By Admire Mavolwane
AS has become the norm ahead of the monetary policy reviews, investors adopted a somewhat cautious trading approach. This saw the market weakening by 5 368 points on
Monday, the first dip since the start of the current bull run on January 6.
Tuesday saw the market recovering these losses and on Wednesday, with investors convinced that the governor would push interest rates down and seemingly discounting any adverse impact from the statement they came back into the market with renewed vigor driving the index up a further 61 025 points to close on 1 610 793 points.
With the review devoid of bad news stock market wise the bulls look set to reign supreme in the short term.
On the interest rate policy front the governor did not disappoint. The bank rate, which in most instances acts as a ceiling to inter-bank and money market investment rates was reduced from the previous 110% to 95% for secured lending. In line with the anticipated continuing fall in the official inflation rate, to between 20% and 35% by year-end, the bank rate will be reviewed progressively downwards to 70% by June 1 2005. Indications on the ground, however, are that investors’ inflation expectations are divergent to those of the monetary authorities, as evidenced by the present rally which has seen the industrial index rising by 46,77% year to date.
Disappointed, however, will be those who were hoping that the governor would implement measures to level the playing field and begin to do away with distortions in the economy. The issue of multiple exchange rates is a case in point with the country having at least seven different exchange rates including; $824 for government; auction rate for importers; diaspora rate; gold rate; tobacco rate; fuel importers rate; and the Zimra rate. After the recently announced hike in the gold support price from $92 000 to $130 000 per gram for those who opt for full local currency payments, the equivalent exchange rate is now $9 511 per US dollar, using the average international gold price of US$425,12/ounce. Effectively, the RBZ is buying gold at US$652,17/ounce, thus subsiding the local producers to the tune of US$227,05/ounce. Assuming that gold output in 2005 remains static at 21,3 tonnes, it would mean that the RBZ will pay an estimated $964 billion in subsidies to gold producers.
Agriculture output, according to the acting Minister of Finance and Economic Development is estimated to have declined by a marginal 3,3% in 2004 and the economy is also guesstimated to have declined by 2,5%.
However, corporate full year to October 31 2004 results from the likes of TSL, Hunyani and Chemco, which are basically manufacturing entities with strong links to agriculture, and tobacco in particular, seem to suggest higher magnitudes of contraction.
Starting with Hunyani, local sales volumes were 33% lower than in 2003, whilst exports grew by 9%, giving an overall 24% decline for the group. The depression in the domestic market was attributed to the decline in domestic demand due to the reduced size of the tobacco crop as well as lower flower and horticulture output.
Tobacco packaging to Malawi and an improvement in commercial packing into Zambia contributed to the strong export performance experienced in the second half.
Against this background, turnover grew by a sub inflation 178% to $216,8 billion. At the same time operating margins declined by seven percentage points to 17% thanks to high energy and wage costs which could not be recovered from exports as a result of the static exchange rate and depressed local demand which hindered aggressive pricing.
After accounting for an interest expense of $3 billion and a tax provision of $9,6 billion, the bottom line came out at $24,8 billion, up only 89% on prior year when $13,1 billion was achieved.
With a 58% decline in tobacco production, agricultural chemical sales which are Chemco’s core business fell by 20% when compared with 2003 and current volume levels are half of what they were two years ago. Inflationary adjustments in prices and periodic reviews in exchange rates, however, saw turnover increasing by 159% to $52,5 billion.
Operating profits grew by 92% to $23,2 billion as margins dropped from 60% to 44% having succumbed to pressure from staff and utility costs. A reduction in finance charges from $1,5 billion to $76 million as a result of the decline in total borrowings from $3,7 billion in 2003 to $2,1 billion, boosted the growth (119%) in attributable earnings to $11,3 billion.
TSL recorded a turnover growth of 250% to $243,4 billion. Volume declines experienced at subsidiaries Chemco, joint venture Hunyani and Tobacco Sales Floor impacted negatively on revenues. Above inflation increases in costs saw operating profits growth being restricted to a mere 54%, to $74,5 billion, as the corresponding margin more than halved, deteriorating by thirty nine percentage points to 31%.
The group’s share of profits of associated companies at $9,3 billion, reflects an increase of 272% and served to mitigate against a 131% increase in finance charges to $9,3 billion. Attributable earnings of $51,9 billion were realised, up a sub-inflationary 67%.
Going forward, the future prospects of the three companies depend to a large extent on the success of the RBZ’s vision 160, which is targeting tobacco production of 160 million kilograms for this season, lately revised downwards to 100 million kilogrammes and an improvement in aggregate demand.
It is also heartening to note that the authorities may, in the last three months, have noticed signs of change for the better in the fortunes of manufacturing industries, adequate enough for them to revise their outlook for the sector. Initially, it was expected to decline by 5% this year, but it is now, according to sentiments expressed by the RBZ’s governor in Wednesdays monetary policy review, expected to experience positive growth.