa/Radio Raheem

On the contrary, when Piggy considers developments on the ground, he notes a huge paradox given the policy inconsistencies and fragile state of the Zimbabwean economy that does not in any way symbolise the strong foundation of a “house of stone”. Barely a month ago, the Reserve Bank of Zimbabwe (RBZ) alongside the Ministry of Finance and Economic Development conducted a Press Conference where they announced to the public that they were introducing a managed floating exchange rate system on the official Interbank Foreign Exchange Market. Soon after that announcement, the interbank foreign exchange rate moved northwards from c18 to c25. The rationale of the new measures was to encourage financial intermediation and channel foreign currency trades being executed on the parallel market to the formal banking system. Great idea! but analyst questions were centred on (i) the impact on inflation and (ii) whether the RBZ had any reserves to support the local currency (ZWL).

Monetary authorities then continued with more draconian measures that included the suspension of fungibility of dual-listed stocks on the Zimbabwe Stock Exchange (ZSE). These measures have helped erase Zimbabwe capital markets from the radar of frontier market investors. Put plainly, portfolio investors are disappointed about Zimbabwe and any Investment Banker knows that it will take a very long time to lure them back to local capital markets. In another recent development, the Reserve Bank of Zimbabwe made a U-turn on the mono-currency drive and announced that it is making available an option for the transacting public to pay using free funds (forex) for goods and services chargeable in local currency.  In addition, the managed float system has been suspended and the exchange rate has been fixed at ZWL 25 to the USD. The reason for this has of course been blamed on Covid-19.

Piggy would like to highlight that it is a fact that governments all over the world are curbing citizens’ activities (including much of commerce) as a way of saving lives. In addition, corporate casualties are increasing. Fewer people are travelling, eating out, staying in hotels, going to cinemas or gathering just about anywhere. Business models, health systems and government policies are being put to the test. Piggy has also insisted on Zimbabwe joining the Rand Monetary Union (RMU) but it appears its now too late for that in the wake of Covid-19. No one really wants to be contaminated!

The crux of the matter is that foreign currency shortages will persist as Covid-19 disrupts business activity and knocks down export receipts. Piggy has written extensively on this and contends that a fixed exchange rate system fuels speculative behaviour. There will be stampede for hard FX from all sectors and economic players. This will push parallel market rates to stratospheric levels. The ZWL will continue to depreciate, thereby fuelling inflationary pressures. There will also be a downward shift in the consumption function, a decrease in aggregate demand as a result of eroded disposable incomes. The economic crisis will continue to affect business activity as unemployment and poverty levels increase.

There is need for policy makers to solve the fundamental problem in Zimbabwe which is the lack of confidence and limited forex generation capabilities. The main sources of foreign exchange for an economy like Zimbabwe are (i) Exports, (ii) FDI Flows, (iii) Lines of Credit, (iii) NGO/Donor Support and (iv) Diaspora Remittances. At this point in time, Zimbabwe lacks the key ingredients to grow exports given the limited production and value-addition capacity. Credit Lines, FDI flows and NGO support is also limited given the lack of confidence and poor ratings in terms of the Ease of Doing Business. Poor policies and Covid-19 have also not helped the Zimbabwean economy.

Given the difficult operating environment in Zimbabwe that is characterised high foreign currency risk, inflationary pressures and suppressed aggregate demand, investors will have to hedge against most of these factors by parking ZWL balances in equities and real assets. Piggy is betting on stocks such as Simbisa Brands, OK Zimbabwe, Econet, Cassava and SeedCo Limited as there is likely going to be any upliftment on the back of Covid-19 and the U-turn on the mono-currency ( or rather official return of a multi-currency regime).

As an investor, always look beyond Covid-19 and remember to stay focussed!

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