Spotting investment opportunities in Zimbabwe’s ruins

Finance Minister Tendai Biti has been unable to attract foreign investment despite the economic stability that the country has enjoyed since the establishment of the inclusive government three years ago but investors were scrambling for business opportunities at the height of turmoil in the country.

The United States embassy said at the time that investors could see the potential in a country that was still wealthier, with better infrastructure and skills, than many of its neighbours.

Here is what market analysts thought at the time.

Full cable:

Viewing cable 08HARARE361, SPOTTING INVESTMENT OPPORTUNITIES IN ZIMBABWE’S RUINS

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TAGS: EINV ECON PGOV ASEC ZI

SUBJECT: SPOTTING INVESTMENT OPPORTUNITIES IN ZIMBABWE’S RUINS

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SUMMARY

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¶1. (U) In the midst of Zimbabwe’s distressed economy, some

investors see opportunity that the risk averse abandoned long ago.

Banking on economic recovery and attracted to Zimbabwe’s cheap price

tags, investors are looking at sectors with international links or

those that will benefit from an increase in consumer spending.

Zimbabwe is also ripe for a massive sale of state-owned assets once

the government–or government policy–changes. Investors’ bullish

sentiment is based on an economic turnaround coming within three

years or less, failing which many of the enterprises that investors

are so hopeful about now probably will be out of business. END

SUMMARY.

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Why Invest? The Pot of Gold at Rainbow’s End

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¶2. (SBU) Embassy officers met key investors in the hospitality,

financial services, and mining sectors, as well as asset managers

and economists in Harare to determine who is investing in Zimbabwe

now and why. We learned that investors interested in profiting from

Zimbabwe’s potential are financing Zimbabwean companies through

direct acquisition and equity purchases, hoping to position

themselves to take advantage of an eventual economic recovery.

Their interest, which suggests optimism about economic recovery that

belies assessments about Zimbabwe’s current economic predicament,

will be crucial to jump starting recovery. Respected economist John

Robertson estimates the economy needs USD 3.5 billion to operate

even at its current shrunken state, but there is only USD 98 million

worth of local currency in the economy. Foreign investment will

help make up the difference, playing a significant role in

Zimbabwe’s economic recovery.

¶3. (SBU) Investors are drawn to the market by Zimbabwe’s undervalued

assets, according to Tongai Muzenda, the CEO of Zim Alloys, a chrome

mining company. The Zimbabwe Stock Exchange (ZSE) is worth a third

of what it was in 1997 at the Old Mutual implied rate of exchange (a

proxy for the prevailing black market rate). Prominent stock broker

Murray Lynton-Edwards cited ZSE-listed Delta Corporation, Zimbabwe’s

beverages giant, whose market capitalization is USD 300

million–less than half the value of its breweries, and Imara Asset

Management’s Managing Director Sean Gammon assessed Innscor, SeedCo

and Dawn Properties as world class companies available at “Zimbabwe

prices.” The Financial Mail, a South African weekly, also lists the

hotel chain ZimSun, the Kingdom Meikles group and cell phone company

Econet as good bets for investors on the ZSE. Lynton-Edwards opined

that international investors viewed Zimbabwe as a venue for the next

Soviet-style sale of state assets, which could be bought cheaply and

turned around.

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A Risky, but Small Piece of the Pie

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¶4. (SBU) Zimbabwe is a risky place to invest, with abrupt shifts in

policy from price controls to indigenization of assets that could

destroy a company’s value overnight. Most investors looking at

Zimbabwe, however, are large enough and brave enough to accept

Zimbabwe’s sovereign risk. Imara Asset Managers was in London

drumming up business for its Zimbabwe fund launched in February 2007

when opposition leader Morgan Tsvangirai was arrested and beaten in

March 2007, but investors’ fervor for Zimbabwe did not cool. The

fund started with USD 5 million in February 2007 and now has USD 23

million invested. Gammon explained that for a hedge fund with USD

600 million in total assets, a USD 5 million investment in the

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Zimbabwe Stock Exchange is less than one percent of the total

portfolio, so the risk is manageable.

¶5. (SBU) To hedge risk, many companies have couched their

Zimbabwean assets as part of a pan-African strategy designed to

capture Africa’s positive growth trend. ZimSun is rebranding itself

as African Sun to reflect its impending investments throughout the

continent. The conglomerate Lonrho has five water bottling

companies throughout the continent and is looking into purchasing a

similar company in Zimbabwe, and has interests in the Kenyan-based

airline, Fly 540, which it would like to bring into the Zimbabwe

market. Many of these companies are chasing the oil and gas

revenues that are leading growth in places like Angola and Gabon.

Zimbabwe has good gas reserves and is a mining powerhouse, much of

which is underutilized in the current environment.

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Strategy #1: Capturing International Demand

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¶6. (SBU) Investors noted that the international community would be

part of any recovery in Zimbabwe, bringing a tide of money into the

financial, tourism and telecoms sectors. When Zimbabwe reengages

with the international community again, investing in businesses that

foreign consultants, advisors and tourists will use, such as hotels

and international telecommunications links, will be profitable,

according to Geoff Goss, CEO of the conglomerate LonZim.   With

this in mind, LonZim is spending USD 5 to USD 10 million to acquire

companies and plans to spend another USD 5 to USD 10 million to

develop them before selling them. If the businesses can be sold

five years into an economic recovery, LonZim foresees making 5 to 10

times its initial investment. LonZim purchased two companies that

would benefit from a recovery in financial services–Paynet, a

payroll services provider and Celsys, a checkbook printer– and has

a payphone company that was very profitable until price controls

reduced the price of a phone call to below the cost of the

international tariff. LonZim also recently purchased Rollex, a

fresh produce supplier to South African Woolworths and to UK-based

Marks and Spencer for USD 5 million.

¶7. (SBU) Tourism has been recovering for the past three years and

will lead any upturn in the broader economy. The manager of the

Holiday Inn, a ZimSun property in Mutare, said that occupancy rates

had risen for the past three years from 53 percent in 2006 to 61

percent year to date. Shingirai Munyeza, CEO of the ZimSun hotel

chain and chairman of the Zimbabwe Tourism Authority predicted when

the economy turns around there will be a shortage of hotel rooms, as

happened in Nigeria and Angola when their economies took off with

the oil price boom. The Kingdom Meikles group is seeking to raise

USD 300 million via an IPO of a company called Mentor plc on the

London Stock Exchange and plans to spend USD 50 to USD 60 million

refurbishing the five-star Meikles Hotel in Harare and investing in

a safari lodge, according to Dave Mills, the director of retail at

Kingdom Meikles. The potential quick rebound in tourism has both

Goss and Munyeza separately investing in the airline industry with

the hope of making Zimbabwe a regional air hub to compete with

Johannesburg’s O.R. Tambo International Airport.

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Strategy #2: Capture Pent-Up Local Demand

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¶8. (SBU) Gammon argues that depending on foreign money and exports

during an economic rebound is not the best investment strategy

because the value of exports will decline in local currency terms

while costs rise as the currency is revalued. Gammon is betting on

another source of wealth: a consumer rebound. When Zimbabwe’s

economy begins to recover, money will trickle down into the local

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economy, boosting the market for consumer goods from food to

clothing. Imara’s investments are diversified, but include

companies such as British American Tobacco and Delta Corporation,

which will benefit from the increase in local wages that will occur

when the value of the Zimbabwe dollar is stabilized as part of an

economic recovery plan. Imara is buying listed assets based on a

quick recovery scenario and assesses if Zimbabwe were to institute

comprehensive economic reform, the economy could see USD 230 million

of investment pour in within 3 months–before the sovereign risk

premium falls.

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Investors Banking on Recovery, But How Soon?

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¶9. (SBU) It goes without saying that investors are counting on

economic recovery to realize their returns. If Zimbabwe fails to

stabilize its economy and begin to grow again, many of the companies

that have benefited from investors’ capital will fail. Goss said if

the economy’s downward spiral continued for another three years, all

the companies LonZim had invested in would be closed. Gammon argued

that Imara is so bullish on Zimbabwean recovery that no matter who

won the 29 March harmonized elections, economic reform would have to

happen, in large part because civil servants are so badly affected

by hyperinflation.

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COMMENT

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¶10. (SBU) It is undeniable that government policy, especially price

controls and the fixed exchange rate, has been devastating to

business. However, investors can see the potential in a country

that is still wealthier, with better infrastructure and skills, than

many of its neighbors. While the positive outlook on Zimbabwe’s

economy is heartening, timing is key–and uncertain. With the

harmonized elections passed and no result announced, the chance of

economic reform in the short term seems remote, which may dash

investors’ hopes and make recovery even more difficult when things

do come right. END COMMENT.

DHANANI

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