Erich Bloch: Near-zero Business Confidence

THE only thing in Zimbabwe that is declining at a greater pace than the economy is the level of business confidence.

 

Almost without exception, the business community is naught but doom and gloom, depression and despondency, pronounced pessimism and filled with a near-absolute conviction that economy is beyond recovery.
  

The overwhelming majority of Zimbabwe’s “captains” of commerce and industry have totally convinced themselves that the entirety of the economy will very imminently cease to exist, that their businesses will be wholly destroyed, that they will be joining the vast ranks of impoverished, and that the economy, their businesses, and their anticipated loss of any and all wealth, is wholly beyond redemption.
Admittedly, there are a few (but only a very few!) of a different frame of mind. They are not oblivious to the appalling circumstances prevailing in Zimbabwe. They are wholly aware of the dismal lack of genuine democracy, of the endless, contemptuous disregard for the fundamentals of the rule of just law, of the abysmal disregard for human and property rights, of the extensive abuses of power and the gargantuan prevalence of corruption, of the worst ever sustained hyperinflation ever experienced, and of the ongoing contraction of the economy.
And they are aware that these are but some of the immensely great negatives that characterise Zimbabwe today. But they do not allow it to blind themselves that, in time, there will be transformation. They do not myopically fail to recognise that a metamorphosis will occur, although inevitably it will be long and slow. They recognise that there are very intense problems, but perceive problems to be challenges which must be addressed, and potentially transformed into opportunities.
 It is not that they are hallucinatory optimists, but are determined to be realists who neither succumb to unfounded wishful thinking, or to misplaced or exaggerated pessimism formed from narrowed vision which conceals the evidence of history that ultimate change, and therefore recovery, is undoubted. (They do, however, recognise that further grievous deterioration may well precede the assured ultimate upturn and that it is vitally necessary to strategise for survival through the period of further decline).
However, so extensively widespread is the pessimism that the distressed perspectives of the despondent majority can well turn their prophecies into realties, thereby greatly exacerbating the diabolically bad prevailing circumstances.
That pessimism is blinding all too many of the business community from seeing opportunities of overcoming, or at least of minimising, the innumerable afflictions bearing down upon the operations of their enterprises. In very many instances, that pessimism is also stimulating business decisions which are only knee-jerk, reflex reactions, without considered evaluation of the consequences of those decisions. There are very numerous examples of such ill-considered, grossly counterproductive decisions.
One such example is that a large number of businesses in general, and industry operations in particular, recurrently decide to discontinue sales, notwithstanding  their holdings of stock, on grounds  that anticipated replacement  costs exceed attainable sale prices for those existing stockholdings.
In striving to avoid losses upon stock replacement, the enterprises disregard the magnitude of continuing cost, inclusive of salaries and wages, rents, finance charges, costs of utilities, and very diverse administrative costs. In the absence of sales, there are no revenues to cover those costs, and therefore seeking to avoid an envisaged future loss, immediate losses are incurred.
 Instead, those businessmen should recognise the adage of decades past, that “no one makes a loss by taking a profit” and, therefore, as long as the existing stocks are sold at prices above cost, a profit is realised which can service the fixed costs. Thereafter, upon more costly replacement of stock, the replacement stocks  must be priced above their cost, thereby enabling profit to cover ongoing fixed costs.
In like manner, all too many businesses seek to pre-empt future inflation by pricing their products on a foundation of estimated replacement costs, instead of the actual costs sustained.
As the cost inflation is futuristic, such inflation does not at all at that time prevail within the economy, resulting in the prices of the products being considered by customers to be excessively high, with many such customers therefore not purchasing the goods, leaving the enterprise possessed of unsold stocks, without the revenue flows required to fund operations, let alone to yield profits.
Moreover, to such extent that sales are attained, albeit of lesser quantities than intended, the seller is fuelling inflation, and that inflation adversely impacts on the seller’s operating costs.
Yet a further example is that of the fortunate few (many miners and other exporters) who directly or indirectly trade foreign exchange, other than within the interbank market. Normally, rates of exchange are driven by the relationship of availability to demand, as is the case with any commodities in a normal economic environment, and for an extended period of time that was certainly so in Zimbabwe’s foreign currency alternative markets (usually known as the parallel market).
But most of those trading their foreign exchange now determine their selling rates by aligning them to  their projections of forthcoming  inflation, or using indices such as the Old Mutual  Implied Rate (OMIR), which is a notional rate determined by correlating  the price  of Old Mutual shares on the London Stock Exchange with that on the Zimbabwe Stock Exchange. But those share prices are driven primarily by perceptions of political developments, both positive and negative, and by the performance of Old Mutual’s operations in diverse countries, resulting in immense fluctuations unrelated to inflation.
The results of the sellers of foreign exchange resorting to inflation or OMIR rates to determine selling prices of their foreign exchange have, in recent weeks, been a sharp decline in demand for that foreign exchange. This is due to intending purchasers not having the working  capital resources to fund purchases,  or to their recognition that the magnitude  of the foreign exchange  costs would, when incorporated into the selling prices of their goods, be such as would make much of those goods unsaleable.
Concurrently, in the few instances that trades are effected, they are yet further fuellants of the horrendous hyperinflation which is destroying the Zimbabwean economy. The foreign exchange sellers are victims, together with all others in Zimbabwe, of that hyperinflation, so effectively they are allowing avarice to shoot themselves in the foot.
These are but a few of many examples of how many businessmen are destroying themselves and the economy, and thereby unintentionally according substance to their excessive  pessimism, which has reduced business confidence to near zero levels, also therefore  negatively  impacting upon  much-needed investment, which is a fundamental for a substantive economic turnaround.
The imbalance between the many, many pessimists, and the few optimists, and the even lesser number of realists, is reminiscent of the writings,  more 150 years ago, by Charles Dickens, in A Tale of Two Cities, when he wrote: “It was the best of times, it was the worst of times,………….it was  the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair,  we had everything before us, we had nothing before us………..”.  Most of Zimbabwe’s business community align their perspectives with the second part of each stanza, and thereby preclude the first part from materialising.

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