Liquidity problems

Could this be the year for Blue Chips? Going by the results that have been trickling out since the reporting season started; it could very well be! The last 6 months of 2012 and possibly January and February 2012 have been difficult months for many companies in terms of growing sales. Not even promotions will cut it when people have generally less in their pockets to spend. Costs, especially rentals and wage costs have also put downward pressure on margins. This has been quite clear in a number of trading updates given since the year started.

The first confirmation of this disturbing trend came this week from Truworths. Sales for the retail clothing company were down in the six months ended December 2011 by 10%. There is nothing wrong with Truworths – http://www.truworths.co.zw as a company; many will agree it is among the better run companies on the ZSE. When you are broke and there is little credit available you have no choice but to postpone unnecessary purchasing decisions. Let us be honest the last thing you will think of when ‘money is tight’ is to buy a new suit or shoes. What you can’t do without you will make a plan e.g. food and beverages! OK, Delta, Econet, Innscor and could very escape with fewer bruises than most.

What is my point in all this? Truworths is a well run company but sometimes when liquidity is as tight as it has been there is very little that you can do to raise sales. You can run promotions and offer the best deals in town but customers have no money, they can’t buy. The ball is firmly in the government’s court on this one. Without the right moves being made to encourage the loosening of the noose tying our economy, few companies will be able to report good sales figures next year. Without alarming anyone, this is just the sad reality. A number of companies have already reported that demand is not the problem (Cafca, Turnall) but the problem is people want things that they can’t afford to pay for right now. How many companies sold some goods and discovered that people couldn’t pay after the sale had been completed? What will happen to these bad debts?

As things continue to get better in our economy consumer wish lists are getting longer! But there is simply no cash so a lot of the demand in economy remains unmet. One of things I remember being taught in my college economics class was that the government particularly the Ministry of Finance (Reserve Bank included) has tools that can be used in controlling the flow of money in an economy. The most direct being cutting taxes in order to leave more in the tax payer pocket! When the consumer has more to spend government generates more taxes and creates jobs etc.

If the truth be told, economic growth is shaped by the players in an economy and most of these players, especially the ones involved in what are considered luxury commodities will not grow this year, meaning the government will end up collecting less than it collected last year in taxes. My advice to the government is to arrest this decline without further delay as the consequences of reduced fiscal revenue will only make things worse. We are already halfway through the first quarter and the pace of economic activity is slowing down. Each day the government delays implementing measures that encourage an immediate improvement in the liquidity in our economy, is a step backwards for the economy. It is also time to take stock of our investment promotion policies.

I have just been to a Fidelity analyst briefing were I have been forced to eat some, but not all of the words I was writing. The company posted a strong set of results for 2011 driven by high premium growth, contained claims and a huge growth in investment income. When I say huge growth in investment income, how does a growth of 524% sound to you? Unreal! Well that’s what I thought. But the company actually has $4,8m dollar cash stash to validate their results. Impressive I say.

What this shows is that it won’t be all doom and gloom for all Zimbabwean companies; there are some that have found a way of beating the ‘system’ – cash shortages etc. These companies are unfortunately not common and the jury is still out on whether such earnings are sustainable, after all the economy doesn’t lie!