Not yet ready for investment?

WHAT a difference a year can make! Around this time last year international investors were piling into high risk assets such as stocks and commodities, buoyed by the anticipated recovery of the global economy.

The US dollar, then, had been deemed a pariah currency beset by the US Federal Reserve’s “reckless” printing of money to stimulate economic growth. The euro was in play amid a prevalent belief that it would hit the 2008 high of US$1,61.
It did not get to that level but strengthened nonetheless peaking at US$1,51 towards year-end. China, which is the dominant holder of US debt instruments with US$895,2 billion as at March 31, was beginning to get uneasy with the “quantitative easing” process in which the US Federal
Reserve printed dollars to reverse the economic recession.
A senior Chinese official, Cheng Siwei, former vice-chairman of the Standing Committee and China’s green energy chief, in 2009 was quoted in the press saying that Beijing hoped the Americans would change their monetary policy “as soon as they have positive growth again”.
“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies,” he said.
Less than 12 months later, it is the euro which is now on the back foot after the surfacing of a debt crisis in the euro-zone. Ironically the US dollar is strengthening on the back of the recovery of the US economy and the “flight to quality” as investors shy away from risky assets like stocks. It seems as if the Chinese have had a change of heart on their views on the dollar as evidenced by their renewed purchase of US Treasuries in the first quarter after almost six months uninvolved.
China’s holdings of US Treasury securities rose by 2% to $895,2 billion, the first increase since September 2009. For now it seems China’s call for the establishment of another international reserve currency to rival the US dollar is shelved. After all the euro that was touted as the next possible reserve currency seems to have failed its first real test.
As the global economy was coming out of the recession, Zimbabwe was also coincidentally emerging out of a decade long depression. The local economy was largely expected to quickly climb out of the hole. That growth looked possible a few months after adoption of multiple foreign currencies but all that changed when the politicians began digging in on their earlier promises of comprehensive economic and political reforms.
One year down the line, the economy is about or has entered into a period of stagflation marked by rising inflation and declining production. Capacity utilisation which rose nicely from below 10% before dollarisation to 35% by June 2009 remains stagnant at that level. For some companies it has since started falling again because of lack of affordable funding, low consumer demand and a plethora of other viability problems. Many companies had borrowed substantial amounts from local banks at high rates expecting to benefit as the economy expanded. Margins have come off significantly due to competition while sales volumes have also taken a dive, leaving many borrowers unable to service their debts. Rising defaults are discouraging the growth of credit in the economy and in turn further retarding growth.
The events of the past six months could have vindicated doubters who have always said this country may not be ready for investment despite a promising start in March 2009. Negotiations have not been able to nudge three parties to the global political agreement to agree on the remaining issues. This has plunged the whole country into uncertainty. Recent promulgation of empowerment regulations also added to investor panic.   The worst fear is that of expropriation of businesses in a similar fashion to how land reforms were executed.
To lower the negative perception this economy requires a major transaction involving a large global player to reassure investors. The country had an opportunity to do so with Zisco but instead, we are told, bids from Arcelor Mittal of South Africa, China Metallurgical Company and Jindhal Steel of India were rejected. They are too big which would make them dictate
favourable terms and that was unacceptable.
Please! Every business big or small wants favourable terms otherwise why bother committing capital. What is probably lost on the decision makers is that there is no small company that has the technology, skills and the amount of money required to bring Zisco back to its feet.
Strangely these rejected bids were from perceived friendly countries such as South Africa, India as well as China. Had the bids been awarded to any one of the short-listed companies, the country would have demonstrated its readiness to welcome more affable investors. But judging by the low key publicity afforded to seemingly positive developments such as the signing of Bippa with South Africa in 2009 and its ratification this month, perhaps even the so-called non-hostile investors may not be easily admitted closer to big monies unless they rope in acceptable empowerment partners. Who said economic prosperity was more important than patronage?

 

By Ranga Makwata

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