Zim’s currency conundrum and implication on earnings

Respect Gwenzi:economist

SINCE its flotation in February 2019, the local currency has depreciated by 97% against the US dollar, which was the reporting and reference currency for Zimbabwe during the 10-year multi-currency era (2009-2019).

The loss in Zimdollar value has been very detrimental to Zimbabwe’s economic sanity. Production levels have significantly declined as evidenced by an economic growth of -10% (Equity Axis) in 2019 and yet another double digit negative growth rate for 2020. Companies have failed to retain similar volumes performance as demand tapered. Aggregate demand, which is a function of purchasing power and income growth, has moved adversely in line with inflation.

Annual inflation for 2019 was seen closing the year at 521% sufficing to push the economy into hyperinflationary territory. Into 2020 inflation has gone on to spike close to the psychological 1 000% mark at close to 800%.

The occurrence of high inflation has seen consumers foregoing a great deal of their purchases and in turn driving broad sector wide production and sales level down. Consumer facing companies such as Delta, which is involved in the production of beverage drinks, last reported that quarterly volumes suffered double digit loss in the three months period to June 2020. Lager beer volumes eased by 18%, while Sorghum beer volumes softened by 50%.

Only sparkling beverages showed a recovery. The company’s volumes performance has been on a cliff over the last two financial years, which coincides with Zimbabwe transitional period over which currency reforms and austerity were pursued. Other bigger brands also reported a sharp decline in volumes performance. Natfoods reported a double digit decline in volumes of 14% for the quarter to March 2020.

Volumes at Innscor’s bakeries division tumbled 40% in the nine months period to March while Colcom volumes eased by 13% over the same period. Consumer facing businesses have been hit harder as customers traded down the value chain, which essentially eat into margins and profitability. It is particularly important to note that the inflationary pressure emanated from exchange rate weakness. Producers seeking to protect margins would rerate their produce in Zimdollar terms at an exchange rate which for most of the time mirrored the parallel market.

It is clear that the hurdle around achievement of price stability is currency stabilisation. At the beginning of September, the Zimdollar achieved its first gains against the USD since the beginning of the auction trading system in June.

Beginning of September, the Zimdollar gained 0,1% curtailing a 10-week losing streak. Over the 10-week period, the Zimdollar lost an average of 5% per week. However as interestingly shown in the chart, the top and bottom bids showed a narrowing trend over the 10-week period. In the first five weeks, the bottom bid was however worryingly narrowing at a faster pace to the top bid.

Polated over a longer duration, this scenario would have seen the Zimdollar losing value at a similar or faster pace. Most Zimbabweans are concerned about whether the currency will achieve stability against other currencies or will remain on a free-fall.

Although there has been hope in recent sessions due to the reduced magnitude of inter-session depreciation, concerns are on whether the current momentum will be sustained. While there are still some off market trades, the level of trading activity currently going through the Interbank is convincing. Earlier concerns were on whether the supply levels could be sustained so as to anchor currency stability.

To establish potential stability two key factors are worth analysing, these being the level of Reserve Bank of Zimbabwe (RBZ)’s contribution to total market flows and the overall foreign currency inflows into the economy.

The bank’s exposure on the sell side has significantly reduced and private sector is now leading in terms of contribution, which is a healthier and more reassuring arrangement. On the broader forex generating side, Zimbabwe has achieved an average of US$17 million in export receipts a day between January and May 2020. This is comparable to an average weekly interbank demand of US$15 million over the last 11 auctions.

These statistics give comfort on the sustainability of supply over the short term given the bullish gold price performance in international markets, which further pushes upwards prospects of higher forex earnings.

Gold is Zimbabwe’s anchor export product contributing about 20% of total export receipts and is up over 30% year to date. However, sustainability will also depend on some factors such as money supply and fiscal stability.

Gold production for 2020 has been grossly lower than the prior year and way below target. Generally, we are encouraged by the Zimdollar but remain cautiously optimistic on the outlook given an unstable fiscus which is showing wide swings in either revenue or expenditure. For 2020 it is unavoidable that general sales levels will grossly lag prior year given the sharp plunge in currency, year to date, even as prior year sales were also depressed.

A significant contraction of 2019 sales was largely a result of austerity measures and monetary dislocations which saw the country experience chronic forex shortages, but for 2020, the sharp erosion in purchasing power will see the market experience deeper cuts in sales volumes of double digit magnitude.

However, from the sixth week onwards the two started to move in inverse manner with the top bid coming off at a faster pace while the bottom almost flattened. A flattening of the bottom bid represents subsiding demand or improving supply. To support the notion of stabilisation, overall bid allotments have improved from US$11 million in the first week to circa US$18 million by week 8. This demonstrates the strength of supply.

Hyperinflationary territory
The plunge in sales, without a corresponding swift realignment of costs, would naturally chop margins and drive net earnings weaker if not dire losses. As in 2019, these losses would be covered in fair value adjustments gains and exchange gains arising from exchange rate movements. If unadjusted for the 2020 earnings will show a grossly distorted bottom-line picture.

Gwenzi is lead analyst and managing director at Equity Axis