Of hyperinflation hangover and insatiable greed

THERE are several issues which can lead to failure of a country’s currency; from weak economic fundamentals to political unrest. In Zimbabwe, inflation figures started to soar to uncomfortable levels in early 2000 and reached a climax in 2008.

The Zimbabwe dollar had unofficially ceased to be used in transacting several months before the adoption of multiple foreign currencies in 2009.  Business transactions were being settled in barter arrangements where commodities were being exchanged. This was before fuel coupons became the defacto currency because they could easily be exchanged for greenbacks.
The introduction of the multicurrency system was widely welcomed as it helped both households and corporates plan and budget their expenses. To retailers, it meant they were now able to adequately stock their outlets through the importation of merchandise, with downstream benefits to the consumer in the form of ready access to once scarce commodities and the resumption of price stability.
Many sectors of the economy now have a general appreciation of the stability of the widely used currencies, namely the South African rand and the US dollar. Prices are now half of what they were when the use of multiple currencies commenced and profit margins of, say, 10% are currently more than acceptable. Increased competition and improved availability of products has been
the main factor for the decline in prices.
While everyone cherishes the end of hyperinflation, it would seem that the general populace is yet to rid itself of the hangover.  This is particularly clear in the investment sector where expectations of high returns remain apparent. Equally, depositors require higher returns for their term deposits. This mindset can be attributed to two reasons. Firstly, during the hyperinflationary period, the stock market became a hedge against erosion in capital values. 
For investors at the time, an overnight increase in a share price of 100% was not unusual.  For instance, Delta traded at Z$320 000 on October 30 2009. The following day, the counter closed at Z$2 200 000 representing a jump of 587,5% overnight!  It is however obvious now that with share prices quoted in US$ and annual inflation at 4,1% in July, such jumps will be most improbable. 
Secondly, after the change in the monetary regime, confidence in the financial sector is still low as many depositors are still concerned about their Z$ deposits which were rendered worthless after the changeover to hard currencies. 
Although banking sector deposits have substantially increased, most of them remain short term to the extent that banks are lending out less than they would like to. The perceived high risk attached to investing in the local financial markets has seen prospective investors demanding premium returns in comparison to other markets.
The demand and, or, expectation for unrealistically high returns is a relic of speculative behaviour that individuals developed during hyperinflation. While outsiders are drooling over the prospects of earning money market returns of 10% per year in US dollars, the local investors still regard that rate to be too low. Likewise, whereas equity investors in other markets jump up and down in excitement if they earn 5% over three months, local investors would want more than that. This is made worse by hyperinflation conditioned analysts who still regard a daily upward movement of, for example, 2%, as marginal while their Wall Street colleagues call that a market rally.
The economics of real and nominal increases clearly differentiate the two.  Although the move in Zimbabwe dollars was huge in absolute terms, the inflation levels were equally escalating at similar levels or even surpassing it, hence no real return was being achieved. 
However, with US$ inflation figures fixed over a significant period of time, any increase in investment values represents a real return on investment.
It is still lost on many that the current conditions of economic stability mean that share prices will only move if there are supportive fundamentals for the economy, industry and the company.
Price will no longer move in succession because the country is not in the hyperinflation mode anymore. Unfortunately, the local investor has failed to detach himself from the multiplication of zeros on investment values which occurred during the Zimbabwe dollar era.
It is not uncommon to get an enquiry from a person intending to invest who asks a question such as: “If I invest US$150 today, when should I expect it to double in value?” Or worse still, “which investment can earn me 100% return in six months?”
Even after giving clarification to such an investor that no one can give such assurances and further explaining the risks of capital loss in some investments, they still become irate at the advisor when they lose some of their capital.
Put bluntly, hyperinflation bred an atypical calibre of investors who ordinarily should not have come anywhere near the financial markets. They are either too ignorant about investments, or excessively greedy, or both. Usually, the second aspect is more apparent than the first.

 

 

Linda Tsarwe