Big bucks in Zimbabwe for brave investors
BY TINA WEAVIND, JUNE 09 2013, 09:35
“ZIMBABWE will see an economic recovery within months.” A pipe dream?
Possibly not.
Ian Saunders, CEO of junior gold miner New Dawn, is one of many business
people who last week expressed versions of this view. At a conference held
by sub-Sahara-focussed asset managers Imara, the consensus was that after
the election — due to be held before the end of July — business would get
back on track, no matter who wins.
Growth in Zimbabwe took off after the adoption of the US dollar in June 2009
ended hyperinflation and a rate of 7.7% was recorded in 2010. Investors
expected big things from Zimbabwe, especially off such a low base, but
momentum has dropped. Last year, for example, growth barely breached 4.4%.
Election fever is blamed for the current investment torpor and slowed
consumer spending but the biggest impediment to business in the past two
years has undoubtedly been the vacillation around indigenisation.
Zimplats, part of the world’s second-biggest platinum miner Impala, was in
January forced to hand over 51% of its shares — a total of R8.3bn — to a
community trust, an employee-ownership trust and the National Indigenisation
and Economic Empowerment Fund. Though Implats billed it as a “sale”,
President Robert Mugabe urged his ministers to renegotiate the deal so no
money changed hands.
The country had “lost a year” because of the lack of clarity around the
indigenisation process, said Mr Saunders. Expansion at New Dawn is hanging
in the balance, and the requisite funding is unlikely to be forthcoming
until there is clarity about the policy and its implementation.
Yet despite this, money is flooding into Zimbabwe. The stock exchange has
grown 59% in the past five months, according to Imara, as share prices soar
at large companies like Delta and Innscor. Last year it grew a paltry 4.48%.
It is a significant trajectory, even if the volumes are a fraction of that
of Wall Street or even the JSE. The manually operated stock exchange trades
once a day for about an hour, turning over about $2m.
But there is no doubt foreign money is interested, albeit cautiously, in
Zimbabwe. A number of South African fund managers, including Investec, have
begun to take advantage of the bargain-basement stocks with great upside
potential.
Investec investment principal Richard Honey described Zimbabwe as an
“exciting country in a transitional phase offering great opportunities”.
More than 140 investors came to Imara’s four-day show-and-tell, which
included trips to factories and mines as well as power-point presentations
on the financials of local operations. Repeated reference was made to the
vast unexplored mineral wealth, the established infrastructure and the
young, educated population.
While the indigenisation requirements are broadly defined, platitudes like
“the door is open, come let’s talk” have shaken investor confidence. “It
doesn’t matter what the policies are,” said a US-based fund manager. “If we
know what we’re dealing with, we can work around it. As it stands now it’s a
moving target.”
The issue is particularly onerous for banks, which are required to keep
$100m of ready cash with the central bank. Without significant foreign
investment, this is a virtually impossible ask. But in this issue as well,
the rules are vague.
The deadline for compliance was initially June 2014 but was later relaxed to
2015. Then the banks were asked to submit a road map on how and when they
would comply with the thresholds, implying the rules could be tailored.
Rumours have since surfaced that the time line would be extended to 2020.
Anton Schaad, a Swiss investor managing a UBS-backed sub-Saharan equity
fund, described Zimbabwe as an “interesting destination”. He said he was
considering a small stake, of about 5% to 10% of his $15m fund.
Another US-based investor, Ailsa Carpenter of Galadriel Capital, was
optimistic about the medium-term prospects for the local bourse. “There is a
massive output gap between the size of Zimbabwe’s economy and its productive
potential,” she said.
But other than a few tailor-made funds and private investors with deep
pockets, a well-honed sense of adventure and willingness to stay put for the
long haul, it was clear most wallets were going to remain shut tight until
the indigenisation framework became clearer.
Meddling by ministers and spurious efforts by some local companies to derail
competitors was another theme at the talks.
Innscor, a conglomerate with a major stake in food retailer Spar — among
other industries — was recently charged by the Competition and Tariff
Commission for not giving notice of its intent to acquire a majority stake
in food retailer National Foods.
The inquiry had led to a slew of negative press and turned out to be
unfounded — John Koumides, Innscor CEO, said the commission had been
notified and once signed and accepted documentation was produced the
accusations and mud-slinging quietly went away.
Another CEO said he had been called late at night more than once to attend
meetings with government ministers interested in getting a piece of the
company action.
But the expectation of improvement is tangible. A rumour repeated by several
Zimbabwean business people was that some of the more progressive MPs had
told them — in confidence, naturally — that indigenisation was going to get
a radical makeover and the country would adopt a much more business-friendly
approach. Some said they had it on good authority Mr Mugabe was going to
step down.
But nothing was going to happen until after the July 31 line clearly drawn
in the sand.
…
Recovery factors in place
Zimbabwe’s established infrastructure is one of the biggest selling points
for potential investors.
The country also has a highly literate population, a road and rail network
and power.
These touches give the country a shine that is lacking in the likes of the
Democratic Republic of Congo, another country emerging from a slump.
Starting a project in Zimbabwe, even in remote parts of the country, becomes
infinitely more possible because of these factors.
The problem is that Zimbabwe’s infrastructure has barely been maintained in
more than a decade.
Upgrades are desperately needed.
The National Railways of Zimbabwe is deep in debt and in dire need of
extensive rehabilitation. The government is reportedly negotiating with a
local company to carry out the work at an estimated cost of $340m but the
money still needs to be found.
Analysts Frost & Sullivan said in February that a full revamp of the
network, excluding locomotives and trucks, would cost $4.5bn.
Freight that can’t be moved by rail is transported by road, which has left
much of the 88000km network in a parlous state. About $35m was allocated to
road maintenance in 2012 — an earlier estimate put the requirement at $200m.
Just $209m was last year set aside for a $2bn rehabilitation programme.
Electricity is in short supply or delivered erratically.
In March last year, power from Mozambique’s Cahora Bassa dam was cut off due
to a $75m unpaid electricity bill. The country needs more than 2200MW at
peak times but produces about 1300MW — the rest must be imported.
Yet the Zimbabwe Electricity Supply Authority owes about $1bn in electricity
imports, loans and outstanding contributions to a joint power project with
neighbouring Zambia.
One solution would be for private power producers to come into the market,
but concerns around indigenisation have put the brakes on that.
As Zimbabwe becomes increasingly less of an economic basket case, investors’
interest in infrastructure projects is being piqued. Scraps of information
about new infrastructure projects are turning up in reports overseas. Right
now, most projects are in the negotiation phase, but there is little doubt
that there will be more movement once uncertainty around policies and
processes — especially indigenisation — has been cleared up.
• This article was first published in Sunday Times: Business Times