Zim’s economics of defiance

AN analysis of the main economic, financial and business stories in the past week and going back a few weeks earlier, reveals a pattern: economics of defiance.

Let us look at the illustrative instances.

First, you have the case of Barclays Zimbabwe. Its market capitalisation has soared by 12% since it was announced that the Malawian banking and financial outfit, First Merchant Bank (FMB), had snapped up 68% of the stake of London-based Barclays Plc in Barclays Zimbabwe. That market capitalisation is a premium of 26% over Barclays Zimbabwe’s book value or equity.

Ordinarily, such a surge in market value is a statement of confidence in the management team of the bank, the sureness that management has the strategic gravitas to create value in the foreseeable future.

It is ironic that the future status of Barclays Zimbabwe is uncertain in terms of management, given that there is a prospective new majority shareholder who might ring in the changes. Furthermore, the soon-to-be majority shareholder has a chequered history of questionable corporate governance infractions.

One of FMB’s top-two shareholders was a majority shareholder in a collapsed East African bank, where it was both the chair and majority shareholder. The bank collapsed under the full gaze of the said chair, with reckless lending, including sub-prime lending at the centre of the banking failure.

Barclays Zimbabwe is unlike FMB’s other three banking investments in Zambia, Mozambique and Botswana. Barclays Zimbabwe alone is practically the size of FMB in terms of balance sheet size (about US$500 million) and in terms of profitability (circa US$10 million).

You would think that investors in Barclays Zimbabwe would be cautious. Instead, they seem to be giving a big vote of confidence with their purses. Maybe they know what we do not know.

It is quite ironic that equity investors on the Zimbabwe Stock Exchange (ZSE) have well-nigh shunned the banking sector, preferring to channel their money to counters other than banking. Banking counters have not benefitted from the current Bull Run on the Zimbabwe Stock Exchange (ZSE).

Barclays is a notable exception. It’s future uncertain, and with the low investor confidence in the banking sector, investors still think it is a safe bet. They are placing a wager. The question is: is that ante based on the dice or on economic rationality? The former seems to be more plausible. Welcome to economics of defiance.

Second, the bull run on the ZSE is favouring traditional blue chips. The irony is that the majority of the supposed blue chips have not been performing well in the past three years.

Take Delta, for instance, a major beneficiary of the hot money. Its revenue, profit after-tax, return-on-equity and operating income-to-net sales (operating margin), all follow a hill-like profile from 2012.

Delta’s revenue profile: US$538,2 million (2016), US$576,5 million (2015), US$602,2 million (2014), US$631,3 million (2013), US$554,8 million (2012). Its profit-after-tax evolution: US$80,1 million (2016), US$92,8 million (2015), US$107,2 million (2014), US$104,1 million (2013), US$75,2 million (2012). Its return-on-equity profile: 16,4% (2016), 20,1% (2015), 25,6% (2014), 30,1% (2013), 27,9% (2012).

Equity investors, clearly, are getting less and less bang for their money. Its operating margin progression (more like regression): 20% (2016), 22,1% (2015), 25% (2014), 24,7% (2013), 20,5% (2012).

Econet, another historical bellwether, has its revenue and earnings marching furiously south, with its cash cow, voice, producing less and less milk, thanks to disruptive innovators who are the modern-day empire builders, the keyboard-wielding Alexander the Greats, Cyruses and Julius Ceasars.

The basis for Econet’s sudden swelling of market-to-book value is surprising since we have no known solution to its plummeting voice revenues, with the new saviour, data, not increasing fast enough and it’s a tightly contested space. You have a listed insurance giant last week swaggering that it has performed very well on the basis of investment income flowing from a good share performance. Where is the value of insurance coming in such a difficult economic environment?

I am not begrudging these historical bellwethers’ blessings from the investing community’s hot money. My point is simply this: At a time when economic indicators are hurtling south with greater speed, by what magic are investors expecting Delta and Econet to defy the odds and sweat equity better in a more hostile economic environment?

There is only one answer here: financial desperation on the part of institutional investors who have no other quality investment options for their clients’ money is driving them to stash cash in bellwethers of yesteryear; it’s more of gambling than economic rationality.

It’s a case of selecting the better of the worst. It is an exhibition of a well-known psycho-economic phenomenon called threat-rigidity. Threat rigidity simply says firms faced with a threat of impending losses resort to familiar responses to try and mitigate the threat. That is the psychological phenomenon driving the ZSE bull run. Economic desperation can result in the economics of defiance.

Third, you have banks recording profitability in a depressed economic environment yet investors are shunning the banks like a plague. Is it not ironic that historical blue chip counters outside banking, though performing badly, are rewarded by investors and banks recording profits are ignored? Is that not economics of defiance?

Economics of defiance is our now our byword. We reinvent rules of money; we seek to retire our national debt by borrowing more expensively. We want to expunge cheap debt by replacing it with more expensive debt. Which law of money is this? At which business school is this taught? Help me.

We live beyond our means as a nation and, without a sense of shame, budget beyond our income. We know what Gresham’s Law is: bad money drives out good money. In all our indigenised brand of intellect that defies unbending laws of money, we somehow think Gresham’s Law will bend to our will. Where have the greenbacks gone to?

We know what the trilemma is: if you fix the exchange rate, you will have to accept loss of independence of financial policy and control over the flow of money externally. Yet we went ahead and defied the trilemma. Now even the bond notes are in short supply.

Have you not heard of the law of supply and demand: you drip feed bond notes and make them scarce and their value becomes attractive to the foreigner who holds foreign currency.

We then wonder why when we cry that we are supplying 14% of money supply as hard cash like other countries and yet we have cash shortages. You cannot cherry pick laws of money, defying others and liking others, expecting that the theoretical results of the laws you like will follow. The laws are a system, not to be taken apart at will.

There are no law enforcement agents that will apprehend you for defying the laws of money. He who defies the laws of money is both a witness and a judge to his very law-breaking; he sentences himself to poverty, financial and economic headaches and economic depression (pun is not intended).

Unfortunately, painkillers and sedatives for economic headaches and depression are yet to be invented. The cure for economic headaches and depression is simple: obey the basic rules of money.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer-reviewed academic journal.

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