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Investment options under hyperinflation

By Nhlanhla Nyathi

THE introduction of currency reforms initially through Operation Sunrise 1 in August 2006 and subsequently through Operation Sunrise 2 in December 200

7 should have sent clear signals even to the hardliners in denial that the country was in trouble on the inflation front.

These symptomatic responses from the RBZ were clear signals that the country was entering the murky hyperinflation waters, wherein prices of most commodities increase by more than 150% per month.

Since the expulsion of Zimbabwe from the funding comfort of multilateral institutions, the economic trading environment has been extremely unpredictable and characterised by crisis management from government decision making structures and several other stakeholders engaged in the Zimbabwean economy.

Arguably Zimbabwe will go down in the history books as one of the few countries that have gone through a hyperinflationary environment without experiencing a war or civil unrest.

Many of the other countries even within the confines of the African continent that have experienced hyperinflationary conditions of the same magnitude have either been victims of civil unrest or outright war.

A recent example of an economy within the African continent that experienced severe inflationary conditions, although because of civil unrest is Angola from 1991 to 1995.

In early 1991, the highest denomination of the local Angolan currency was 50 000 kwanzas and by 1994 it had risen to 500 000 kwanzas because of inflationary pressures.

In 1995, the government instituted currency reform mechanisms reminiscent of Operation Sunrise 1 of Zimbabwe that saw 1000 kwanzas exchanged for 1 kwanza-readjusto.

Further currency reforms were instituted in 1999 through the introduction of 1 new kwanza for 1 million kwanzas-readjustos. The overall impact of hyperinflation was 1 new kwanza = 1 billion pre 1991 kwanzas.

Although the RBZ, the second time around under Operation Sunrise 2 resisted the pressure to slash more zeros from the bearer cheques issued in August 2006, inflationary pressures still remain overbearing and require some attending to.

While the RBZ has for the meantime found a convenient method of camouflaging the effects of inflation through cosmetic changes in the monetary system, individuals and corporate entities that bear the brunt of the worn buying power of money need to structure appropriate investment strategies that protect their hard earned savings.

Prior to the economic recession and the hyperinflationary environment, Zimbabweans were used to straight forward investment programmes structured by their personal bankers or some other financial advisor. Investment programmes focused on interest- bearing investment plans, retirement plans, annuity plans, and pension plans. The stock market was rarely pursued by individuals and perceived as a long term investment vehicle.

Most of these structured investment plans were rendered impotent by the hyperinflationary environment that systematically eroded the accumulated savings at the fruition of the various investment plans.

Most people that had reached retirement age found that they could not retire comfortably on their inflation-eroded pensions and were forced either to live in abject poverty or to continue working beyond their retirement age to make ends meet.

To survive in the new dispensation, people structured their own home-made investment programmes that entailed piecemeal investments in foreign currency while others left formal employment to establish small business operations in the informal sector as traders and dealers.

On the upper end of the class divide, the ultra rich kept a portfolio of property investments in residential and commercial properties.

The informal sector provided a resourceful safety-net for the lower end of the market that could then afford to adjust their trading stock to replacement cost linked to inflation. Many others joined the stock market band wagon that was experiencing a boon because of regular upward adjustments of share prices in line with replacement cost of plant and machinery held in balance sheets of most listed companies.

It appears people in one way or the other had found their own home structured investment plans to weather the hyperinflationary environment albeit excluding the involvement of financial advisors and traditional financial institutions.

Many of these home-made investment plans involved transacting outside the banking system because the financial services sector had largely remained dormant in pioneering the development of alternative investment programmes best suited for the hyperinflationary environment.

The RBZ governor, Gideon Gono, recently lamented the debilitating culture of many Zimbabweans transacting outside the banking system, which he blamed for causing $65 trillion to go missing from the official banking system. If such moneys are to come back voluntarily to the banking system, the RBZ and traditional financial institutions should structure innovative tailor made investment programmes to compete against the home-made investment programmes that people had devised for themselves. There is no need for the financial services sector to re-invent the wheel in pursuit of that objective.

It is quite clear that the investment objective under hyperinflation is to protect the real value of funds invested and offer some margin over and above the real amount invested. In most cases such objectives would point to an obvious investment in property and private equity funds.

It is no surprise that many people have flooded the stock market, because in essence it probably is the only viable unitised investment option within the formal banking system that keeps up with inflation trends.

The money market is used by many primarily to facilitate cash-flow management of funds already in the formal banking system and is hardly perceived a potent investment option.

Unfortunately, our market has not kept up with global investment trends. Other more advanced markets, although very stable in their nature have devised innovative financial products that would suit our market extremely well at this point.

The concept of unitised pooled funds in the form of property unit trusts, real estate investment trusts, and unitised private equity funds have gained wide spread acceptance in other markets because of the higher returns that they offer relative to other asset classes.

The beauty of private equity unitised pooled funds is that it links various investors who help each other in accumulating financial resources that can be invested in private companies in their growth phase of their life cycle for the benefit of the unit holders.

Studies have shown that such private equity funds outperform stock markets and other asset classes primarily because of the exponential growth experienced by the target companies.

The same also applies to pooled funds in property investments that can be listed on stock exchanges to achieve liquidity convenience for unit holders. Going forward, Zimbabweans in the diaspora will find that these are good investment options for them as they normally do not have the time to structure and identify good investment opportunities for themselves. Zimbabweans that had found solace in the informal market will also find these options viable for them.

Once Zimbabwe recovers from the economic recession, the economic trading environment will once again be dominated by big businesses and multinational companies that will probably swallow up smaller players and informal traders leaving most operators with no option but to return to formal employment.

Distortions will cease to exist forcing the culture of deal making primarily through the parallel market to end. In that event, it would be better to be strategically invested in some well positioned unitised fund with investments in diversified and well capitalised entities with potential for providing significant returns.

* Nhlanhla Nyathi is Director of LCE Capital, a private equity firm. He can be contacted on 0912250092.

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