Everyone I meet is increasingly worried and is asking me this very question. With the ZSE’s main industrial index down 17% since December 2009, it is not surprising that anyone with investments on the ZSE is worried. In years gone by such a drop would not lose anyone sleep, but now that we are in a hard currency environment everyone wants to know what has gone wrong. You can’t watch your portfolio lose 17% in 6 months and wish it away! Put into perspective if you had $1000 cash in January and you put it under your pillow it would be $1000! On the stock market assuming you had bought the industrial index in total and sold off your positions today you would have $830. On the money market 30–day rates have fallen to between 6-8% from 12-15% in the last few months. You would have slightly more than $1000. There is really nowhere to run to! Suddenly guys who held onto cash appear smarter!
Zimbabwean markets are driven by liquidity and really this is true of all markets in the world. Ceteris paribus (All other factors being constant), as my professor in college used to say, too much liquidity on the stock market sees higher share prices. On the other hand too much money on the money market has exactly the opposite effect. The improvement in liquidity in the country, though this is not very apparent, has seen a massive fall in investment rates. Over the last quarter Zimbabwe has seen a huge improvement in liquidity as a result of a number of factors:
1. Banks have scaled back their lending after realizing that borrowers were failing to pay back loans, as a result of a slowing down of economic activity. Remember lending was being done at rates of between 20-35% per annum since dollarisation began.
2. On the other hand some companies have repaid their loans following successful Rights Issues. Art, Afrisun, Star Africa, OK Zimbabwe are some of the companies that come to mind. Estimates put the amount returned to banks at over $40m in the last quarter alone.
3. Market efficiency is an amazing thing to watch in action. Lending rates elsewhere in the world are around 1% per annum. Slap in your risk premium and charges companies in stable markets rarely pay 3% per annum for their debt. Over the last few months a lot of money has entered Zimbabwe in search of better returns. Coupled with the fact that Zimbabwean companies are allowed to borrow up to $5m without seeking Exchange control approvals, cheaper money has been taken up by companies from investors seeking higher returns.
4. A number of local companies have no reason to borrow now that dollarisation has exposed the inefficiencies in our economy. Capacity utilization which sat below 15% in 2008 has been upped to between 40 and 60% and it appears Zimbabwe is doing just fine with this level of production in the economy. This has eased the demand of money in the economy lowering lending rates.
Some companies have quickly adjusted their business models to counter their inefficiencies, but most have not been so lucky. Layoffs have increased dramatically and a number of listed companies are expected to let go of hundreds of workers. This comes at a huge cost and unfortunately means that Pensions Funds will continue to sell off their positions to meet their obligations further depressing the market. Everyone had 80-100% exposure to the stock market during hyperinflation.
What does this mean for all of us? Well it means that the stock market is not a place were we can invest blindly and hope for the best! A lesson has been learnt. But clearly we didn’t have too many choices during hyperinflation. Buying forex was illegal and seems to have been the best and only way to preserve value. Those who bought physical assets are in worse shape compared to those who bought shares.
Forget the politics I always say. It will always be there! The good thing about Zimbabwe at the moment is that we are in a hard currency economy and so there are no short-cuts. There is no printing of money. Actions have consequancies. So to answer the question what is happening to Zimbabwe?
I say things are happening but not as quickly as we would like to see and sadly it is not entirely our fault as market players. The whole world is lurching from one crisis to another and countries like Zimbabwe that have started to recover are at the mercy of the world economic crisis, that has seen drying up of credit, falling investor confidence, a fall in aggregate demand and investor apathy.
This is no time to sit back and relax. Governments across the world are trying shore up investor confidence and doing everything to attract money from those that have it to improve economic activity. Zimbabwe needs to do the same if we are to see more jobs being created in our economy.
