HomeBusiness DigestCame with a bang but faded away quietly

Came with a bang but faded away quietly

By Admire Mavolwane



“THERE are too many data gaps. We went to too many shops to observe and so compilations have not been completed.” These sentiments were expressed by

the acting director of the Central Statistical Office (CSO) when he was explaining the delay in the release of the October Consumer Price Index (CPI) inflation figures. A fair amount, if not all of the goods that constitute the inflation basket are not available in shops. Whilst the goods may not be available on supermarket shelves, they can be found on the informal market. Unfortunately the methodology of enumerating the inflation figure does not allow the CSO enumerators just to take the prices at which the goods are available but restricts the survey to the formal shops. In other words the CSO does not recognise the informal market.


So the CSO is in a dilemma. Should it defer the publication of inflation figures until such time that goods are available on the formal markets or should it from now on operate two baskets; one for the formal market and the other for the informal market prices, in the same manner as the exchange rate system is working now. The price control blitz was launched on June 25th this year. By end of July the shelves were virtually empty. The question then is what products were surveyed to arrive at the August, let alone the September CPI, inflation figures.


Whilst Zimbabwe had been an inherently and markedly different place to what is expected in the other parts of the world, after June 25, the country mutated into yet another, unique animal. This mutation was yet another unintended consequence of the price controls. An early acknowledgement of this by the planners will be very important.


The other side to it is whether the inflation rate is still objectively relevant, particularly in the light of Statutory Instrument 159 of 2007. According to this law, the indexing of prices of goods and wages to the CPI, the exchange rate depreciation or any other such proxy is discouraged. This leaves the inflation rate with fewer uses other than being an indicative figure and the basis for producing the famed inflation adjusted accounts.


On November 6 2003 shareholders of Trust Holdings (THL) voted overwhelmingly in favour of the acquisition of a 15% equity shareholding in First Mutual Limited at a consideration price of $23,2 billion or US$10,2 million. Shareholders were also asked to approve the issue of 80 million shares, equivalent at that time to 17% of THL, for $245 per share to FML. This 17% stake was valued at US$8,6 million. These two were the main resolutions for that day. Other secondary resolutions included the merging of Trust Asset Management and First Mutual Asset Management (FMAM), at the same time FML would take 40% equity in the stock broking unit Trust Corporate Securities. The other transactions would see FML taking a 40% stake in Trust Discount House and THL would control 40% of FML Reinsurance.


At the end of it all, the strategic partnership was such that THL ended up with 15% of FML, whilst FML controlled 25% of THL whilst joint partnerships also existed at business unit levels. The strategic agreement precluded FML from venturing into banking outside its interest in THL whilst THL could not set foot in the insurance sector except through its alliance with FML. When all the netting off had been done, THL paid $6,2 billion (US$2,7 million) to FML.


At about the time that the strategic alliance was bedding down, disaster struck. Trust Bank, which was THL’s flagship, ran into difficulties in January 2004. The central bank eventually pulled the plug end of September 2004, after eight months of nursing it. FMAM went under after it was exposed to ENG Capital managed, Century Discount House, which also fell by the way side. The asset manager was also exposed to Royal Bank. Trust Discount House was still born. Trust Corporate Securities succumbed to the contagion effect, which was exacerbated by some hands which were looting the cookie jar. As fate would have it, by the beginning of 2006, THL had lost all the business units in which FML was a strategic partner. On the other hand FML had only lost FMAM. In other words THL by and large had become an impaired bride, whilst FML was for all intents and purposes still the groom that it was in 2003.


The relationship obviously further deteriorated when the management faces on either side changed, with FML seeking to move forward, whilst THL was obviously indifferent. In fact THL had much bigger fish to fry. As in any divorce, assets have to be shared in order to achieve the disentanglement. The same process that was embarked on during the 2003 courtship was engaged in. Assets on either side were valued and the netting off was done, with October 17 2007 being set as the effective date of parting ways. This time around, FML had to pay THL an amount which is rumoured to be approximately US$4,1 million.


At the end of the day, it would appear that THL came out of the relationship at a profit unlike FML, both in absolute dollar terms and on an opportunity cost basis.


This divorce settlement took place at a time when Kingdom and Meikles are in a serious courtship, with the final consummation of the relationship having been delayed by reservations from one shareholder.


Last week we had the Minister of Finance presenting the 2008 budget presentation. The total expenditure figure for 2008, estimated at Z$7 840 trillion is high sounding but is only US$2,4 billion, almost half of the US$5,5 billion the Industrial and Commercial Bank of China will expend in acquiring 10% of Standard Bank of South Africa (Stanbic). It was just like changing numbers in an old template, and as usual, the budget is based on the most optimistic assumptions, whose probability of materializing in practice is on the low side. The figures are now just numbers of which the information content is minimal, except that we will have more and more inflation going forward.


* Please note that the conversion to US$ was done using the Old Mutual Implied Rates applicable on the day mentioned.

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