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Turf Wars That Could Destroy Investor Confidence

THE current spell of political uncertainty in the country could not have come at a worse time. Investor confidence had improved considerably following the crafting of reasonable economic policies early this year.

Both the private sector and government hosted several investor conferences within and outside the country aiming to attract capital.

At all of these meetings, key politicians in the country pledged to work towards sustaining the economic revival. Even some known sceptics were beginning to warm to the new government as it scored some modest achievements in the first six months albeit with known squabbles within.

A recent survey by the Confederation of Zimbabwe Industries (CZI) revealed that on average capacity utilisation improved from below 10% in 2008 to 32, 3% by August. Some companies that had closed shop altogether resumed operations while those that had not re-opened yet were hoping to do so soon.

The recovery story which a year ago seemed a pipe dream has been slowly becoming a reality. Early this year the economy was projected to grow by 3, 7% but the estimate has since been reviewed upwards to 7%. This is because some sections of the economy have so far recovered faster than was predicted.

The effects of the positive outturn in the real sectors also filtered onto the stock market.

Equities had a positive bias until a fortnight ago when the disagreements within the inclusive government mutated into a crisis. From a dip of US$1, 2 billion in March the market capitalisation peaked at US$4,3 billion this month driven by foreign buyers.

With locals being net sellers the market had largely been supported by foreign investors who were piling into heavily capitalised counters in anticipation of an economic turnaround.

It is believed that above 80% of the trades on the stock exchange after dollarisation have been coming from foreigners.

The remaining 20%, estimated at US$1million per week, are trades by locals. New money from domestic investors on the market is still negligible. Instead, most of the trades by locals are switches from one counter to another plus sales of shares mainly to foreigners to raise liquidity.

Value of trades has been averaging US$1m daily and this is above average for an economy whose gross domestic product (GDP) is projected at US$3, 4 billion for the year as a whole. In fact this makes the ZSE the fourth most active market in Sub-Saharan Africa after South Africa, Nigeria and Kenya.

It is a no-brainer that if the political standoff is not resolved quickly and amicably the country could experience another spell of capital flight.

This is not desirable considering the effort that was put in to retain old capital and to attract new money. This time around the capital flight could be more severe as the country would have proved that redemption is beyond its current capabilities.

While it takes one wrong decision to destroy market confidence it takes a much longer time and more effort to rebuild it when it is lost.

The costs of lost confidence are usually much higher and more painful to bear. For instance corporate deals that were currently under consideration will most likely be put on hold until the dust settles. Few investors would dare to risk their money where political tension is high.

This would be a major setback to companies that were hoping to attract new funding from existing and potential investors. Several listed companies had lined up rights offers in a bid to raise funds for working capital and expansions of their operations.

Others had reached advanced stages with private placement arrangements to prospective investors in exchange for cash.

All these initiatives may amount to nothing if the political tension is not quickly diffused. If the companies fail to raise capital they will not be able to expand capacity usage. Tax revenues which hitherto have been rising will decline again in the process hampering service delivery by government.

More people will be laid off while products may disappear from the shelves once more. In the end everyone will be a loser.

The uncertainty surrounding the survival of the unity arrangement has been at the heart of the performance of the stock market for months now. Risk averse investors were buying on recovery prospects while those unconvinced about the “inclusive” arrangement did not bother coming in at all.

Those who invested, say, in March when prices were low, have so far amassed high returns. However if the environment deteriorates further, all these gains could be quickly wiped out. Investors, being rational beings, usually do not wait until they have lost everything.

The normal thing is to cut losses and move on. Losing capital at this point will be akin to moving back ten big steps after everyone celebrated two forward steps achieved since a coalition administration was formed.

Ranga Makwata

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