Imaara warning shots on Zimdollar assets

IMARA Asset Management (Zimbabwe) has warned against holding on to Zimbabwean dollar-based (Zimdollar) assets, amid a possible return to the multi-currency regime in the aftermath of the Covid-19 global pandemic.

Melody Chikono

Imara CE John Legat, in the company’s quarterly update, said there are fears that significant gains in Zimdollar property values pushed through by various pension funds during 2019 and an aggressive move into long-term alternative investments (including land banks) have rendered a number of pension funds illiquid.

Pension fund liquidity requirements come from their equity investments, implying that a greater proportion of such portfolios will be invested in highly illiquid assets as equities lose value.This, according to Legat, does not bode well for the future of those particular funds.

The Zimbabwe Stock Exchange (ZSE) rose strongly during the first quarter, nearly doubling in value in Zimdollar terms.

This means those listed on the ZSE therefore constitute a larger proportion of pension and insurance fund assets which will lose real value.Legat said this puts the regulator, the Insurance and Pension Commission (Ipec), in a difficult position.

“In line with Jon Chew’s paper, we ultimately expect a return to the multi-currency system but without the ZWL. We therefore have to be very aware of the risks of holding any ZWL asset that could lose all of its value as occurred in 2009,” Legat said.

“This puts the regulator, Ipec, in a difficult position. On the one hand they are attempting to force pension and insurance funds to meet the prescribed asset levels (20% of market value for pension funds) but on the other, they are guiding pension fund trustees not to sell down strongly performing assets such as equity and property under poor market conditions.”

In a recent paper, Ipec issued guidelines for the insurance and pensions industry on “adjusting insurance and pension values in response to currency reforms”. It stated that insurers and pension funds should use all means necessary to avoid selling assets under poor market conditions.

It also stated that insurance companies and pension funds should prepare analyses of expected asset, liability, income and expenditure cash flows in order to properly manage their liquidity position and avoid forced sales of assets when market prices are depressed.

This implies that only new cash inflows into pension and insurance funds could be directed toward prescribed assets which will not be enough to raise prescribed asset levels to 20%.

“On the other hand, pension fund trustees will be unwilling from a fiduciary perspective to allow their investment managers to invest in assets that will lose real value relative to the likes of property and equities. We fear that the very large gains in ZWL (Zimdollar) property values pushed through by various pension funds during 2019 and an aggressive move into long-term alternative investments (including land banks) has made a number of pension funds illiquid,”
Legat said

Asset values based in US dollars remain very low by historical standards and are arguably lower now than they were when the economy crashed in 2008 with the economic outlook now further complicated by Covid-19.

“Back in 2009, the Government of National Unity became an ‘enabler’ for the economy through liberalisation, as opposed to legislation and regulation, and hence allowed the private sector to rebuild the economy with the assistance of foreign investors. As the economy started to grow rapidly, so too did asset valuations in United States dollar terms.

“From our perspective, the same medicine is now required in 2020 and beyond. We are not aware of any other option,” Legat said.