SAGIT – Debt restructuring proving a daunting task

By Addmore Chakurira

GOVERNMENT domestic debt peaked to about $2,2 trillion as at August 20 from $1,2 trillion in April 2004. The government, however, has some $158,5 billion deposited with the Reserve Bank

of Zimbabwe (RBZ), coming off from a peak of $400 billion in April.


The rise in domestic debt could be attributed to the decrease in corporate tax payments as most companies’ earnings momentum has decelerated as well as the significant Treasury Bills (TBs) issued. Government has already started restructuring its debt by issuing long dated Treasury Bills, having last issued 91-day TBs in May.


That said, the ongoing attempts by the central bank to mop up excess liquidity from the market through the use of the special TBs might fuel domestic debt in the coming months. The RBZ has been issuing 180-day TBs at a rate of around 102,79%, the majority having been fully subscribed.

The spread between the bids has been thin and there is a view that the tender is now a managed auction, just as what happens with the forex auction system.


As efforts to restructure government debt continues, the RBZ came into the market seeking to raise $50 billion through a three year government stock – stock number 4/2004 – which opened on September 1 and will close on September 9. The stock is offered at a coupon rate of 95% with semi annual payments. Going forward, it’s likely that tradability of government stocks on the secondary market might pick up, as a result of the shortage of short term dated paper, providing for greater market liquidity enhanced by strong demand from investors seeking ways to enhance the overall yield in their fixed income portfolios.


The benefits for investing in the bonds are that: if interest rates rally, the investor has some money locked in for the long term. If interest rates “back up” or go higher, the investor has money coming that may be reinvested at higher interest rates. Generally, investors expect to earn more for a longer holding period; thus, the yield curve should reflect expectations about where interest rates and inflation are headed.


With the inflation rate anticipated to continue to decelerate, interest rates are accepted to come off from current levels when two-digit inflation rate is achieved. In the absence of short-term dated paper, issued by RBZ, bonds are likely to become a more lucrative form of investment for long-term investors, if the inflation targets set for the next five years are attained. The bond is anticipated to receive institutional support especially for those seeking assets for regulatory conformity.


Time to fret but don’t panic yet. During the week the stock market retreated with no significant volumes changing hands in a number of counters. On the equities, prospects for dividend payments seem to be driving some counters in an environment in which appreciation in the share price is limited hence focus is now on overall capital appreciation.


That said, some companies have not declared dividends despite sitting on cash piles alluding to the need to reinvest into the business. Investors should look at Return On Invested Capital (ROIC) to make sound decisions. High ROICs are the product of both high returns and disciplined use of capital, and they tend to be correlated with stock prices. A high productivity trend also implies higher earnings quality, as a larger share of earnings is traceable to real growth than to inflation.


But the extent of the improvement in the productivity trend will proscribe the increase in returns. Having said that, investors should note that higher productivity also implies higher real interest rates, companies will not be able to use leverage without limit to translate the improved returns into still higher growth rates. Excessive leverage, just like excessive capital spending will erode ROICs and stock prices. On a net asset investment value basis many companies are significantly undervalued. However, the assets in most cases are hardly sweating.


Is Zimbabwe losing its luster as a low cost producer? Traditionally, Zimbabwe has been considered as a low cost producer in the region and in Africa in general, in hard currency terms, as most local costs have not been aligned to the US dollar. With the recent surge in local costs – salary and wage hikes, water and electricity increases, rentals – questions have been raised as to whether the status quo could be maintained. Is the economy going to be “dollarised” through the back door? If inputs costs continue to escalate at current rates this might turn out to be true and the production base might move out of Zimbabwe into other neighbouring countries where the cost base and the socio-political issues are more stable, depriving Zimbabwe of the much-needed investment. In spite of this, most of the costs are coming off a low base (it’s catch up time) thus the likelihood of further huge increases is minimal in most cases enhanced by the decelerating inflation rate.


*Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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