Batanai Matsika
“Sir, if those assets just decrease by 25% and they remain on our books, that loss will be greater than the entire market capitalisation of this company”, said a young risk analyst named Peter Sullivan (Zachary Quinto) in a 2011 American drama film called Margin Call, written and directed by J C Chandor. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the financial crisis of 2007–08. In the film, an unnamed investment bank begins a mass layoff on the trading floor during a normal business day. Among those let go is Eric Dale (Stanley Tucci), head of risk management. Dale tries to speak about his current, unfinished project, first with human resources staff and then with desk head Will Emerson (Paul Bettany), but is told that this is no longer his concern. While being escorted out of the building he meets one of his risk analysts, Peter Sullivan, and gives him a USB stick to look at with a vague instruction to “be careful.”
The film explores capitalism, greed and investment fraud. At the same time, it demonstrates the catastrophic effects of excessive leverage. When Sullivan works late night to finish Dale’s project he discovers that current volatility in the firm’s portfolio of mortgage-backed securities had exceeded the historical volatility levels of the positions. Because of excessive leverage, if the firm’s assets decrease by 25%, the loss will be greater than the value of the firm, implying that the firm will go bankrupt.
While the film looks leverage at investment bank level, there are definitely lessons to take away especially when you are looking at excessive debt at a country or national level. Zimbabwe is battling with a massive debt overhang. Currently, total national debt stands at cUSD16,9bn (65,5% of the rebased GDP figure of USD25,8bn). DoTINASHE MAKICHI L isted roofing and piping products manufacturer, Turnall Holdings has grown its appetite for exports into the region even at a loss as foreign currency shortages bedevilling the economy continue to bite. Turnall Holdings chief executive Roseline Chisveto told Business Times that export initiatives remain part of the company’s strategies mainly emanating from the need for the company to generate foreign currency which is required in its production processes. Through exports, the tile manufacturer also stands to benefit from the Reserve Bank of Zimbabwe export incentive which will go a long way in off-setting some of the company’s costs. Turnall’s import component for its raw materials is currently at 15% while its exports make up 1% of the company’s total production. “Exporting remains a priority for the company at the moment but there are still challenges considering that the profit margins are slim. We are finding it difficult from a pricing point of view because of the high cost of manufacturing in Zimbabwe and secondly the regional currencies continue to depreciate against the invoicing currency, the United States dollar,” Chisveto said. Zimbabwe is battling a foreign currency crisis which has seen some local companies struggling to import key raw materials. The central bank is pushing for an export-led growth and has dangled an incentive to boost exports. Turnall recorded an increase in turnover of $13,5 million for the six months of 2018 compared to $7,7 million in the comparative period. Gross profit margin increased to 39% compared to 27% in prior year attributed to a significant improvement in capacity utilisation, consistent raw material and spares supply, procurement efficiencies and cost control. During the last six months, Turnall started receiving fibre from the local Shabani Mashava Mines and has since conducted successful trials. The company commenced with 10 percent local fibre and increased to 50 percent usage against imported fibre. The revival of SMM according to the listed firm will play a massive role in minimising the company’s import bill on raw materials. Operating expenses were 20 percent down from 23 percent due to cost control measures and improved revenue base. Production volumes for the company for the period were 29 630 tonnes, which is an increase of 79 percent from the previous comparable period. Margin Call Margin Call (2011) Cover Image Turnall prioritises exports CBZ to develop 4 600 Harare, Marondera stands mestic debt is currently cUSD9,5bn and external debt is at USD7,4bn. An estimated USD5,2bn is in arrears which includes cUSD1,2bn owed to the World Bank, cUSD600m owed to the African Development Bank and cUSD200m owed to the European Investment Bank.
Recent news reports have it that Zimbabwe is on course to clear obligations to international financial institutions (IFIs), with the government already in talks with creditors over bridging finance to settle the debts. According to Finance and Economic Development Minister Mthuli Ncube, the arrears clearance plan is tied to economic reforms that are earmarked to lead Zimbabwe towards attaining Upper Middle Income status by 2030. “The cheapest funding you can ever get is from themselves (the World Bank, IMF and African Development Bank) and there are mechanisms through which this can be done and we are working on that”, said Ncube. Overall, it remains to be seen on how the talks will evolve, especially given that the Zimbabwe Democracy and Economic Recovery Act (ZIDERA) sanctions remain in place. This is definitely a mammoth task for the new administration but it might just be worthwhile taking a cue from the Margin Call movie; Be first, be smarter or cheat!
Author – Batanai Matsika is the head of Research – Akribos Research Services. He can be contacted on +263 78 358 4745 or batanai@ akriboscapital.com
