Economy

Turbulent Environment Unsettles Investors

TAURAI MANGUDHLA

Zimbabwe’s turbulent macroeconomic environment is proving untenable to business as domestic and foreign investors are now forced to look seriously at their positions.

Euphoria gripped Zimbabwe when President Emmerson Mnangagwa came into office in November 2017 preaching a message of international re-engagement, macroeconomic stability, anti-corruption, pro-production, job creation and a “Zimbabwe is open for business” mantra.

This was billed to result in a stampede of investors lured by his investor-friendly policies. There was hope among individuals and corporates as the currency situation improved and reached some point of stability for months, but all hell broke loose after last year’s general elections at the end of July.

Foreign currency shortages worsened, forcing some businesses to pay huge premiums on the black market. Since February when the 1:1 parity between the local currency and US dollar was removed, the Zim dollar has been on a slippery slope.

Rising inflation, cash shortages, power shortages, dwindling disposable income among consumers, and a huge exchange risk coupled with a growing political risk have been some of the major challenges for business in 2019.

According to Zimstat, month on month inflation for the month of October stood at 38.75% after gaining 21.03 percentage points on the September rate of 17.72%, largely as a result of exchange rate movements and power tariff hikes. Zimbabwe’s implied annual inflation rose to 440.1% in the month, up from 353% in September.

While some businesses still have the luxury of employing a wait-and-see attitude, the hope of the dark season quickly passing, is fast sinking. Others, like the low -cost carrier, Fastjet, and South Africa’s Pepkor have just had enough and are contemplating leaving Zimbabwe, whatever the cost.

Indications on the ZSE are that foreign investors have been leaving Zimbabwe, as such their participation has been sliding from 17% in September compared to 35% between 2009 and 2015, as they fail to repatriate their profits and dividends.

For Pepkor, which operates 20 PEP branches in Zimbabwe, the loss will be a staggering R70m in impairment and write-off of some assets. In a full year results statement for the period to September 2019, Pepkor said a decision was made to exit operations in Zimbabwe as a result of the continued macroeconomic challenges and the ongoing devaluation of the local currency.

“Discontinued operations therefore include the results from PEP Africa’s operations in Zimbabwe, amounting to a total loss for the year (after tax) of R70m, which includes the full impairment of the disposal of the group’s assets,” the company said.

Last week, Fastjet proposed a restructuring of the group, and clarity on the liquidation order of Fastjet Airlines Ltd. The low-cost carrier said while the group’s FedAir operation remains resilient and is expected to be profitable for the year, this has been offset by the continued volatility and uncertainty in the Zimbabwean market.

“Fastjet Zimbabwe has increased its year on year revenue despite the difficult trading conditions, following the introduction of a new currency which effectively devalued the existing currency by up to 15 times its previous value at the official rate, and has pushed inflation rates to above 200%,” the company said.

As a result, Fastjet is currently in active discussions with certain of its major shareholders to explore various options including raising equity capital and or a restructuring of the company involving the disposal of Fastjet Zimbabwe.

“The disposal would be made in receipt of a consideration of approximately US$8m from a consortium that would be led and underwritten by Solenta Aviation Holdings Limited (c. 60 shareholder in Gastjet Plc today), and additionally by other local investors in Zimbabwe,” the company said.

The move by the two companies fur-ther dents confidence in Zimbabwe among foreign investors and is an attack on the pro-production stance by the government to resolve the foreign currency shortages and job losses.

Economist and Zimbabwe National Chamber of Commerce CEO Chris Mugaga said the two companies in question had problems of their own and their exit do not quite mirror current business sentiment.

He said Pepkor had had recent scandals in South Africa, while Fastjet had some management problems.

“Zimbabwe has its problems but it remains a good route,” Mugaga said.

“Air Zimbabwe has a higher chance of pulling out of its domestic market than SAA.”

Mugaga’s ideas are hard to sell as the companies in question explicitly ascribed their moves to volatility, uncertainty, high inflation, and the devaluation of the local currency. These are the problems facing Zimbabwe industry, with the survival of many companies now under threat and closure.

The country’s telecoms players have asked for an inflation-based tariff regime that reviews tariffs regularly to ensure they remain afloat in a market where the local dollar loses value daily.

Currently, the sector is using a telecoms price index which is reviewed on average quarterly as opposed to a monthly consumer price index-based system.

Economist Prosper Chitambara said the macroeconomic environment was untenable for business, hence the decision by Pepkor and Fastjet to exit Zimbabwe.

“There is chronic high inflation which has affected the bottom line for business, and there is also general uncertainty both political and economic,” Chitambara said.

“What most businesses might do is to withdraw and come back later because it’s difficult to do business when the local currency is losing value on a daily basis.”

He said many businesses might close shop in the absence of a radical stance by the government to solve the challenges. Currently, he added, indications are that the country is not committed to solving the challenges bedeviling the productive sector.

“I hear the RBZ is issuing Treasury Bills again, it doesn’t look like we will see stability soon. Ours is a toxic macro-economic environment, very poisonous,” Chitambara added.

Economist Persistence Gwanyanya said the Fastjet and Pepkor’s move was an indication that Zimbabwe had a volatile, turbulent operating environment where there was no currency stability and prices were escalating.

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