The unspoken ZSE bloodbath

2019 was a devastating year for all on the Zimbabwe Stock Exchange (ZSE) as pensioners lost a significant portion of their savings for the second time in just 10 years. Local equities have failed as an inflation hedge as pension funds are not allowed to invest outside our borders. While performing better than fixed income or money market assets the currency devaluation took its toll on the ZSE industrial index. Property markets fared better only losing about 30-40% in real terms over 2019.

The ZSE index started the year at ZWL18.94 billion (USD $5.4 billion) and ended at ZWL28.84 billion (USD 1.27 billion), which is a 77% real dollar loss for 2019. These losses are directly linked to the currency devaluation, where we saw the ZWL go from 3.5:1 to 22.7:1 in 2019 alone.

The year 2019 raised some serious questions and concerns for investors and pensioners alike. With no local based inflation hedging assets where do you invest? Or do we think the ZSE has gone too far and will we see a bounce back in 2020?

It is impossible to accurately answer the above two questions as we have seen time and time again that politics far outweigh economics. What we can say is that something needs to change, or else the ZWL will continue on its 2019 trend. The ZWL is being rejected more and more each day and at some point it may be abandoned totally.

Yes you are right Governor; we don’t need to fret about coins!

We woke up to an article in the Herald today, where the RBZ governor was telling us not to fret over the rejection of coins in certain sectors of the economy. Apparently the informal sector and some retailers are not accepting some coins especially those under ZWL1. This is hardly surprising as the coins, individually buy just about nothing!

As usual, the governor had a solution; we should just take these to our banks! You go and queue to deposit these and then hope to be given higher denomination coins/notes. The point is we do not need any of these coins at all. If anything we need higher denomination notes. Implied annual inflation is just under 500% and our biggest note is $5. You need about 4 of those to buy a loaf of bread or a litre of diesel. So yes, you are right Doc Governor – we need not worry about those coins – we DON’T need them!

ED sends Mthuli straight under ZUPCO

……..whither policy consistency

In his 2020 budget, Finance Minister Mthuli Ncube had a detailed section dealing with what he called ‘Subsidies and Other Market Distortions.’ He correctly highlighted that ‘_…..subsidies present an additional risk to macroeconomic and fiscal stability._’ To be specific, he highlighted subsidies related to Command agriculture, ZESA financing and fuel as having led to significant budget deficits in prior years.

Amongst other measures, the Minister announced an intention to remove the (then) existing grain marketing subsidies for maize and wheat that were being provided to Grain Millers through the Grain Marketing Board. Ultimately, the GMB and the millers would have had to sell or acquire these two commodities at the market determined prices, even if it meant importing.

Before the ink had dried, and in typical ZANU PF style, the President reversed this at a youth rally in Kadoma some weeks ago! The President claimed not to have been consulted when this policy initiative was being crafted. What hogwash! In response, and embarrassingly, Mthuli was forced to issue new measures last week announcing the restoration of the subsidies. This is one of the very many reasons why the citizenry finds it difficult to believe anything that comes out of this government, no matter how noble it seems. Decent policies have been and will continue to sacrificed for political expediency.

Is it a new currency or new notes? What does this mean?

The recently announced Monetary Policy Committee held its inaugural meeting yesterday and its chair (who happens to be the RBZ Governor) announced, post the meeting that the ‘government will be introducing new notes and coins ($2 and $5 denominations) in the next two weeks.’ Finance minister, Mthuli Ncube, in a separate post cabinet briefing, also mentioned the looming introduction of new notes. It’s important to note that these announcements are not the first ones, with the governor in the Mid-Term Monetary Policy Statement making a similar pronouncement.

Since these announcements, there has been debate about what this entails and the implications on the broader economy. Does this mean we now have a new currency? What happens to the bond notes? Will the cash queues and premiums disappear? What about inflation? We briefly try to answer these questions below:

Do the new notes signal another new currency?
No. Zimbabwe introduced a new currency in June this year through SI 142; which also brought to the end the multi-currency regime. This was initially the RTGS$ and has since transitioned to the ZWL.
Strictly speaking however, this is the FIRST time, since the Gideon Gono era that the government will issue notes for their currency. We have had the bond notes, but they were never our currency. Semantics, right?

What happens to the bond notes and coins?
The existing bond notes and coins will continue to be used alongside the newer notes and coins. Also, very interesting to note is that new bond coins will be minted. The new notes and coins will be issued at par (yes that term again!) with the existing bond notes and RTGS$ (electronic cash)

Will this ease cash queues?
Really depends on how much cash government prints and injects into the economy. As also mentioned by the governor, to function normally we need about 10%-15% of our deposits to be in form of cash. Using the last publicly available statistics and applying a conservative 10% ratio, a minimum of ZWL1 bn will need to be injected in form of cash; to buttress the just under ZWL 700m we had in bond notes and coins. We speculate the number could be larger as bank deposits have most likely increased between July and October.

Our view is RBZ will most likely drip feed the new notes into the system. This, in our view was well captured in the mid-term MPS review statement when the governor said, ‘…the bank will continue to inject additional notes and coins on a gradual basis…’ Also critical from a government perspective, will be to manage the impact of a predominant cash based system on the 2% IMTT (which we think has been the main reason why no new notes are issued). Forced to choose between availing cash for the public and increasing government revenues through the intermediated tax, government seems to have chosen the later. We have no reason to think they have changed or are changing tact!

And what about the cash premiums?
Ideally, and linked to the above, an improved access to cash should reduce or wipe out the premium on cash; currently at about 60%. For the reasons explained above, we do not think new cash issuances will be substantial enough to make any impact on the rates. While there might be short term declines as speculators take advantage of the confusion, at best rates will most likely hold at these levels.

Inflation implications
Generally speaking, any printing of cash not backed by economic activity is inflationary as this results in money supply growing faster than output. The government is aware of this and has been at pains to explain that the new notes will be printed out of the existing stock of electronic/RTGS$ dollars. If true, this should not result in price increases. However, we have been here before and been given a lot of promises before that have been broken. Therefore, don’t hold your breath!

In conclusion, no new currency has been introduced, but new notes and coins will be issued. How this impacts cash queues and premiums, is dependent upon the quantities issued in the system. We doubt there will be much issued and therefore no change on the status quo.

As a side note, we would have preferred that RBZ prints higher denomination notes. We are already in hyperinflation and our highest note cannot even buy half a loaf! It’s just enough to buy approximately 300ml of petrol at the new price of ZWL 16.75/litre!

Fuel procurement now via interbank rate

Government has, with immediate effect, removed the 1:1 foreign currency exchange rate for the procurement of fuel by Oil Marketing Companies (OMCs), which will result in the interbank market being used. Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya yesterday said the move sought to promote the efficient use forex and to “minimise and guard against incidences of arbitrage” in the economy.

“The Reserve Bank of Zimbabwe is pleased to advise the public that with effect from 21 May 2019, the procurement of fuel by the Oil Marketing Companies (OMCs) shall be done through the interbank foreign exchange market,” said Dr Mangudya.

“There shall be only one foreign exchange rate to be used in the market for the importation of all goods and services. This means that the 1:1 exchange rate that was being used by OMCs for the procurement of fuel will be discontinued with immediate effect.

“The new position is necessary to promote the efficient use of foreign exchange and to minimise and guard against incidences of arbitrage within the economy.”

The decision to discontinue the 1:1 exchange rate for fuel comes against the background of concerns by market watchers that some beneficiaries of the scheme were abusing it, hence the continued fuel supply bottlenecks in the country.

Government is also set to be relieved of pressure of sourcing forex for OMCs. The RBZ introduced the interbank market for forex in February, in a bid to formalise transactions that had largely been taking place on the parallel market. Government is working on making the interbank market more “efficient” to allow manufacturers and individuals to readily access forex.

Currently, there are concerns that very few, if any industrialists and individuals, are getting forex on the interbank as the market continues to be dominated by more buyers and no sellers.

Finance and Economic Development Minister Professor Mthuli Ncube told Parliament last week that nostro foreign currency (FCA) accounts now have US$800 million.

Prof Ncube said Government is now “fine-tuning” the interbank market to make it easy for individuals and manufacturers to access the funds, in a move that will see prices of goods and services declining.

Over the weekend, RBZ Governor Dr Mangudya said there was US$500 million from an offshore line of credit that was going to be channelled towards the interbank market.

Dr Mangudya yesterday said the RBZ was “proceeding to make a drawdown of US$500 million” from the offshore line of credit to supplement the country’s foreign exchange receipts in order to underpin the interbank forex market.
The drawdown is designed to meet foreign payment requirements of businesses and individuals.

“The facility will be disbursed into the economy through the interbank foreign exchange framework at the prevailing interbank foreign exchange rate on a willing-seller willing-buyer basis.

“Over and above these initiatives, Letters of Credit (LCs) shall continue to be used for the importation of essential commodities such as fuel, grain and cooking oil,” said Dr Mangudya. The LCs will also be priced at the prevailing interbank foreign exchange rates.

The interbank rate was US$1:RTGS$3,4832 yesterday against about 1:5,5 on the parallel market. Dr Mangudya said the RBZ has since directed banks to effectively apply the willing-seller willing-buyer principle to ensure that the interbank foreign exchange market is reflective of market conditions.

He explained that banks must ensure there are no moral hazards in the operation of the interbank foreign exchange market. “In this regard, all the foreign exchange requirements for banks for their own use that includes dividend payments, subscription fees, etc, would need prior Exchange Control approval for the proper conduct of the interbank foreign exchange market.

“Similarly, banks should discontinue twinning arrangements for their customers as this undermines the efficient operation of the interbank foreign exchange market,” said Dr Mangudya.

More: herald

Redollarise to fix economy: Biti

The crippling fuel and power shortages facing Zimbabwe are likely to get worse if government fails to deal with price distortions on the market, former Finance minister Tendai Biti has said.

Speaking in a radio interview, Biti, who also chairs the Parliamentary Portfolio Committee on Finance, said government does not have money to continue subsidising fuel and should allow private players to fill the gap.

“The energy situation is dire; the fuel situation is particularly dire as evidenced by the long queues. We require about 1,6 billion litres of fuel every year, 1,12 billion diesel and about 570 million litres of petrol at a cost of $1,3 billion to US$1,5 billion per year,” Biti said.

“I want to underline US$ part; the government doesn’t have that money. My advice to the new (Energy minister Fortune Chasi) is that government should not try what it can’t do, it can’t buy fuel, it can’t give fuel companies money to buy because it doesn’t have the money.”

Zimbabwe’s cash shortages have crippled industry, forcing regular price hikes and triggering labour unrest.

Biti, credited by many for bringing stability to the fiscal space during his tenure as Finance minister in the inclusive government that ran from 2009 to 2013, said the solution to the glut of problems facing the country was to redollarise and end the RTGS dollar era.

“We need to liberalise fuel procurement. Anyone who has foreign currency, who can bring fuel should be able to bring it, but here is a catch; you can’t bring into Zimbabwe fuel in US$ and sell it in bond notes because soon you will run out of the foreign currency. So, the minute you liberalise fuel you must essentially redollarise the economy,” Biti said.

Biti also called on Chasi to break fuel cartels accused of holding Mnangagwa’s government at ransom and fiddling with foreign currency pricing in the country.

“The minister has to break the fuel cartels; the oligopolies and monopolies that are controlling and stifling our fuel industry, the fuel in this country is controlled by two companies, Trafigura of Singapore. Singapore does not produce anything, why should Zimbabwe buy the bulk of its fuel from a middleman called Trafigura? He (Chasi) has to break that cartel. The pipeline is controlled by Glencore, I shall not mention its local partners. The minister must break that monopoly and allow competition,” he said.

But Chasi, instead, said he was more inclined at controlling demand by conjuring plans and legislation that could control usage of fuel and energy as opposed to meeting the demand.

Mnangagwa last week moved Jorum Gumbo from the Energy portfolio, presumably because he had failed to deal with the fuel crisis, which Chasi says he has solutions to.

“We are going to resolve the challenges. I cannot give you a date, but we are going to be moving at a fast pace, that’s what the situation demands.”

Zimbabwe is, meanwhile, suffering a crippling power shortage as Zesa is failing to service a US$80 million debt to South Africa and Mozambique, who have been exporting electricity to the country.

Acting Zesa chief executive Patrick Chivaura said they have been hit by foreign currency shortages and do not have any solution until and unless the debts are serviced in full.

“We have not been able to pay any of our bills from August last year to date. South Africa can still give us power, but we still need to clear what we owe them, about $35 million and about the same amount we owe Mozambique. The major challenge is foreign currency,” he said.

The power utility is also struggling to recover a total of ZWL$1,2 billion in debts owed by government ministers, ministries and individuals.

More: newsday

Zimbabwe police assure visitors of safety despite U.S. travel warning

The Zimbabwe Republic Police on Thursday reassured locals and visitors to the country that despite a negative travel advisory issued by the United States government on its citizens wishing to travel to Zimbabwe.

The U.S. government on Tuesday issued “Zimbabwe Travel Advisory, Level 2: Exercise Increased Caution”, warning citizens to be careful while in Zimbabwe because of “crime and civil unrest.”

“Violent crime, such as assault, carjacking, and home invasion, is common. Smashing the windows of cars with the intent to steal, which can harm the driver or passengers, is also common. Local police lack the resources to respond effectively to serious criminal incidents. Read the safety and security section on the country information page,” said the advisory.

It also advised those deciding to travel to Zimbabwe to stay alert and avoid openly displaying cash, stay away from political rallies, demonstrations and crowds, as well as monitor local media for any developments and adjust plans accordingly, and for citizens to carry copies of their passports and visas while keeping the originals in safe places.

However, ZRP said in a statement that the country remained safe to visit.

“Contrary to the Zimbabwe Travel Advisory Level 2 issued by the Americans recently, the Zimbabwe Republic Police wishes to assure all Zimbabweans and visitors who include tourists to all parts of the country that the country remains safe, peaceful and secure.

“The ZRP is conducting general patrols, blitz (and) stop and search patrols in all central business districts, industrial sites, residential areas and other places which are usually frequented by the public with a view of getting rid of the malady of criminality,” the police said.

U.S. travel advisories have four levels, with Level 4 being the most severe as it advises citizens not to travel to certain identified countries.

The lowest advisory – Level 1 – simply says that there is some risk in any international travel as conditions in other countries may differ from those in the U.S.

Level 2 calls for increased caution, Level 3 advises citizens to avoid travel due to serious risks to safety and security and Level 4 telling them not to travel to the identified countries or leave the countries as soon as it is safe to do so.

More: xinhuanet

Govt pays US$64,4m to white farmers

Government has to date paid US$64,4 million to 93 white former commercial farmers for the improvements they made on reallocated farms, a senior official has said.

Presenting the Ministerial statement on the state of economy last night, Finance and Economic Development Minister Professor Mthuli Ncube said Government was committed to finalising compensation for all farmers who were affected by the land reform programme in accordance with country Constitution and obligations under bilateral agreements.

“As outlined in the Transitional Stabilisation Programme. Government is committed to finalising compensation for all former farmers affected by the land reform programme.

“Government is also engaging development partners and other bilateral countries with the view to mobilising the requisite resources.

“Since 2009 to date, US$64,4 million was paid to 93 former commercial farmers as compensation for immovable improvements.

“In 2018 alone, US$12 million was paid to 29 farmers. In the 2019 National Budget we set aside US$53 million for the same purpose,” he said.

He said the process of compensation involved the evaluation of assets to ascertain the extent of Government’s obligation to former commercial farmers owing to the magnitude of resources required.

Prof Ncube said Government had been working with the former commercial farmers to identify qualifying beneficiaries

“The process is now complete. Currently, Government is in the process of vetting the identified members as a verification exercise to trigger disbursements.

“Compensating the affected farmers is a noble idea and is in keeping with our Constitutional dispensation,” he said.

More: herald

Inflation shoots to 75%

Zimbabwe’s annual inflation rate for the month of April shot to 75,86%, up nine percentage points on the March rate of 66,8% as the country fails to tame price increases.

Last month the statistics agency, Zimstat, adopted a new matrix to calculate the consumer price index, but going by the old base, the inflation rate for April would have been 175,326%.

However, in a country where trust in official data is slim, the figures remain disputed with scholars suggesting that the country’s inflation is now in the region of 200%.

On a month-on-month basis the inflation rate in April 2019 was 5,52% up from 4,38% in March 2019.

“The month-on-month food and non-alcoholic beverages inflation rate stood at 7,85% in April 2019, gaining 2,75% points on the March 2019 rate of 5,10%. The month-on-month non-food inflation rate stood at 4,45%, gaining 0,40 percentage points on the March 2019 rate of 4,05%,” Zimstat said in an update.

An ever-intensifying shortage of foreign currency and a weakening local currency has seen retailers in the country peg prices in line with parallel market rates.

Authorities, however, maintain that by year-end the inflation rate will have been managed within a preferable range of less than 15%.

But prospects of achieving that remain highly unlikely as the economy, characterised by acute shortages of fuel and electricity, shows little signs of recovery.

The International Monetary Fund revised downwards its initial growth projection of at least 4,2% for Zimbabwe warning that the economy will probably contract by as much as 5,2% and slide into recession.

More: newsday

Govt demands $206m from miners

Government is owed a cumulative US$206 million in unpaid mining taxes and has since declared that it will soon be forfeiting claims held for speculative purposes.

According to Mines and Mining Development Deputy Minister Polite Kambamura, Government will this month deliberate on objections made regarding the Exclusive Prospecting Orders (EPOs).

Speaking in Chinhoyi recently, Deputy Minister Kambamura said the accumulated debt was as a result of bad attitude from mining companies reluctant to support Government.

“The US$206 million owed is a cumulative figure compromising of unpaid ground rentals, unpaid special grants and some are continuing to mine without paying those fees.

“We are contemplating forfeiting claims on such grounds of non-payment because people are only complaining that things are tough, but on inspection it’s only a paltry US$100 per year with a mining resource, yet a gramme (of gold) is being purchased at fairly reasonable price,” he said.

Deputy Minister Kambamura said Government would first give debtors notices before forfeiting the claims.

“We are going to forfeit on those grounds just to try and recover the money owed but will give people notices first to come forward and pay on an agreed date.

“Failure to pay then, we will forfeit and follow legal channels to recover those monies because of late even if a person owed $20 000, Government would just forfeit without making a following up. This time we forfeit and follow up the legal way,” he said.

On Government’s position regarding EPO’s, Deputy Minister Kambamura said the issue will be tabled before the mining board this month.

“We have vast pieces of land throughout the provinces set aside for exploration, as the procedure is a lot of those EPO’s were objected. The mining affairs board will be seating this month to consider all those objections and everyone who objected will be called to come forward and explain reasons for objections.

“Thereafter the body will make a decision whether to issue such EPO’s or not. Of late there have been some EPO’s that were applied time back and since then the owners of such did not come forward with any exploration results or reports.

“All such cases are going to be considered under the ‘use it or lose it’ principle going to be announced by Mines and Mining Development Minister this month,” he said.

More: herald