THINK ON IT by CHRIS CHENGA
Peak uncertainty is when commentators struggle to write enduring analyses of government policy. Before the ink dries on whatever commentary piece, a policy announcement is reversed, amended, or contradicted by government itself. So each commentary has to be momentarily and interpretatively qualified; “if that is indeed what they meant at that time” for instance. Such is the level of uncertainty cultivated by government. The last couple weeks have shown a seemingly incoherent administration, or perhaps one that lacks strategy to communicate with markets.
On October 1, the Monetary Policy Statement explicitly states intentions by the central bank’s transition to a more market based foreign currency allocation system. On October 8, Finance Minister Ncube made remarks on how government is content allowing markets, which were disproportionately parallel traders of foreign currency on that day, to determine the exchange rate of USD to a surrogate currency which will foreseeably be demonetised. It is vitally important that government gives clarity on exactly which market participants are to reconcile these two statements; will a foreign currency market largely made up of parallel traders or one of formal trading determine exchange rates, let alone towards an impending demonetisation or creation of a new local currency? The uncertainties behind these nuances are exactly what moved near $7 billion on capital markets within the week subsequent to Minister Ncube’s remarks.
Perhaps motivated by this sudden jolt, President Mnangagwa then indicated a firm will to banish parallel market trading altogether. His own signalling, however, should have been timely with both his Finance Minister and Governor. The margin of communication lapse here, exemplified by a $20 billion ZSE moving $7 billion in three days, shows just how sensitive currency reform is a concern to current and prospective investors of this economy. Real serious thought has to be given on how markets, however represented they may be, will determine the exchange rate of a locally based currency to the USD moving ahead. This is a very important consideration for the economy, especially in reference to the USD.
A cultural vice within exchange rate determination in Zimbabwe has been that exchange rates are not often responsibly priced, due to the fact that arbitrage, speculation and manipulation have long been more influential than demand and supply based on productivity and yield. This is why no matter the currency regime, since as way back as the structural reforms of the early 1990s, the economy has failed to sustain productive and yield competitiveness in reference to the USD. Exchange rates in Zimbabwe have hardly been a reflection of productivity in industry, and the potential yields made by USD inflows meant to finance industry. What this means from an investment perspective is that exchange rate regimes are never congruent to USD financiers’ expectations. USD financiers are still globally dominant, and this is why the USD should remain Zimbabwe’s main currency of reference in currency reforms. According to the Bank of International Settlements which regulates central banks, nearly 48% of the world’s $30 trillion in cross-border loans are priced in US dollars. This is actually up from 40% a decade ago, contrary to the assumed ascent of Chinese Yuan or other currency alternatively often suggested in parliament and industry groups.
Consider the case of KFC. There is an incorrect assumption that because the business utilises and settles payments of chickens, labour, overheads, amongst other resources in local currency, it should continue operations regardless of exchange rate variables. KFC, like many other foreign financed enterprises, invariably determines its productivity and yield to USD competitiveness. KFC Zimbabwe is a franchisee of Country Bird Holdings, a South African entity listed on the Johannesburg Stock Exchange. When CBH entered the Zimbabwean market, the per-store capital investment was estimated to be US$713 236, with potential annual revenue of $5,9 million per store according to SA’s Financial Mail. These are loosely the financier projections of which productivity and yield competitiveness of the franchise are benchmarked. CBH itself merely has the rights to franchise KFC from YUM Brands, an American Fortune 500 company listed on the New York Stock Exchange. This further accentuates the USD reference of yields that CBH’s investment in stores, including those in Zimbabwe, must return. Though a South African company, CBH’s yield targets are priced in USD not Rands.
It is evident then that when Zimbabwean authorities consider a currency reform strategy, most foreign investors are chasing benchmarks of productivity and yield in USD. Arbitrage, speculation, and market manipulation only serve to distort the Zimbabwean economy’s productivity and yield to investor expectations. This is why when there is a lack of clarity of what markets will determine exchange rates an entity like KFC has no other choice but to close stores. As long as the main financiers of Zimbabwe’s local operations have a global reference for their investment, high currency risk and uncertainty makes the economy globally unattractive.
Unfortunately, certain interventions in Zimbabwe have been self-inflicting pains. Price controls, forcing stores to open, and generally creating a begrudging sentiment towards business does not help, especially without attending to their real financier concerns. It only affirms perceptions of a nation that not only is business unfriendly, but perhaps genuinely illiterate to the functions of global financiers. While President Mnangagwa’s administration may posture a business friendly, and open for business narrative, it is not the governmental delegates who go to New York or shake hands with the IMF who persuade global capital of Zimbabwe’s business attraction. Rather, it is Kevin James of Synapp International Ltd, majority owners of CBH who has to explain to YUM Brands whether or not the KFC franchise in Zimbabwe is yielding enough returns. After all, it is YUM Brands which is seeking global markets for KFC to create competitive yields for American incomes and savings invested on the NYSE listed company.
Perhaps the KFC anecdote serves to create an accurate narrative of why currency reforms in Zimbabwe should be based on productivity and yield. Focusing on asset valuations as reflected on the ZSE or exchange rates as determined by the parallel market traders keep the economy away from what should be the fundamental exchange rate determinants, which are productivity and yield. Government has to focus on these two variables first, and enhance their correlation to whatever exchange rates will be the USD to a local currency. Right now currency reforms and exchange rates seem to be captured by agents of arbitrage, speculation and manipulation. Maybe Minister Ncube and the RBZ should be more convincing in their control of the economy. They should perhaps reflect on the separation of duties and expertise to gain back investment confidence. For instance, Minister Ncube must ensure fiscal capacity to ensure a sustainable local currency, the RBZ should have credible Monetary Policy Committees to evaluate exchange rate variables, and Governor Mangudya can then balance monetary policy to either stimulate or stabilise productivity. This is what investors and businesses under the regime of King Dollar need to hear!