Friday, July 24, 2009

Zimbabwe: as close a fairytale ending as one could hope for

Zimbabwe: as close a fairytale ending as one could hope for http://www.newzimbabwe.com21/07/2009 00:00:00by Roelof HorneONE advantage of hitting rock bottom is that things are bound to get betterfrom there. The authoritative Washington publication Foreign Policy recentlyrated Zimbabwe as the second-worst failed state in the world (afterSomalia).After watching ten years of economic destruction in Zimbabwe, there are atlast clear signs of a turnaround.News flow from Zimbabwe does not always help to form a balanced view -between the shameful propaganda of the state-controlled media and thejaundiced eye of perpetual doom-mongers, there is a story which is not beingtold. Having visited Harare recently, here are some observations.The demise of the Zim dollar has solved many problemsI have a 100 trillion Zimbabwe dollar note in my wallet. I also have 2008company results for one of the bigger banks reported in quintillions ofdollars (that's 18 zeros!). The comparative column is blank - all zeros, asthe 2007 numbers, having been eroded away by hyperinflation, are too small afraction to count.Towards the end of 2008, prices were going up by 100% a day, so owning anycash or having a positive bank balance was ruinous. Employees were queuingfor days to get their salaries out of bank accounts while faced withrestrictive (government imposed) daily withdrawal limits.So what happened to the Zim dollar? The population spontaneously abandonedthe currency late last year, turning to barter, fuel coupons and (later)foreign currency instead. By the time the transitional government announcedthe demise of the Zim dollar, they were simply blessing what had alreadybecome the norm.The change to USA dollars (in Harare) and rands (the rest of the country)had two very important results. It launched a business revival and stoppedhyperinflation (by stopping the printing presses and thereby limiting theamount of money chasing goods and services).Business is boomingBusiness leaders are almost absurdly optimistic about conditions inZimbabwe. This should be seen in the context of conditions last year:Business time and personal time was consumed by one thing - keeping afloatin a fast deteriorating environment.Apart from banking, stock, pricing, energy and staff problems, they also hadto deal with price controls, legalised seizure of export proceeds, and aninability to import foreign maintenance components or productionrequirements.With the end of hyperinflation in 2009 and the scrapping of prohibitivecontrols, the captains of industry can, for the first time in years, focuson rebuilding their businesses. They now concentrate on recapturing lostmarket share and margins, refurbishing and restarting production capacityand finding capital for capex or working capital purposes - in short, thethings that a businessman should be doing.However, the banking system is wounded. Banks have "lost" their entirebalance sheets, except for hard assets that can now be revalued in USD. Thecapital base and deposit base of the banking system is severely depleted.There are signs of life: starting from virtually zero in January, thebanking system now has US$500m of deposits. There are only four banks (ofwhich three are multinationals) that clearly meet the new requirement ofUS$12.5m capital. The rest would need recapitalisation. For the moment,individuals are largely shunning the banks. Confidence has been eroded, andATMs and credit cards are not functioning.Government is functioning in spite of the 'shotgun wedding'The (MDC-controlled) Ministry of Finance has accomplished the seeminglyimpossible - running the government on a balanced budget since the beginningof the year. This is no mean feat, as the previous regime had for years beenprinting cash to finance their 50%+ budget deficits (and thereby causing theinevitable hyperinflation).Civil servants are paid a monthly allowance of $100 (increased to $150 lastweek) - sourced from who-knows-where. (President Mugabe publicly scoffed atthe idea, citing a lack of government funds). Fiscal revenues have climbedfrom $6m in February to almost $100m in June.Unbelievably soon, and in spite of a lack of funds, basic services arepicking up, streets are being cleaned and potholes being filled across thecountry.The quote of my visit? An (indigenous) businessman: "We should be pleasedthat the collapse came as soon as it did - the country has retained itscollective memory of the right way to do things. It means the recovery to adecent environment will be far quicker than in countries where the declinelasted 30 years".I had the opportunity to speak to Morgan Tsvangirai and his privatesecretary (in separate meetings). Their approach and attitude were bothadmirable and heartening. As the Prime Minister said in a recent speech: "Weare pursuing negotiation rather than confrontation, pursuing teamwork ratherthan dominance."In one word, I would describe the attitude of the MDC as "pragmatic". Itwould have been easy for the transitional government to become bogged downin power plays and petty squabbles. For example, the refusal of thepresident to replace Gideon Gono as head of the central bank could haveturned into a show-stopper.Instead, the MDC has, with a "Yes We Can" attitude, simply pulled allconstitutionally sanctioned fiscal and monetary functions into the Ministryof Finance. With no printing press and no local currency, there isn't muchfor a central bank governor to do.Anecdotal evidence of the way the business of government is conducted farexceeds current perception of two (or is it three?) parties at each other'sthroats. An off-site at Victoria Falls resulted in new bonds across partylines, cabinet meetings are productive, and - most of the time - energy isbeing directed at rebuilding the country.The road ahead is rocky, but we've seen the worstPredicting the future is setting oneself up for failure, but nonetheless,here are my expectations: December 2008 will be recorded as the low point ofthe "lost decade" in Zimbabwe.After a period of very rapid economic improvement, triggered by the removalof the serious impediments of hyperinflation and restrictive regulations,the real work of reconstruction will start. I predict a rapid "recovery"phase in 2009, followed by multiple years of high GDP growth.Zimbabwe was an economic poster-child of Southern Africa, and (politicianswilling) has all the ingredients to grow back to that position. The humancapital is still in my opinion the best Sub Saharan Africa has to offer on aper capita basis. Yes, it has been eroded by emigration, but we will seemany return as conditions improve.Already the top schools have long waiting lists for returnee children, andthe upswing has hardly started.How will the political scenario play out? I expect the transitionalgovernment to hold, in spite of public tiffs. The MDC will, through doggedperseverance, gradually work itself into a position where Zimbabweans willoverwhelmingly view non-Zanu PF involvement in government as a positive.The new constitution will mix direct and proportional politicalrepresentation, thereby removing much of the acrimony caused by the currentwinner-takes-all system.Financial policy will be pragmatic, growth-friendly and investor-friendly.With every month of growth and stability that passes, confidence in thegovernment and the country will grow.Foreign Direct Investment will pick up; donor and reconstruction capitalwill follow. By the time we have the next election (expected in two years'time), it will be orderly and truly democratic and the outcome will beaccepted by all Zimbabweans.And that would be as close to a fairytale ending as one could hope for.Roelof Horne is a portfolio manager for Investec Asset Management

No comments:

Post a Comment