Traders welcomed dollarisation

Asset management companies welcomed the partial dollarisation introduced in January 2009 but said they still faced problems because contributions were still in Zimbabwe dollars while their costs were in United States dollars.

Zvomunoda Chizura, the Managing Director of Old Mutual Asset Management Company, said that asset managers earned their income from commissions from managing clients’ assets that included shares on the Zimbabwe Stock Exchange, properties and pension funds.

The suspension of trading on the Zimbabwe Stock Exchange on November 20, 2008 had devastated asset managers’ incomes as most asset management companies held large proportions of their clients’ assets in the form of shares.

Deeply negative real interest rates made money market investments unattractive.

Chizura said that asset managers still faced challenges despite the benefits from partial dollarisation of the economy, because most of their costs were denominated in foreign exchange whereas their income in Zimbabwe dollar terms had not grown sufficiently to cover the costs.

 Chizura said that pension funds that had been operating in a net negative position, with contributions insufficient to cover payouts due to the hyperinflationary environment.

Full cable:

Viewing cable 09HARARE159, ZIMBABWE’S EQUITY TRADERS WELCOME DOLLARIZATION,

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VZCZCXYZ0005

RR RUEHWEB

DE RUEHSB #0159/01 0561447

ZNR UUUUU ZZH

R 251447Z FEB 09

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC 4095

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEAIIA/CIA WASHDC

RUEHRC/DEPT OF AGRICULTURE WASHDC

RUCPDOC/DEPT OF COMMERCE WASHDC

RUEHC/DEPT OF LABOR WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC

RHEHAAA/NSC WASHDC

UNCLAS HARARE 000159

AF/S FOR B. WALCH

AF/EPS FOR ANN BREITER

AGRICULTURE FOR RONALD LORD

COMMERCE FOR ROBERT TELCHIN

TREASURY FOR D. PETERS AND T. RAND

NSC FOR SENIOR AFRICA DIRECTOR

STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN

SENSITIVE

SIPDIS

E.O. 12958: N/A

TAGS: EFIN PGOV ZI

SUBJECT: ZIMBABWE’S EQUITY TRADERS WELCOME DOLLARIZATION,

RE-OPENING OF STOCK EXCHANGE

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SUMMARY

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¶1. (SBU) Zimbabwe’s financial sector welcomed dollarization of the

economy and the foreign currency income that asset managers, the

Zimbabwe Stock Exchange (ZSE), and stock brokers can now earn. But

they do not expect a sudden return to profitability, as trading only

re-opened on the ZSE last week after a three month suspension.

Asset managers are also concerned whether thereturns on new

hard-currency denominated prescribed assets will be market

determined. In addition, liquidity constraints arising from foreign

currency shortages will likely dampen trading volume. Privatization

of state assets using the ZSE could provide liquidity to the market

in the short-term. In the meantime, more reforms are needed to

attract foreign investment and support economic recovery. END

SUMMARY.

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Partial Dollarization Welcomed

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¶2. (SBU) Although asset management firms welcomed partial

dollarization introduced in the January 2009 Monetary Policy

Statement (MPS), they also expressed some concerns. Zvomunoda

Chizura, the Managing Director of Old Mutual Asset Management

Company (OMAM) explained to economic specialist on February 10 that

asset managers earned their income from commissions from managing

clients’ assets that include shares on the Zimbabwe Stock Exchange,

properties and pension funds. The suspension of trading on the

Zimbabwe Stock Exchange (ZSE) on November 20, 2008 had devastated

asset managers’ incomes as most asset management companies held

large proportions of their clients’ assets in the form of shares;

deeply negative real interest rates made money market investments

unattractive. Farai Manjokota, Head of ZB Asset Management Company,

told economic specialist on February 18 that the Association of

Asset Managers had written to the RBZ to protest the US$1,000/month

licensing fee for trading in foreign exchange, stating that it would

lead to the collapse of many asset managers. To the relief of the

players, the RBZ suspended the fee on February 13.

¶3. (SBU) ZSE CEO Emmanuel Munyukwi told us that the ZSE was in

deficit largely due to the suspension of share trading last year.

ZSE income comprised annual levies on registered companies and a

proportion of trading income. Munyukwi foresaw the situation

improving with the resumption of trading in U.S. dollars on February

19, 2009. Although the first day of trading witnessed a mere 3,000

shares in one company changing hands at 1 U.S. cent per share, by

the third day activity had picked up substantially with the number

of counters traded increasing to 13 and turnover rising to over

US$37,000.

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Costs in Foreign Currency

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¶4. (SBU) Chizura and Manjokota agreed that asset managers still

faced challenges despite the benefits from partial dollarization of

the economy, since most of their costs (including labor) were

denominated in foreign exchange whereas their income in Zimbabwe

dollar terms had not grown sufficiently to cover the costs. Chizura

told us that pension funds that had been operating in a net negative

Qtold us that pension funds that had been operating in a net negative

position, with contributions insufficient to cover payouts due to

the hyperinflationary environment, welcomed the decision to allow

them to trade in hard currencies. The benefits, however, would not

be immediate. Chizura said that the sector could not meet

pensioners’ expectations to be paid out in foreign exchange as soon

as contributions were paid in foreign exchange.

———————————

Prescribed Assets Still a Problem

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¶5. (SBU) Chizura welcomed the reduction in the prescribed asset

ratio for insurance companies from 35 percent in Zimbabwe dollar

terms to 5 percent for short-term and 7 percent for long-term

policies and to 10 percent for pension funds in foreign currency.

However, he said the industry lacked confidence that the instruments

that the government will introduce to enable players to comply with

these statutory requirements would pay positive real returns.

Chizura also said that it was not clear from the monetary policy

statement whether the rates applied to the stock of assets or to the

increase in stocks of assets. If it applied to the stock, then

Chizura believed no player could remain profitable given the low

returns associated with most prescribed assets.

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Capital Requirement Too High

—————————–

¶6. (SBU) Neither Chizura nor Manjokota saw the need for minimum

capital as high as the present US$2.5 million minimum requirement.

Chizura told us that even though Old Mutual Asset Manager was backed

by a wealthy parent company, in light of the low risk involved it

was not prepared to tie up as much as US$2.5 million in capital.

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Lack of Liquidity Constrains Trading

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¶7. (SBU) Munyukwi told us that the main problem facing the ZSE was

lack of U.S. dollar liquidity. Both Munyukwi and Chibaya said that

the amount of U.S. dollars in circulation in Zimbabwe was very small

relative to the country’s needs. Munyukwi added that most companies

were in desperate need of re-capitalization. He believed money

would flow in once the economy had stabilized and foreign lines of

credit were restored. In the short term, he proposed the

privatization of state assets as the only way of quickly injecting

liquidity into the market, particularly if the process is open to

foreigners through the ZSE. Manjokota added that the restoration of

fungibility status on counters that have a dual listing would boost

investor confidence.

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New Finance Minister Drops Levies And Charges

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¶8. (SBU) Munyukwi told economic specialist that new Finance

Minister Tendai Biti, with effect from February 19 and to the relief

of the equity market, had dropped onerous levies and charges

introduced by RBZ Governor Gono in his January 2009 Monetary Policy

Statement. Gono had introduced a 1.5 percent financial sector

stability levy, payable to the RBZ, and directed that 3.5 percent of

proceeds be paid by the seller of shares to the RBZ.

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COMMENT

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¶9. (SBU) Asset management firms, the ZSE, and stock brokers all

agree that dollarization will restore viability to the financial

sector. However, in the short-term, liquidity is a constraint. As

donor funding is unlikely to fill the gap quickly, Munyukwi’s

suggestion of privatizing state assets using the ZSE merits further

study. Finance Minister Biti’s removal of some taxes introduced

less than a month ago by RBZ Governor Gono on share trading will

help lower transaction costs and boost activity on the ZSE. Biti’s

Qhelp lower transaction costs and boost activity on the ZSE. Biti’s

action also bodes well politically, as he re-asserts for the Finance

Ministry authority usurped by Gono over recent years, but more

reforms are needed to attract foreign investment and support

economic recovery. END COMMENT.

MCGEE

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