Politics to take a back seat in 2011

Politics is likely to take a back seat this year and this could spur investment interest in Zimbabwe, which, because of the use of the United States dollar, is increasingly becoming attractive to both local and foreign investors, especially Zimbabweans in the diaspora.

Imara Asset management Chief Executive John Legat says in his first investment newsletter for 2011 he does not expect elections to be held in 2011. Instead he sees the positive momentum that has prevailed since the introduction of multiple currencies in 2009 continuing with the government earning more revenue that it can use to increase salaries for civil servants.

“Our view has long been that the AU and SADC would only sanction elections once a new Constitution was in place and that all the necessary electoral law amendments have taken place, including a review of the voter roll,” he says.

The Zimbabwe Election Supervisory Network has just released a report that shows that the voter’s roll is in shambles. More than a quarter of those on the voter’s roll – 27 percent- are dead, the report says.

President Robert Mugabe says elections will be held this year especially if there is disagreement over the new constitution.

Legat, however, argues that there would be little point in holding elections that would not be recognized at least regionally. Since the referendum of the new Constitution is unlikely before September at the earliest, it will prove difficult to have elections in 2011, he says.

South African President, Jacob Zuma, who is the chief mediator, is putting his foot down that elections can only be held after all the issues in the Global Political Agreement have been fulfilled.

Legat’s newsletter in full:

“2011 – Positive momentum to continue!”

The Zimbabwe economy has officially been based on a multi currency system for two years now. In practice, the US dollar has become the foundation of the economy. A stable monetary system, as predicted by Prof Steve Hanke of The John Hopkins University in his book, “Zimbabwe: Hyperinflation to Growth” (sponsored by Imara in 2008), has brought an immediate uplift in economic activity and a collapse in inflation. Exchange controls, once a noose on economic activity, all but went overnight thereby making ‘doing business’ a whole lot easier. Recent statistics for 2010 put inflation at 3.2% and economic growth at over 8%. The Hon Minster of Finance, Tendai Biti, in his 2011 budget forecast growth of over 9% in the current year which could prove to be the highest in Africa, if not the World.

We have long held the belief that the Zimbabwe government, the IMF, the EIU and others have been under estimating the size of the Zimbabwe economy in real terms. Estimates for 2010 were placed at around $5 billion (up from $3.5 billion in 2009) but our own ‘back of the envelope’ numbers suggested an economy that was more likely in the $8-10 billion area, some 80% higher. This was simply based on our own perceptions of what was happening on the ground in terms of government spending, investment and consumer demand, evidence of which was provided by discussions with private sector businesses and their own experiences. As the Zimbabwe Statistical Office upgrades its data collection after years of neglect, we would expect to see more reliable figures for the future. Interestingly, the 2011 budget predicts an economy of $8 billion for this year, a number that is more realistic although again too low in our view. An economy greater than $10 billion is more likely although it is too early in the year to be more accurate. Of course, any ratio with GNP as its denominator starts to look more attractive whether it is Debt to GNP or, from a stock market perspective, market capitalization to GNP.

The economic reforms that the Unity Government has been able to achieve should not be underestimated, especially given the perception that the Government is frozen in a political log-jam. Of significance, and largely unreported, was the agreement by Cabinet in early December to adopt the “Hybrid” model to reduce the heavy foreign debt burden that hangs over the economy and country. Whilst not a ‘HIPC’ programme by name, in practice we will be moving along similar lines. It is further of interest that both the World Bank and the IMF have increased their country missions and thereby their presence in the country in 2011. They are clearly of the opinion that the positive interaction that they have experienced between themselves and the Government to date will continue. If this serves to improve Zimbabwe’s image amongst the lending community during the year, then all well and good.

A stronger economy than expected has led to a larger tax take for Government. Since the country runs a cash budget with limited ability to borrow at this juncture, any boost to revenues increases its own spending power. We were amused to see the advertisement by ZIMRA, the tax authorities, entitled “A big “Thank You” to you All” as collections exceeded $2 billion for the year, surpassing their target. (see www.zimra.co.zw). Surely a World first for a tax man, especially in this day and age! A higher revenue base for 2011 will imply higher wages for civil servants and a greater capital expenditure budget. Higher wages will mean more spending and therefore more VAT receipts.

Also of significance was the sale of the Government owned Ziscosteel to India’s Essar Group in November. Essar will take a majority stake in the company in return for repaying the foreign debt (held by a German bank), paying the Government a token sum and injecting much needed capital into the business. Whilst not all the details are publically known, (the deal has yet to be consummated) it highlights that this Government can and will privatise, that foreign debt can be repaid and that the 51% local ownership as established in the Indigenisation Regulations is negotiable! We hope to see more such privatizations in 2011.

We also hope to see public/private partnerships in such areas as power generation and the railways. Both could see Indian influence and maybe Indian capital. Indeed we have been fascinated to watch a growing Indian influence in the region over the past twelve months. India as is well known is short of coal to power its economy. In October JSW Energy of India launched a bid for CIC Energy in Botswana which has the rights to a huge reserve of coal and a power plant. In Mozambique, the Indians and the Brazilians are investing in the Tete region to export coal. With the Richard’s Bay port in South Africa at full capacity it would make sense for the Indians to upgrade the rail links that run through Zimbabwe to the Mozambique coast thereby enabling the export of coal from Botswana, and arguably Zimbabwe, to India via Mozambique. Further we understand that the Indians are also looking at Rio’s Sengwa coal fields to develop their proposed power station and are advising on the refurbishment of Hwange power station as we write. The Chinese would appear to have been left behind in this process; but then again historically and culturally, the Indians have a closer tie to Africa than the Chinese, and are likely to be easier to negotiate and speak with!

We do not expect elections to be held in 2011. Our view has long been that the AU and SADC would only sanction elections once a new Constitution was in place and that all the necessary electoral law amendments have taken place, including a review of the voter roll. (There would be little point in holding elections that would not be recognized at least regionally). Since the referendum of the new Constitution is unlikely before September at the earliest, it will prove difficult to have elections in 2011. Instead we hope to see an extension of the GPA negotiated by the three parties, and brokered by Jacob Zuma, thus providing a road map to elections. That would mean that ‘electioneering’ and general politicking should be tempered thereby reducing uncertainty within the economy. No doubt indigenization will keep rearing its ugly head but as we have seen in the latter stages of 2010, even this seems to be less of an issue particularly as a number of deals have taken place where foreign investors have secured a majority holding. After all, it was hyperinflation that put paid to indigenization as it wiped out domestic savings. In short foreign capital is required to rebuild the economy and refinance businesses!

2011 could and should be a busy one for the Zimbabwe Stock Exchange. A number of companies are or will be looking for additional capital during the year with both Rio Zim and Aico already in the pipeline. We hope to see more companies looking to unbundle as Innscor successfully did with its crocodile subsidiary, Padenga in December 2010. Indeed we hope that Innscor unbundles more! It would also be good to see some of the mining companies dual listing on the ZSE as a means to raise US dollars from local investors as well as giving Zimbabweans the opportunity to invest in local mining operations. In the past there was little incentive to list as Zimbabwe dollars were of little use for cash hungry businesses. We hope that will now change.

We also hope to see the Stock Exchange infrastructure improve with the introduction of a Central Depository for scrip. This has been on the drawing board for at least 15 years. Interestingly a local consortium together with Indian technical partners won the contract to build and run the system which is supposed to be introduced in the second half of 2011, although we will believe it when we see it! Once that is in place, electronic trading should follow thereby helping to increase trading volumes on what should be one of Sub Sahara Africa’s more active markets.

If we are correct that politics will more than likely take a back seat as compared with recent years (famous last words in Zimbabwe!!), then we hope that investors will focus more on corporate earnings, corporate investment plans and their future opportunities. We also hope to witness more foreign direct investment into infrastructure and through privatizations. In this way stock picking will become important for stock exchange investors. We also hope that foreign investors will be more encouraged to build longer term positions in the market, helping to re-rate valuations. Larger market capitalized stocks should outperform their smaller counterparts unlike in 2010. We look forward to the year ahead with excitement and optimism. Best wishes for 2011 to all our readers!

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