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Many foreign suppliers are fighting for space for their products on shop shelves in the country due to higher returns because Zimbabwe is using the United States dollar

Albert Norumedzo In the Money
The adoption of the multi-currency system in 2009 could not have come at a more opportune time, as it halted capital erosion due to hyperinflation and reopened the economy to potential investment.
Although there has been widespread speculation on a possible return of the Zimbabwean dollar due to a number of challenges with the multi-currency regime, (both political and economic) chief among them a chronic liquidity challenge that has crippled local Industry rejuvenation, Government has on several occasions assured the nation that the multi-currency regime will continue.

Government is aware of the pivotal role that the multi-currency regime plays in economic revival and the successful implementation of the Zimbabwe Agenda for Socio-Economic Agenda and has assured that the multi-currency regime will be in use up to 2018. The inclusion of four more currency to the regime speaks volumes to this effect. Having United States dollar denominated assets has opened up Zimbabwe to investors seeking such assets.

A number of foreign manufacturers are now competing to have their products stocked on the shelves of Zimbabwean stores while others are keen to set up direct investment into key sectors and some just want portfolio investments in the form of debt and or equity.

Although the dollar induced interest in doing business in Zimbabwe intensifies the competitive landscape for local Industry which is still in its recovery mode, it however highlights the potential that the economy possesses should certain steps be adopted.

Most of the investors that have expressed an interest to set up shop in Zimbabwe are those with emerging market type risk appetite that look beyond perceived country risk and waning macro-economic fundamentals.

The US dollar has outperformed many emerging market and African Currencies and is expected to maintain this trend as the outlook for global commodity prices (upon which many developing nations currencies are based) remains suppressed.

In recent years dollar denominated assets have rewarded shareholders with good return, prompting many investors to opt for them.
Zimbabwe’s financial markets are starved of liquidity needed to rejuvenate industry, which has resulted in a lending environment characterised by high real interest rates with corporates accessing funds at an average cost around 20 percent which is far much higher than the average prime lending rate of about 9 percent that is prevailing in the Southern Africa region.

Local financial institutions are getting facilities from regional and international financiers at an average landing cost of 12,5 percent.
The combination of a high real interest rate coupled with an expected currency appreciation in the investee currency, a low domestic inflation rate in the investee country and limited capital mobility restrictions is a recipe for profitable low risk FX Carry Trade Strategies.

This involves borrowing funds in low yield currencies that are expected to trade weaker to the US dollar (investing currency), for example South Africa (funding currency), and investing the borrowed funds in a higher yielding currency like the US dollar in Zimbabwe. The resulting return from this strategy will be Percent Return on Investment (US$ ) — Percent Cost of Funds (ZAR ) — the Depreciation of the US dollar.

Rates in Zimbabwe average around 12,5 percent in safe sound financial institutions with a good track record for repayment and debt servicing with solid balance sheets to underwrite decent levels or risk while the funding costs in neighbouring countries like South Africa is around 4,5 percent while that of other countries is even lower. The US dollar is expected to outperform emerging market currencies.

Despite the prevailing economic apprehension it’s not all companies operating in Zimbabwe that are struggling to remain viable, some have solid business models that have remained relatively immune to the local economic stress. This means that if an investor with reasonable risk appetite was to identify credible investment options after making careful due diligence and taking into consideration the economy wide vulnerabilities and financial sector fragility, such an investor stands to get a good return from the high yield and the expected strengthening of the dollar relative to the funding currencies.

A number of regional and international financial institutions, among them PTA, Afrexim Bank and other Funds including Private Equity funds with interest in perceived high risk countries received very good returns exploiting Carry Trade Strategies supported by a strengthening US dollar and prevailing  high interest rates (that are among the highest in the region).

The scenario around the US dollar and the prevailing interest rates in the country makes a good case for debt investments in sound companies that display relative immunity to the local economic shocks.

While some analysts contend that most companies operating in Zimbabwe are highly indebted and cannot sustain further debt investments, on the contrary there exists good portfolio of companies which would do well if given recapitalisation lines in the form of either debt or Equity.

Incapacities at operational level have constrained many companies from nearly satisfying available and sustainable demand. However, to view all companies operating in Zimbabwe as high risk and distressed would be somewhat harsh and defies investment logic, (there are cherries in the thorn bush, and the market is starting to realise the immense potential for return that the Zimbabwean investment landscape possesses. The honour rests on the ability of stakeholders in the economy to create a conducive investment environment that places significance on property rights and investment policy clarity and the rule of law.

Issues of corruption must be impartially and imminently dealt with if we are to fully exploit the advantage that the US dollar has brought.
Having dollar denominated assets on the capital markets presents a unique opportunity for Zimbabwe which can enjoy the investment pull factors of the US dollar and avoid the downside effects that come from adverse exchange rate movements simply because what happens in Zimbabwe has no impact on US dollar exchange rate with other currencies.

Albert Norumedzo Equities and Alternative Investment Analyst He can be contacted via e-mail: [email protected]