African Ceo's Weblog by AfricanShareholder

Christmas holidays can often be a scary ride

noreply@blogger.com (African CEO) — Mon, 21 Dec 2009 11:05:00 +0000

Rushing headlong into the traditional Christmas holidays can often be a scary ride. For Celsys, the roller coaster of our share price continues but the light is now clear at the end of the tunnel.

The Year-End results have come and gone, and the cold hard truth of operating in a dollarised economy has become apparent. Expenses are high, margins are thin and revenues are hard to find in a severely diminished market. The good news however is that we have capped opex, every month our revenues increase, every month our margins are being prised open, and we have continued to invest significantly in quality equipment to ensure our operations can compete.

Two weeks ago we commissioned four additional printing presses at Celsys print, including our first four colour press. We also expect to receive a new automated book binding machine next week, and our finishing and packing machines have been refurbished.

Our first 200 POS devices are on hand, our next ten new Diebold ATMs are on their way, and the first of our new Adondo Payphones and Timpa EVD devices have been received.

Even with the increased capacity at Print, the levels of work in progress are unprecedented, and the imminent re-introduction of our payphones has also meant that we won’t be shutting down over Christmas for anything other than the Public holidays. We will be hitting the ground running as we enter 2010!

So, while you relax over your Holiday Season festivities and contemplate the world in the next decade, rest assured that we are working day and night to protect and enhance your investment in Celsys.

Stay safe and keep in touch.

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

Dollarisation and the case for Unbundling

noreply@blogger.com (African CEO) — Tue, 01 Dec 2009 16:00:00 +0000

The only positive aspect of hyperinflation (if that is possible) is that if you, as a corporate executive, made the wrong business decision, rising prices would soon conceal that error. In the era of dollarization, that ‘get out of jail’ card has disappeared. Indeed in many industries, competition is leading to deflation making the task of management that much tougher. Further, businesses that suffered from stock theft during hyperinflation could also hide the problem. Once again dollarisation exposes such inefficiencies quickly. That stated, doing business operationally has become considerably easier under dollarization than before as we are learning from management reports and contacts. That implies that good management will quickly spot any inefficiencies in their business models and take appropriate action.

Indeed there will be many business models in Zimbabwe today that simply do not work in the new dollarized and competitive environment, but which managed to get by in a less competitive and inflationary environment. Such companies could well be those whose models were built on import substitution products. Such businesses need to be closed or remodeled so that they have a comparative advantage in the new environment.

Looking at the listed companies in Zimbabwe, there are a number of companies that are in effect holding companies of various different operations. Often there may be little synergy or correlation between each business largely because the structure of the group was a product of history, driven by former mergers or driven by economic imperatives. In Zimbabwe exchange controls and a lack of foreign exchange were such imperatives. A recent example would be Delta which acquired a controlling stake in Ariston in order to access much needed foreign exchange for their beverage operations. Now that the country has dollarised, there is no longer any need for Delta to own such a business and hence Delta management have rightly chosen to sell the company and utilize the proceeds for capital investment in their core business.

We believe that there is huge scope amongst the listed companies to undertake such restructurings especially given the need for capital and skills. One such mechanism is to issue shares in a subsidiary of the listed vehicle to a technical partner that has the capital and the skills. PGI undertook such an operation a few years back when it sold 40% of Manica Board to Steinhoff. The PG Board correctly took the view that PG’s strengths were in merchandising and distribution rather than in manufacturing. Should capital be required in Manica going forwards, a rights issue can be held at that level, which may or may not be supported by PGI itself. A similar option remains for them in PG Glass where capital could be extracted for the core merchandising business by bringing in a technical partner.

Where there is little or no synergy between the subsidiaries of a company, it makes sense to “unbundle” them. This is a great method to adopt should the major shareholders wish to remain invested in both businesses, whilst allowing the management of the ‘parent’ company to focus on the core business of the group. It further allows the management of the ‘spun off’ division to act independently. One of the largest examples of an unbundling internationally was in March 2007 when the US cigarette maker and food group Altria, unbundled their food division, Kraft in which they held 89%. A year later, Altria then spun off Philip Morris International which held the group’s global cigarette operations outside of the US. The original shareholders of Altria then owned a listed share in Philip Morris International, a listed share in Kraft and the remaining assets of Altria (being US cigarette operations and a 30% stake in SAB Miller). This had the effect of increasing shareholder value as the value of the three separately listed companies became more valuable than the original combined one. Kraft is currently bidding for chocolate maker Cadbury in the UK, since they can now raise capital by issuing shares, something that was not possible as part of Altria.

In Zimbabwe there are many opportunities for Group companies to unbundle a division (or divisions) that has little synergy with the core business of the group. One such way would be to issue the shares in that division to the shareholders of the main group in the form of a dividend in specie. That division could then be separately listed on the Stock Exchange so that the original shareholders can then decide whether they wish to retain or dispose of the division. Again, Delta did as much in 1990s when it spun out Pelhams, OK and ZimSun. Further, the management of that newly independent division can then act independently with regards seeking a technical partner or indeed look to make further acquisitions, as Kraft are doing with Cadbury. Such a strategy more often than not increases overall shareholder value, and especially if it is done in a tax efficient manner. It also serves to further deepen the Stock Market by adding a new listed company, that itself encourages trading activity and new investors.

Most Zimbabwean companies today require capital, either for working capital purposes or for long term capital investment. It makes little sense to shareholders for their management to issue shares for short term working capital needs, and one would hope that the boards of directors of companies, who represent the shareholders, understand these issues. Rather try to borrow or issue commercial paper (if its cheaper) or even a convertible bond instrument.

For long term capital, capital is available in the form of equity for listed vehicles, from existing shareholders and from new shareholders assuming the project makes sense financially. In addition private equity is available at a divisional level, which may or may not be in the form of a strategic partner as discussed above, or from foreign private equity investors. Imara has access to the necessary capital if the investment makes sense. Capital can also of course be raised by selling businesses or divisions which no longer fit the group business model as Delta has done with Ariston.

There is no doubt that shareholders will need to accept dilution if their businesses are to grow significantly from current levels through capital expansion. Rather have a smaller share of a much bigger pie!

John Legat

Chief Excecutive, Imara Asset Management

Falling ARPU's do not necessarily mean that our doom is imminent

noreply@blogger.com (African CEO) — Wed, 18 Nov 2009 07:06:00 +0000

Greetings followers (yes that includes both of you and my friend D)

As you know I have been on my travels, and have just returned from the annual get together of the telecoms industry in Africa, AfricaCom. All the usual suspects were there, plus one or two newcomers worthy of a mention.

Our sister company ForgetMeNot Africa, had a stand and were shortlisted for the best new technology of the year award, so well done to them. And I, as mentioned previously had the pleasure of presenting and discussing the issues of tackling falling ARPU’s in one of the event workshops. I also spent some time chatting to James Middleton, editor of Telecoms.com, a transcript of which found it’s way into the event journal and which I feel is worthy of repetition here… so sorry if you’ve already read it!

JM:

What are the main points and conclusions you will be making in your presentation?

GG:

Falling ARPU's do not necessarily mean that our doom is imminent.

Mitigating against falling revenues must be addressed from both ends of the equation, i.e. increasing subscriber base and reducing costs.

Increasing the subscriber base requires radical new thinking for many large Telco's and there size may actually work against them as the leaner more nimble competitors find ways to out-maneuver the big guns.

JM:

At present, Africa leads the world in mobile growth. But when will that growth start to slow and how can it be countered?

GG:

The untapped parts of the African market are definitely at the low revenue end so whilst there is a large pent up demand for mobile services, the speed of adoption will be directly related to the abilities of the industry to continually reduce the cost of access devices and available services.

In my view the growth is unlikely to slow over the next year or two, but after that networks will need to look beyond mere cost reduction to mitigate against the slow down.

Consolidation among the 4th, 5th and 6th networks in African countries will become essential for their survival.

JM:

We've seen some big regional merger proposals fail recently. Does the African mobile sector still offer potential for foreign investment?

GG:

Yes. There are opportunities in infrastructure ownership, (independent ownership of shared towers for example) and in strong brand led mobile services (MVNOs) and in the field of mobile content, which is relatively untapped in most African markets.

Internet access via the undersea cable network rolling out at present will result in a quantum leap in available resource for content download and I anticipate a mini explosion in this space.

Foreign investors will also still find opportunity in consolidating the late entrants into the various markets.

JM:

Are there enough home grown investors within Africa?

GG:

There are plenty of passive investors, but active indigenous telecoms operators are often left behind by the sheer speed of evolution of the industry and the scale of investment required to succeed.

JM:

What can the African communications sector teach the rest of the world's telecoms markets?

GG:

How to run low ARPU operations in very hostile environments....

JM:

How well are the region's governments responding to the needs of the continent's telecoms sector?

GG:

If one is to generalise the answer is very poorly. There are exceptions, but the general bureaucratic quagmire and punitive tax regimes that operators often find themselves in can be a serious hurdle. Many governments are threatened by the access to information that telco's can offer, whilst others recognise the value but also see it as a cash cow for the fiscus.

JM:

Which three carriers with interests or assets in Africa are worth watching over the next year and why?

GG:

Well Zain's on again off again sale of African assets is going to be strategically important for the continent. At this stage it looks like the group as a whole may have a change in control, which could lead to bigger and better things for the company in the year ahead.

Also, MTN's failed "merger" with Bharti will leaves them 100 million Rand out of pocket and no further ahead with their growth into Asia aspirations.... so what will they do next?

At the other end of the scale, there is TelecelGlobe who are also ones to watch. Having exited much of Africa, they have reorganised and are appear to be on the acquisition trail around the continent.

See you next time for a Christmas special!

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

The US dollar or the Rand?..... that is the Question

noreply@blogger.com (African CEO) — Tue, 20 Oct 2009 11:21:00 +0000

The adoption of a multiple currency regime in Zimbabwe as a part of the STERP reform programme has been a resounding success. Not only has it resulted in stability in Zimbabwe’s monetary system but it has in effect also led to a substantial easing in exchange controls. Inflation is virtually zero and doing business has become significantly easier. Coupled with the removal of price controls, Zimbabweans are beginning to feel like ‘normal’ people again, able to do what they want and when they want. Welcome back to the real World! Six months down the line there has been a noticeable improvement in activity. The past two weeks alone has seen a build up in traffic on the roads as fuel importers struggle to meet new demand. Construction activity, or basic repairs and maintenance, is plain to see in both the major cities and towns. Brick production is being increased as cement demand rises. For those who go about their duties on a daily basis, the changes are far less apparent than they are for those who fly in and out every few weeks or months. Foreign investors, of whom we see at least two a week nowadays, are staggered to see and hear what is happening on the ground, so tainted are they by the international and local media obsession with politics. Some of us have chosen to ignore the newspapers and the local airwaves, preferring instead to use our eyes and ears to understand what is really happening on the ground!

Monetary stability, an end to inflation and a sharp recovery in economic activity, has lead to a substantial rise in real wages as compared with those of a year ago under hyperinflation. That in itself has resulted in a large increase in volume demand for a whole host of products and services both in the towns and cities as well as in the rural areas. Higher volumes are leading to greater capacity utilization in industry whose profitability is improving. For those businesses already in profit, corporation tax revenues rise for the Government. Added consumer demand boosts VAT receipts and rising wages lead to higher PAYE receipts. In short, Government revenues should be increasing by the month, numbers that we hope will be revealed during the Budget next month. Higher Government revenues imply that Government expenditure can also rise under the cash budgeting system. That in itself could lead to rising wages for civil servants and hence rising consumption. And so the virtuous circle continues.

We further hope that the Minster of Finance will announce in his Budget that Zimbabwe will adopt a low flat tax regime. He hinted as much in his speech to the Mining Indaba in September when he gave the example of Georgia who has implemented the same. A flat tax system not only simplifies the tax collection system and hence removes unnecessary wastage and cost to Government, but it also encourages greater economic activity. Individuals would earn more after tax and would spend more as a result. Business would need to meet that demand and invest more as the after tax return on investment would improve. Bigger business usually employs more and spends more. Foreign investors would also be attracted by a higher return on after tax earnings and indeed regional players may look to transfer profits into Zimbabwe, rather than transfer price out! Bottom line of a flat tax regime is that the resulting increased activity will result in a far greater uplift to Government revenues than would be lost in a reduction in the rate of taxation. That has been the effect in each country that has introduced such a tax system and Zimbabwe would be no different.

There has been much talk of which currency Zimbabwe should adopt in recent weeks. The “free” market would have appeared to have already made that decision; the US dollar. Almost all transactions, including Government parastatals and tax collections, are in US dollars. Prices in shops and restaurants are in US dollars, and so are wages. It seems to work well and so why change it? STERP referred to the South African Rand as being the reference currency, but that was written before the multiple currency regime settled down. Further the South African Rand is subject to SA Exchange Controls, and hence physical Rand cash is hard to come by. Furthermore, SADC has yet to agree to adopt the Rand or a timetable to do so. To join the Rand Bloc on a par with Swaziland or Namibia without the use of rand cash, would in our view be too early for this Inclusive Government. There would be little trust in the Monetary Authority sticking to what is effectively a currency board linking a new Zim Rand to the SA Rand. Rather stick to the US dollar at least until SADC is ready for monetary union.

The argument to maintain what has proved to work – the US dollar – is a simple one. Almost all Zimbabwe’s exports – gold, platinum, tobacco – are priced in US dollars. Key import costs for Zimbabwe are priced in dollars – oil, fuel and electricity. Doing business in ONE currency makes life very much easier and allows businesses to budget and plan ahead without having to worry about currency fluctuations.

The argument for the Rand is flimsy at best and usually emanates from the retail sector that imports in rand but is currently selling in a depreciating US dollar. That argument suggests that adopting the rand would remove inflation caused by a depreciating US dollar as is the case today. We have noted however that US dollar prices in supermarkets have barely risen suggesting that competition is proving a better cap on inflation – which implies a squeeze on margins of the retailers. Further, if the rand were to depreciate against the US dollar in 2010, the rand prices would necessarily rise as South Africa’s input costs rise. Our main exports are not in Rands and our main imports are not in Rands. Would employees want to be paid in Rands…or would they prefer dollars which they can freely spend anywhere in the World? Sorry, but our vote is that Zimbabwe should stick with what works and that is the US dollar. Asia is largely pegged to the US dollar and that has worked for them - it is and will continue to work for Zimbabwe too.

We look forward to November’s Budget in eager anticipation. We have spoken and written about flat taxes and coupled with that, we hope to see import tariffs slashed or removed in line with SADC protocol. Zimbabwe should be an attractive country to live, work and operate in. We also eagerly await the signing of the investment agreement between South Africa and Zimbabwe. Long awaited privatizations would not go a miss on our Xmas wish list and Parliament needs to pass those laws we wrote about last month. So once again, much rests on the Finance Minister’s shoulders. If he could satisfy this simple wish list, then ordinary Zimbabweans, individuals, civil servants and businesses would have much to look forward to, as we all got down to some REAL business, not just recovery. The hard part of his job would then be done; the foundation would be in place for the free market to succeed. It would then be over to the judiciary to ensure all stakeholders work within the law. The foreign investor would be delighted and of course they would then help us to finance so much of what we all need to make Zimbabwe prosperous again! Good luck Minister Biti!

John Legat

Chief Excecutive, Imara Asset Management

Coffee and Croissants

noreply@blogger.com (African CEO) — Mon, 28 Sep 2009 07:39:00 +0000

As Celsys is in a closed period right now, it would be inappropriate for me to comment in too much detail about the performance of the Company for the year ended 31 August 2009.

However, I can tell you that phase two of our scratch and win airtime distribution initiative has launched in conjunction with Spar and Delta/Coca Cola and after the first week is being well received by all. There are loads of prizes and cash to be won which always seems to motivate people, but interestingly, much of the feed back from the stores is about our reliability in terms of service and product delivery. This is always most heartening and we will continue to make sure that we attain even greater heights as the promotion unfolds. We are working now on the next promotion, which should kick off in time for Christmas... can you believe we are talking in those terms again already?!

As for me I have been kindly invited to attend a Telecoms Executive Summit in Nairobi in October. This annual event organised by NGT (Next Generation Telecoms) for Telecoms execs from around Africa involves a series of workshop style meetings, keynote addresses and of course the obligatory word(s) from the sponsors. In my view there is no substitute for good old face to face discussions, and although my friend D, often argues with me about this, I know I'm right!

Then in mid-November I am also addressing a workshop at the annual AfricaCom Conference and Exhibition which is another occasion where the industry gets together en masse to showcase their products and services and debate a variety of topical issues. Dealing with shrinking margins in the industry is what I shall be looking at, which is certainly pretty topical for us here in Zim!

If you are a supplier or customer in the Telecoms sector I urge you to get to Cape Town in November for this one. In conjunction with Forget Me Not Africa, for whom we are a distributor, we will be demonstrating the Message Optimiser SMS technology that is being introduced to Telco's across the continent so there will be a team of us there to welcome you!

Last week we also officially launched the new range of Opteva ATM's from Diebold, at a breakfast event held during the IT Africa Exhibition in Harare. Dave Nixon from Diebold was on hand to talk directly to our customers and there was significant interest in the full range of self service equipment available from Diebold. We also used the platform to announce our distribution agreement for Creon Point of Sale terminals, and these too were of great interest to our gathered audience. I made the point at the time, but it is worth making again now, that for probably the first time in Zimbabwe, we had an over-subscribed event, where almost everyone arrived on time, or even early! D said it was the coffee and croissants that got them there, but I think it was a genuine interest in the new Diebold ATM's amongst Zimbabwe's bankers that is the real reason!..and as you know.. I'm always right!

That's it for now.. a bit later than usual I know... but it's year end..we've been busy!!!

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

Sounds Good Sir, but Can We See It in Writing First Please!

noreply@blogger.com (African CEO) — Mon, 07 Sep 2009 21:14:00 +0000

The economic turnaround that has taken place since the formation of the Inclusive Government in February is extraordinary. Recent corporate results highlight the sharp recovery that is taking place in almost all industries. Strong monthly volume growth, growing demand, rising capacity utilisation and a move into profitability have all been features of management presentations. True, Zimbabwe’s formal sector is coming from a very low base, but nevertheless momentum is gaining traction. The banking sector, which was all but insolvent in January being the last sector to dollarize, has recently reported strong profit growth for the first six months of 2009, far exceeding expectations. Deposits continue to expand rapidly, rising from virtually nothing in February to $500m in May and we estimate over $1 billion at the end of August. This is significant as the banks are finally beginning to lend at long last. The ‘local’ banks are reporting loan to deposit ratios approaching 50%. The result, given competition and continued monthly gains in deposits, are declining borrowing rates to corporates and a greater availability of capital for industry. Again we are coming from a low base where a few months ago, what credit could be accessed was at exorbitant levels. For the banks whose deposit rates are very low, the margins on loans remain high and hence the profitability. Loan to deposit ratios can rise but with no lender of last resort (ie the Central Bank), the banks themselves have to be cautious in their lending which is not a bad thing in this day and age, not just in Zim but globally too. It remains early days in Zimbabwe’s developing banking industry and money markets and the development of a commercial bond market will only help to put pressure on lending rates. Debit cards are now increasingly available, VISA is back and cheque books are back in use for small denomination payments. In short, holding large quantities of cash is less necessary than it was. Over time, hopefully not too long, we will begin to see the return of mortgages and credit cards. That in itself will result in another major boost to the domestic economy.

Long term capital and credit lines from offshore remain illusory. Despite the ‘talk’ of credit lines being extended to Zimbabwe, in practice those lines are hard to access if at all. There is good reason for this. Whilst the economy is now operating under multiple currencies (largely US dollars and rands), and in effect exchange controls have been eased, the laws have yet to be changed! We are all in effect breaking the law by using foreign exchange and not the now extinct Zimbabwe dollar. With the recent suggestion by the Governor of the Reserve Bank that the Zimbabwe dollar could be reintroduced at some point in the future, it is hardly surprising that foreign bankers and investors are very cautious about placing their money! At the moment, Zimbabwe is one of the few countries in the World where there is no currency risk should you be a US dollar investor. This is a huge advantage over other frontier economies where currency risk is to the fore. It is an advantage that Zimbabwe needs to capitalize on but to do so the law needs to be changed to solidify the multiple currency regime and the removal of exchange controls. Calming words from the Minister of Finance are simply not enough for foreign capital providers in the current global environment, whilst ‘personal suggestions’ from the Reserve Bank Governor are unhelpful to say the least. The economic authorities should be speaking with one voice.

Changing the laws to reflect reality in the monetary system, is just one area. Repealing laws in other areas is equally important. Over the past three months, Zimbabwe has hosted two mining indabas, in both London and Johannesburg. Shortly, there will be another mining conference but this time held here in Zimbabwe. The mining ‘laws’ are a great source of confusion for potential foreign investors. The Prime Minister said in London that the indigenization aspects of the mining laws would be reviewed. At the moment the suggestion is that a foreign investor should in effect provide 100% of the capital to develop a resource but give 51% away to indigenous partners. That is clearly unworkable and the Government knows it. Before any sensible foreign mining company will take advantage of developing Zimbabwe’s many resources, the definitive law needs to be put in place. That will make the forthcoming Harare Indaba particularly interesting as we doubt that the authorities will be speaking from the same hymn sheet, further adding to confusion amongst the foreign investment community! We hope we are proved wrong. The net result is that the only developments taking place in the mining industry today are being undertaken by existing companies that are already on the ground with a resource, but these developments are being held back by a lack of capital.

A further hindrance to development has been the Government’s reluctance to sign any investor protection agreements, the most significant being that with South Africa. Given Zimbabwe’s recent past and the fact that an Inclusive Government is not a long term solution to the country’s political landscape, foreign investors and in this case, South African investors, naturally need a Government to Government agreement that will help to protect any investment that they may make in the country. This might cover sectors such as telecoms, mining, banking, tourism and agriculture in addition to other sectors where strategic partners are required. This agreement has been on the
table since March and yet still the Zimbabwe Government remains reluctant to sign it. As the Minister of Finance has said on many occasions, Zimbabwe is ‘shooting itself in the foot’. We have no doubt that an agreement will be signed, but any delay simply delays Zimbabwe’s further recovery. Again the ‘right’ talk needs to be converted into legal documents.

Meanwhile local industry is being forced to adapt…or die. Dollarisation takes no prisoners. Pricing pressure on traded goods will not disappear so long as Chinese and South African competition is strong. Pricing pressure on non-traded goods, suchas air cuts as an example, can only be increased through local competition. So whilst we have seen prices of products in the shops fall sharply, the price of a ‘hair cut’ has gone up. As the money supply increases and wealth with it, non-traded goods prices will likely rise whilst tradable goods price will stay under pressure. For the manufacturing sector, the pressure on prices is relentless. Under sanctions in the 1970s, Zimbabwe’s manufacturing sector thrived as the country needed to manufacture its own products. The legacy of that is that arguably Zimbabwe manufacturers are producing too many product lines and hence economies of scale cannot be achieved. The Zimbabwe market on its own is tiny. Management should see the region as being the market and should focus production on those products where they have a comparative advantage in the region, especially north of the Limpopo. This may mean producing only one or two products but rather do that and well than not at all. Export those products to the region. Being a member of both Comesa and SADC puts Zimbabwean producers at an advantage, as does the fact that production costs are largely based in dollars as are their revenues. A fluctuating local currency - as Zimbabwe’s regional competition face - makes it hard for them to compete consistently.

Finally some numbers to put Zimbabwe today into perspective. In 1997, Zimbabwe’s GDP according to the IMF was just under US$9 billion. By comparison, Zambia’s economy was around US$3.5 billion, seven years after their economic reform started in 1990 when it had effectively become a basket case. Today, Zambia’s economy is US$13 billion but according to IMF estimates for Zimbabwe in February of this year, GNP was a mere $3.5 billion. That’s some turnaround! We recognize that these numbers are estimates and take account of the formal economy that by the end of 2008, barely existed. As the formal economy once again takes market share from the informal economy, we would expect Zimbabwe’s GNP number to rise rapidly. Indeed, looking at the micro level and hearing what companies are witnessing in terms of volume growth and capacity utilization, we would expect GNP to grow very rapidly indeed in 2009 and 2010 and far faster than current Government and IMF estimates of 6% or so. Indeed it should not take too much to see Zimbabwe’s GNP approaching Zambian levels again in the not too distant future.

At its peak, gold production was one million ounces per annum. At current gold prices, that represents about $1 billion or 30% of estimated GNP. Platinum though is a much larger resource for Zimbabwe. Who knows what diamonds could be or what we might get coal back to. The former British Ambassador suggested that humanitarian aid to Zimbabwe was currently running at about $700 million per annum. Government estimates that potential credit lines could total more than $1 billion. All of these are big numbers relative to $3 billion estimated GNP. Meanwhile the stock market, excluding dual listed counters (Old Mutual and PPC) is capitalized at $3.5 billion. As formal GNP grows rapidly, and given that Zimbabwe has a well diversified and active Stock Exchange a high Market Capitalisation to GNP ratio is well justified, implying the market cap today is way too low relative to the growth potential of the economy.

To date, the credit lines and investments promised by international financiers and businesses have yet to be forthcoming. This has surprised and worried the Inclusive Government. There is a simple reason for this delay though. Zimbabwe has yet to put its words into law, whilst investor protection agreements need to be in place. Until that happens, no funds will be forthcoming from those entities. Foreign investors need to know where the goal posts are before making major commitments and not just where the pitch is. That said, and as we write, the IMF are providing Zimbabwe with foreign exchange reserve support to the tune of $500 million. That is highly significant although at this stage we have yet to hear of any strings that might be attached to this support. For a $3 billion economy, that’s also a big number.

John Legat

Chief Excecutive, Imara Asset Management

The Sun and the recession

noreply@blogger.com (African CEO) — Wed, 19 Aug 2009 09:29:00 +0000

Most businesses in the tourism and hospitality sector have been affected by the recession in one way or another with growth in the global tourism market falling to 2% in 2008 compared to 7% in 2007. African Sun has not been immune to the effects of the crisis, however we have been better prepared than most and have the lessons we learnt from our experience in what was then a very unpredictable Zimbabwean market to carry us through.

Growth in terms of new properties under management and direct ownership by African Sun has been on the increase and we maintain progress towards our goal to continue expanding our operations this year. However, our pace of growth is more metered as we source informed funding for Greenfield Projects in a capital market with limited liquidity.

In our July analyst briefing available here, we gave an outline of how close and achievable our strategic objectives are. We aim to grow the number of rooms in Africa from the current 2,500 to 8,500 by 2012 and achieve a market capitalisation of USD1billion – it is currently USD128millon.

So how are we going to get there? We currently have more than 7,000 rooms in the pipeline across Africa. In addition, over 70% of our revenues are from Southern Africa, mainly Zimbabwe where we are looking at recapitalising some of our key properties. Since the beginning of the year, 9 countries including USA and UK, have lifted travel warnings on Zimbabwe, so we foresee more growth coming from that market. We have also seen an increase in the number of visitors to our hotels coming from aid agencies and prospective investors.

While some of our properties are in the ‘leisure enclaves’, many are also in the resource rich regions such as Nigeria and Ghana (which is expected to become an oil producer by 2011). The long term fundamentals driving economic growth in these focus regions are highly likely to remain unchanged and this in turn ensures a consistent flow of guests from the business and leisure markets.

Despite the recession, our private placement has generated an incredible amount of interest and we are confident that we can meet our target of USD60million. I believe that this, combined with our interest in listing on the JSE’s Africa board, is a solid position from which to weather the impact of the global recession.

Shingi Munyeza
Group Chief Executive
African Sun Limited

The ‘New’ Zimbabwe: A Rapid Recovery from a Low Base

noreply@blogger.com (African CEO) — Fri, 24 Jul 2009 08:35:00 +0000

Imara Zimbabwe hosted an international investor conference in Harare during June, the first of its kind since the new Unity Government was formed and certainly the first of that size for over ten years. Fourteen listed companies presented for forty five minutes each during the two day event whilst the key note speakers were Tendai Biti, the finance minister, and Prof Steve Hanke of the John Hopkins University, Washington DC. Even those living in Zimbabwe learned much and for a number of our international guests, it was a true eye-opener.

All the companies who presented were generally positive about the new Unity Government on the one hand and upbeat about the post-dollarisation future on the other. Not one CEO felt that the country could or would return to the bad old past. As a result, the strategy for all the companies is geared to ‘the New Zimbabwe’. Indeed, in many respects it reminded us of the pre-1994 ‘New South Africa’ where business actively engaged their new Government of National Unity (GNU) to support reform and alter strategy to a new paradigm. The same is clearly happening in Zimbabwe today.

Under dollarization, companies cannot grow earnings through price increases any longer, and so growth is very much a volume game. Costs have to be slashed to maintain efficiency but with hyperinflation now gone, management can now at least identify poor performing divisions and boost overall returns on capital. All companies had seen a dramatic increase in volume growth since the December/January lows with growth rates of 40% per month or more in many cases. There is a long way to go before capacity utilization levels require expansion, and so the gearing effect on profitability, we believe, will be massive once costs have been contained. It is hard to value the future revenue streams as each month is better than the last and each month exceeds management expectations. So return on capital is very high but so too is the cost of capital, or the discount rate. A blue chip borrower may be lucky to access capital at 18% in US dollars, and then only for a short period, but most businesses may have to pay 3% per month and again only for a short time. The latter may sound high but the gearing effect on volumes is such that even a high cost of capital can make sense if the amount borrowed for capex or working capital is small relative to the overall boost in volume going from a 15% capacity ultisation rate to 50% or even more. Companies that have a South African or multinational parent, have typically been able to access working capital in the form of fast moving consumer goods on favourable credit terms that can be sold within Zimbabwe for cash. This helps to kick start those industries.

The banking sector that was all but bust at the end of December is rebuilding fast. Deposits had grown rapidly to US$500m by the end of May but suspicion and lack of trust in the banking sector post hyperinflation and post the theft of forex by Government in 2008, is holding that growth back. Barclays Bank estimates that cash outside the banking system amounts to a further $500 million. (The IMF believes GDP was $3.5 billion in February. This tallies with World Bank data which shows an average broad money-to-GDP ratio of 27% for non-oil resource intensive countries in sub-Saharan Africa. The poorer the country, the higher this ratio tends to be as financial systems become cash-based. But, coming from rock-bottom where statistics were not being collected, the volume of deposits/cash in the system in Zimbabwe is probably the best way to estimate the size of the economy and its growth rate). The banks are now just starting to lend but with no lender of last resort they will maintain lower maximum (i.e. 50%) loan to deposit ratios. Nevertheless the multiplier effect is now kicking in as loans are starting to take place, albeit cautiously and slowly.

With no effective rule-of-law as yet - especially with regards to land i.e. a property register protected by the law-ofcontract and enforced by the courts - but with such high potential returns on capital, the private sector is seeking new ways to invest. The tobacco industry hopes to double production from a low base in 2009/2010 as tobacco buyers fund contract farmers to grow tobacco on land that both the ‘new’ owner and the ‘old’ owner have agreed to allow. The tobacco seed beds are currently in the ground. Tobacco was once Zimbabwe’s largest export.

In effect, a “shadow banking system” is evolving, bypassing the immediate problem of poor ownership rights. Wheat, maize and barley is also being grown on a contract basis between corporate users and farmers.

Now that the gold miners no longer have to hand over their gold to the Government but can now sell their gold to anyone (and are), the industry believes that Zimbabwe could return to production levels of 1m oz of gold (i.e. revenues of $1bn) per annum in the not too distant future. Furthermore, by developing existing underdeveloped mines, production could rise to 3m oz (i.e. equivalent to GDP). Coal projects are already being reassessed whilst platinum, Zimbabwe’s largest export revenue earner, is being ramped up as we write. Under dollarization, there is now no currency risk for investors into Zimbabwe, unlike for most of English-speaking Africa.

There is much skepticism. The national newspaper, the Herald, daily downplays the Unity Government’s achievements and suggests that the Prime Minister’s recent trip to Europe, the US and UK have been an unfruitful exercise. (The PM says he raised $500m in additional funding). The international media also seems to focus on the politics, but not the economics. We well remember the in-fighting that took place within South Africa’s GNU pre 1994, the local and international media skepticism and investors’ concerns. Unlike Zimbabwe, South Africa had the violence too. But South Africa had embarked on an irreversible path, and one which took many investors and South Africans by surprise. Emerging from the World’s worst hyperinflation after Hungary (Hanke’s estimates), why should Zimbabwe be different? Indeed, assuming that the statistical office can collate and compare the numbers, we suspect that Government’s/IMF’s GDP growth target of 6% for 2009 is way too low. Talking to the companies on the ground you would expect to see growth rates of at least 15% but coming off a very low base that was 2008.

The British Ambassador informed us that the donor community is providing US$700m per annum for Zimbabwe, almost all of which is being targeted directly at NGOs and NOT through government. That’s a great deal of money for a small economy and accounts for a sizeable boost to local demand. Add growing private sector investment to the cocktail and the combination will give Zimbabwe a welcome economic boost. In the first instance, the Unity Government simply needs to set the parameters by which the private sector must operate. That means privatise, franchise, simplify taxes and reduce Government. In short, reform, reform and reform. This is where the South African GNU and successive ANC governments have failed. Their reform has arguably been too slow. Indeed, they still have exchange control and inefficient parastatals to this day. For Zimbabweans under dollarization, it’s adapt or die. To date, the listed companies that spoke at the Imara conference are eagerly adapting, and would move faster if there was more capital available. Then again, Zimbabwe is only five months into the change, so the capital is yet to catch up. Exciting times!

John Legat

Chief Excecutive, Imara Asset Management

Econet Operations Update - July 2009

noreply@blogger.com (African CEO) — Wed, 15 Jul 2009 09:04:00 +0000

AfricaCom 2009

noreply@blogger.com (African CEO) — Thu, 09 Jul 2009 08:53:00 +0000

If you are of a Telecomms mindset, then no doubt you will be aware of the annual AfricaCom conference that takes place in Cape Town in November and is now in it's 12th year.

This year the line up of speakers and topics is stronger than ever, no doubt due to the inclusion of yours truly amongst that esteemed gathering of presenters. Actually, it is very flattering to be asked to give a Zimbabwean perspective at this pan African event, albeit in a very small and focused way and I am looking forward to the opportunity. (Even though my friend D, thinks I must have paid them to let me speak..bah!)

Undoubtedly the telecomms industry is one of startegic importance to our country as we look to find ways to open up the airwaves. Being land-locked, access to the myriad of undersea cables that are snaking their way down the East and West coasts of our continent is particularly mired in international red tape and regulatory complications. However there is absolutely no doubt about the correlation between access to affordable bandwidth and the speed with which a developing country can grow. Here's hoping someone in authority is listening!!

Meanwhile we are left to contend with the severe limitations of our outdated infrastructure and legislation and I have been asked to address the aforementioned audience on the subject of strategies to increase margins in an environment of falling ARPU's. Now there's a thought! Although Zimbabwe is on a wobbly but nevertheless worthwhile recovery path, we still have the daily peaks and troughs of emotion trying to operate here and in ARPU terms (that would be average revenue per user D!) we are experiencing the wild fluctuations that are bound to be part and parcel of a change in currency and revaluation to real terms of the costs of goods and services. Which brings me sadly back to my old hobby horse. It seems to me that the network's approach to falling ARPU's is to simply jack up the price...without any commensurate improvement in services..... hopefully they'll pitch up at the conference and learn something!

Speaking of speaking, I'll also be at the Annual Institute of Chartered Accountants Winter School in Nyanga next week, to discuss investment opportunities in Zimbabwe. Depending on who has said what to the press in the preceding days, it will either be a riveting and exciting conversation or a very short chat.. we shall see.

While I'm on the subject of fluctuations, I wonder if there is anywhere else in the world where business is subjected to the same level of confusing legislation and contradictory communications as we are blessed with here. Take my other favorite subject, wine, for instance.

Having reduced duty on importing this product to zero percent, for producers with SADC certificates of origin some 12 months ago, we suddenly find ourselves with a new 15% duty imposed upon us for the same product. Is this protectionist? Does it reflect an abject lack of understanding of free market principals? Is it an attempt to increase Government revenues or reduce currency outflows? Either way, it flies in the face of what the SADC and COMESA trade agreements set out to achieve and in reality probably reduces the net tax revenues for the fiscus. So the more that things change here, the more they stay the same it seems.

Till next time, salute!

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

Half year analysts presentation (African Sun)

noreply@blogger.com (African CEO) — Sat, 27 Jun 2009 09:33:00 +0000

We had our half year analysts presentation yesterday at the Royal Harare Golf Club. I presented to a packed room of analysts and it was very heartening to see the levels of interest in our group at the moment.

I thought the question and answer session would be short and over quickly but some insightful questions came from the gallery as they explored different aspects of our business model and investment story.

I thought I would use my blog to provide some additional insights into the presentation that we posted online on www.AfricanSunInvestor.com. In this blog I cover Ghana, Zimbabwe growth, 2010, our margins, Angola and Namibia and capital markets/financing initiatives.

www.AfricanSunInvestor.com

Ghana is a growth story for African Sun

Our hotel in Accra, Ghana, Holiday Inn Accra Airport is doing very well and it is the only hotel we have launched that recorded a profit in the first month of operation. Ghana is a good story. We like Ghana and we believe that opportunities there are sustainable and it is for this reason that our long stay brand, MyPlace is looking for a second hotel in Ghana.

By June 2010 Ghana will be an oil producing nation. Ghana has been stable and growing for many years. Business travel to Ghana is growing. Barack Obama is expected to visit Ghana. We expect occupancy rates in Ghana to remain above 70% for the next 3 – 5 years.

Zimbabwe growth based on current bookings

The statistics shown in your presentation record that Vic Falls Hotel occupancies are due to double but Elephant Hills occupancies are static. Let me put this into perspective. In 1998 we had occupancies at Elephant Hills of about 62% throughout the year driven by incentive groups and conferencing. This year we have had COMESA and the Government retreat. Typically the lead times to booking and utilising our hotels for these sorts of events are short and so the booking system statistics (shown in the presentation) may not be a true reflection of the possible growth for the remainder of the year. This is because the booking statistics and occupancies assumed in my presentation assume that only the current bookings in the system come to fruition and no other bookings are made for the remainder of the year.

2010, the story is about what’s beyond

African Sun is already a part of the 31,000 rooms already booked by FIFA in South Africa and negotiations are still underway for African Sun to understand fully the terms possible relating to the deficit of rooms that FIFA still has to allocate.

We have a global distribution system PACRO and we pursue a variety of other distribution channels to ensure that we participate meaningfully in the region. This mosaic of marketing initiatives is needed in order for us to fully leverage 2010.

Another channel is attendance at trade shows. We attended Indaba – the biggest travel show in Africa – which attracts the whole world to Durban. Online and website reservations are a growing part of our distribution channel and we plan to grow this area fully to maximize the capture of new online booking trends.

Construction is under way for a new hotel in Gaborone prior to the commencement of 2010 and our strategy for hosting teams generally is to avoid gambling with some of the highly risky conditions that can come with hosting teams in the World Cup. The terms and conditions of hosting can be particularly damaging and whilst the opportunity of hosting 2010 teams and supporters we are going to do this in a responsible manner.

There is a lot of focus on 2010 but we look beyond this. Post- 2010 we expect a general level of increase in travel to the sub-region. This has been experienced in every recent World Cup and the post-2010 period is expected to be no different.

Margins in a recovery phase

Last year in September our EBITDA margin was 27%. Our operations of January – March this year were reduced to Greenfield operations on account of the collapse of the currency. Our business is break even at 25 – 27% occupancy. Recent estimates show that for every increase in 1% occupancy EBITDA grows by over U$1m assuming that rates stay the same. African Sun is currently in a period of recovering from the extraordinary times of the beginning of this year.

Angola and Namibia on the radar

The language barriers in Angola can be overcome. We see a bigger issue however in property rights. Property rights is a sticking point and this issue has to be dealt with through the President’s office. Namibia is another area of opportunity as uranium has been discovered near Walvis Bay.

We plan to launch a new safari brand before the end of the year to cater for the lodge market which really needs a separate business model to the traditional hotels.

Capital raising and capital markets initiatives are a GO

Given the global meltdown we have had to re-look at the future and our strategy for growth and financing. In December last year we were seeking US$60m (for the cash flows of our property developers as well as African Sun). Those initiatives did not come to fruition and we are now working with multi-lateral institutions for finance.
We have publicly stated our intention to list on the JSE’s Africa Board. The Africa Board is a stepping stone to our stated objective of a listing on a major bourse but this initiative is not going to be carried out for the sake of it. It will coincide with a capital-raising and we intend to offer 20% of our share capital on the Africa Board to achieve this.

The timing is not yet confirmed but we hope that by the end of the year this initiative will have been confirmed. Consider that our business model is hedged geographically and from a currency and business model perspective so investor interest might be there. Add to this my previously mentioned comment on debt levels. Our gearing is less than 2% at the moment and the stability referred to in my presentation above has prompted us to seek finance from multilateral lending agencies in order for us to refurbish 60% of our hotels in Zimbabwe. We expect to make an announcement in the near future on this and estimate our funding requirement to be approximately US$15m.

Debt levels are undemanding and more than matched by growth

With African Sun coming from a very low occupancy base its tempting to reduce prices to increase occupancies but we feel that low occupancies are due to factors other than pricing. They are due to the general global slowdown. So it is not our strategy to price cut at this time.

It is however our strategy to leverage our growth through borrowing. You may question this as we are currently experiencing negative cash flows and you may ask is it wise to take on more debt when occupancies are so low. Our gearing is at 2% and we have a US$670,000 5 year loan in Rand at SA prime less 2%.

In my presentation I showed that occupancies are due to more than double based on current bookings in the system. For example, occupancies at Victoria Falls are expected to be around 48% so the increase in debt is going to be more than covered by the cash flows arising from our core business growth.

Shingi Munyeza

Group Chief Executive

African Sun Limited

Africa, a forgotten continent

noreply@blogger.com (African CEO) — Wed, 17 Jun 2009 21:00:00 +0000

By Merryn Somerset Webb

Instead of talking about investing in France or Canada, in small firms or in large, savvy investors talk about benefiting from long-term shortages of natural resources, energy or clean water, climate change or the consumption patterns of the emerging middle class in Asia.

The last one has long been a favourite of mine. I’ve used it to explain why I think the big oil companies remain a good investment (middle classes love cars); why diamonds are an investor’s best friend (middle classes all over the world have been duped into believing they somehow represent love); why the mass market “luxury” brands such as Tiffany make a good addition to all portfolios (new middle classes love brands that scream status); and why agricultural commodities should be core rather than marginal investments (the richer we get the more we eat). But I’m beginning to wonder why it is we only think of the new middle-class theme in reference to Asia.

What of Africa? We hear about hyperinflation in Zimbabwe, drought in Kenya, war in Sudan and the plight of the continent’s thousands of child soldiers. We all know that the region has a substandard infrastructure and is handicapped by extreme and widespread poverty. When did you last read that economic growth across Africa is rising at an average of 5% a year and that this is forecast to continue for at least the next three years?

If you take China and India’s stellar growth rates out of the equation, Africa as a whole is growing at least as fast as Asia. The average mobile-phone owner in Nigeria spends $22 a month - nearly double that of the average Chinese user.

The point is that there are plenty of signs that Africa is not a basket case. It is a perfectly reasonable place to think about putting money. There is, I admit, not yet much demand for Tiffany keyrings in Kampala, but there is certainly a growing demand for air conditioners and more basic consumer goods, as well as globally branded foodstuffs (think Coke and Cadbury’s).

The general view is that Africa’s growth comes courtesy of the commodities boom and as such is little more than a side-effect of the demands made by the emerging middle classes of China and India.

To a degree this is true. Africa is home to vast reserves of every commodity you can think of: it supplies half the world’s diamonds, a third of its gold, more than three-quarters of its platinum and palladium and holds about 12% of our known oil reserves.

So the supercycle in the commodities sector has been a great thing for Africa. It has meant that huge amounts of money have suddenly become available to improve infrastructure and to pay down debt.

It has also meant that the continent has made a powerful new friend - China. In the past year the commodity-hungry President Hu and his colleagues have visited scores of nations signing hundred of deals with national governments along the way.

The result? Sino-African trade hit $55.5 billion last year, up 40% from the year before and the Chinese have now directly invested more than $6 billion into Africa.
In the spirit of creating long-term bonds between nations, the Chinese have also provided millions of dollars worth of aid and low-cost loans. Africa needs roads, railways and money and the Chinese are giving all three.

But Africa isn’t just about the commodity story or China; it’s also about increasing political stability. Zimbabwe aside, very few nations are so badly run that their GDP is shrinking and, again Zimbabwe aside, it is increasingly possible to vote an African leader out of office rather than having to start a war to achieve regime change. It’s also about debt forgiveness, which is allowing many countries to make a fresh start.

So how can you get in? This is the tough bit. There are many good-quality listed companies across Africa. Analysts at Global Thematic Investors point out that African companies are often well-managed because of rather than in spite of their environment. Corruption, political uncertainty and dysfunctional credit systems mean cashflow has to be self-generated and tightly managed. There are also a lot of cheap companies - many blue chips yield 8%-plus.

The problem is that individual investors will find it almost impossible to buy into individual firms (it is hard enough to find a broker to buy shares in Asia, let alone Africa). And most funds that invest in Africa do so just in South Africa.

The only funds I know that look further afield are Investec Africa and Imara Africa Opportunities, in which you need to invest at least £53,000.

You could get exposure through one of the big mining companies (Anglo American has a huge African business) or a natural-resources fund, but that doesn’t get us much closer to being invested in Africa’s more diversified growth.

One option is to seek out UK-listed stocks that have real African exposure. The best I can find at the moment is Lonrho, a small AIM-listed firm that represents the remnants of Tiny Rowland’s global empire. Its new chief executive, David Lenigas, has big ideas about returning the company to its former glory by investing across the continent to create a new pan-African conglomerate.

Can he do it? So far so good. He has taken stakes in a hotel, a uranium mine, a diamond mine, a water company, a port in Equatorial New Guinea and two air-lines and claims he is only getting started. It is a risky strategy, but if Lenigas keeps making deals, Lonrho could turn out to be a very good long-term investment.

See orginal article here Link

Econet releases abridged results for the year ended 28 February 2009

noreply@blogger.com (African CEO) — Tue, 09 Jun 2009 09:35:00 +0000

Salient statistics include:

Connected capacity : 1.2 million

Revenue : US$87.9 million

Profit before tax : US$3.1 million

Loss per share : US$0.01

The full results are available from their investor relations website and also on the link below:

›› Abridged report for the year ended 28 February 2009

Annual Reports update - June 2009

noreply@blogger.com (African CEO) — Mon, 08 Jun 2009 11:41:00 +0000

Botswana

Ghana

Kenya

Malawi

Mauritius

Namibia

2008 : Namibian Breweries Limited

South Africa

2008 : 1time Holdings Limited

Tanzania

Uganda

2008 : DFCU Group

Zambia

Zimbabwe

Dual Listings - An Expensive Luxury with little or no Return

noreply@blogger.com (African CEO) — Tue, 02 Jun 2009 07:48:00 +0000

There is often a feeling or belief that the grass is greener on the other side and that there is perhaps a greater chance of raising capital outside of one's own capital market. That is not often the case. AIM and the Toronto stock exchanges have been successful 'hubs' for mining and resource companies that operate globally or in countries with no capital markets. For African listed companies, the local exchanges are more often than not the best place to raise capital especially if the local market has a growing and active local savings base.

Zimbabwe Stock Exchange:

The original Zimbabwe Stock Exchange (ZSE) was established in 1896. There is as a result a long tradition of investing on the market and an entire industry has been created. Unlike many of its neighbours, Zimbabwe has a pension fund industry, an insurance industry, a local asset management industry, unit trusts and an established stock broking community. The financial sector survived the ravages of hyperinflation as it was largely left alone by Government authorities. Indeed the ZSE became one of the few places to hide during the hyperinflationary years.

Foreign investors became active on the market following changes to the Exchange Control Regulations in 1993. This allowed foreign investors to freely invest their capital on the market and repatriate both their capital and their dividends free of exchange control. During the 1990s, foreign investors were very active on the market as a result and this enabled local companies to raise capital.

As Zimbabwe's foreign exchange pool was depleted in recent years, repatriating capital became impossible through normal banking channels whilst new money coming into the country would have been at the official and overvalued exchange rate. Taking advantage of the fungibility of Old Mutual shares, foreign investors were able to bring funds into the country by first buying shares in Old Mutual in South Africa and then selling those shares for Zimbabwe dollars on the ZSE. The reverse was also permissible for foreign investors only. For the average foreign investor, such a process was not only cumbersome but also expensive. The net result was that only a very few foreign investors chose to buy into Zimbabwe shares. The bulk of the new asset class of African Funds have very little exposure to a market that is one of the most developed in Sub Sahara Africa ex South Africa.

The domestic share registers of the majority of listed companies, are dominated by the local institutions, and primarily by the pension funds. Foreign multinationals who have listed subsidiaries on the ZSE are typically already at their legal limit with regards their ownership level.

Currently the ZSE is an expensive market to deal on for both local and foreign investors. We have been assured by the ZSE that this is a short term issue and is being dealt with to bring Zimbabwe back in line with other African markets.

Zimbabwe Pension Funds

Due to hyperinflation, most pension funds have almost 99% of their assets on the ZSE as a means to preserve capital. As the local stock market rises, they will sell into strength and look to purchase money market instruments in order to earn a real US dollar return. At the moment, the money market is reawakening but it is still small with little opportunity. Meanwhile the banking sector is beginning to lend again but at huge US dollar interest rates once fees have been added. This is an opportunity for companies to issue debt/convertibles/preference shares to pension funds at a rate that undercuts the banks. In short, the need is to bring in competition so that companies can borrow at sensible US dollar interest rates.

Zimbabwe pension funds are unable to invest in assets listed outside of the country and would be unwilling to allow any dilution in their shareholdings as a result of not having this ability.

Foreign investors:

Foreign investors are very prepared to invest in foreign and emerging capital markets so long as the infrastructure is in place. Zimbabwe has that infrastructure and it works. Furthermore custodian banks are in place, the largest being Barclays Custodial Services. Above all else, foreign investors like liquidity and will be hesitant to purchase an instrument which they cannot easily exit from.

Zimbabwe is lucky in that it has a domestic institutional savings base which provides on going liquidity to the capital markets. This enables foreign investors to buy and sell local assets with considerable ease. Foreign investors would be unwilling to buy an asset if it could only be sold on to another foreign investor. A class of shares that would be listed outside of Zimbabwe would make it impossible for domestic institutions to buy that class of shares. As a result, premiums and discounts to the local ZSE price would be likely, unpopular and unhelpful.

Zimbabwe offers a unique situation currently as the ZSE is priced in US dollars. The common denomination for foreign funds is US dollars and occasionally Euro or pounds. An investment on the ZSE therefore provides NO currency risk to foreigner investors, unlike most other African countries.

Capital Raising:

Zimbabwean companies need to recapitalize. The capital is available from local institutional investors and foreign investors. Equity prices are low at the moment, implying that issuing equity is expensive. It is therefore better to look at corporate bonds, preference shares or convertibles. If equity needs to be raised through rights issues, domestic institutions have the option to take up their rights or not. Should they not take them up, the sponsoring investment bank/broker can look to allocate those rights to foreign investors who will be attracted by the ability to buy a sensible holding in a local company without having to bid the share price up in the open market. At a later date those shares can be sold back on the local market as required.

Conclusion:

Zimbabwe offers one of the more developed capital markets in Africa and in the Emerging Frontier universe globally. Furthermore it has an active and developed institutional investor base that few other frontier markets have.

It is rare in the Frontier Market universe to have a US dollar market. There is therefore no currency risk.

Zimbabwe is accessible to visit, company management is open and annual reports are available and in English. Foreign investors are therefore happy to visit the country just as they did in the 1990s.

Zimbabwe offers the necessary financial infrastructure for foreign investors to buy, hold and sell assets.

Zimbabwe offers foreign investors liquidity independent of other foreign investors.

Given the above attributes, there would seem little reason to seek a dual listing on another exchange. Dual listings imply dual costs, dual investor presentations and dual headaches but offer nothing that an existing listing in Zimbabwe cannot offer. It could provide a short term ego boost though!

John Legat
Chief Executive Officer
Imara Asset Management (Pvt) Limited

Tel : +263 4 790090, 700000,729335
Fax: +263 4 791875

Website: www.imaraholdings.com

The trees in front of us are thinning!!

noreply@blogger.com (African CEO) — Fri, 29 May 2009 13:30:00 +0000

I don’t know if you’ve looked at our share price graph recently, but if you are of a medical disposition you might think that the patient is dead…. Flat lines on an ECG are never a good thing!! However, as we all know, looks can be deceiving, so my advice is to always take a closer look.

At a consistent 3/10s of a US cent we of course believe that we are undervalued, but it takes a while for the good news and the progress to filter through to the market, so let’s not get too upset about that just yet.

But while we’re on the subject of heartbeats, mine skipped a few the other day. I discovered something that I feared may be lost forever, and with that discovery comes a new lease on life, a new inspiration, a reminder of why we get up and do this every day.

Now before you get too excited, let me tell you that we, along with everyone else, are not out of the woods yet… but what I rediscovered was the lost art of being able to focus on the real issues of our businesses; marketing, selling, product development, production, and all this because we have a vaguely stable currency and a marginally less tilted playing field.

I was in Zambia last week, and in conversation with a group of local executives, the subject of which was “the Zimbabwe threat”. Interestingly they were very concerned about losing ground and opportunity to their Zimbabwean counterparts. When I asked them why they were so worried about their decimated neighbour, they were very quick to point out that as a nation, during all of the chaos and disruption, the business community somehow survived, and in some cases even flourished, so how much more energetic, productive, creative and successful will Zimbabwe now become as the economic tide begins to turn?

They have a point.

And already we can see that at Celsys. Our energy is being channeled into productivity, our efforts into areas of growth and management and staff are seeing real reward and progress for their daily endeavours.

As I said, we are not out of the woods yet, but it sure is good to see that the trees in front of us are thinning!! Of course “the future just ain’t what it used to be” (thank you Meatloaf), but if we can take the best of our previous experiences and carry that with us into our future, as inspiration or just as a reminder that what we once had was real, then surely that is a good thing.

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

The Pension Fund Industry: A Survivor despite Hyperinflation….Just!

noreply@blogger.com (African CEO) — Mon, 25 May 2009 13:40:00 +0000

Most countries that suffer from hyperinflation experience the total destruction of their savings base. Zimbabwe recorded the second worst hyperinflation ever, surpassing Yugoslavia but trailing Hungary (but only by a month)before the Zim dollar became useless. Of course any cash, or monetary balance in a Zimbabwe bank account, or corporate or Government bond became worthless overnight with the demise of the Zim dollar. On the other hand, savings held in assets, such as property, inventory or equities in the stock market tend to preserve their value assuming that the country does not become a failed state such as Somalia, but even there, assets have a value. Faced with a lack of funds, Governments generally not only print money that causes the hyperinflation, but they also can steal assets from the private sector or force private sector savings into Government bonds. In Zimbabwe this did not happen to such a great extent. The farms went, as did the farming equipment, and pension funds were forced to buy prescribed assets but fortunately the law saved them from holding anything more than just a scrap. Nationalisation did not take place although the odd businessman lost his company or mining concession for being on the wrong side of politics. The key for businesses and individuals during hyperinflation, was to invest their earnings immediately. For just one day or even a few hours later could see the true value of those earnings decline substantially. That in the end was the biggest cost for Zimbabweans generally and where the wealth destruction occurred. Outside of that, Zimbabwe probably had “a good hyperinflation” by the standards of other hyperinflators!

One of the major assets that Zimbabwe had and still has, is its Stock Exchange. Founded in 1896, it is one of the oldest in Africa and even to this day, offers one of the more diverse list of sectors and companies that investors can buy in Sub Sahara Africa, outside of South Africa. As inflation accelerated, pension funds simply increased their weightings toward equities. With prescribed asset weightings governed by book values, holdings of Government bonds became irrelevant and money market instruments a dead loss. Hence by the height of hyperinflation, pension funds typically held 98% or more in the stock market and property, a far change from the75 75%/25% equity/money market split that was typical in the late 1990s. Private individuals also became serious investors in the stock market, in the end used the stock market and stock brokers as their savings bank. Corporates too who needed to buy assets quickly, when raw materials or inventory for their businesses were not available, bought the market.

Needless to say the market roared but on average, only in line with the inflation rate. Almost by definition, it rose in tandem with the amount of money in the system, itself a function of the credit creation of the Reserve Bank. Under such a scenario, it didn’t really matter which stock was bought, they all went up with the rapidly rising tide. The most attractive were the more liquid on the day. The most liquid of the lot was Old Mutual because the supply of shares on the Zimbabwe exchange grew each time a foreign investor moved shares to the Zimbabwe register in order for them to sell them and buy a stock whose business was domestically orientated (typically Delta, Innscor and Econet). All other listed companies had a stable number of shares and hence were less liquid. Old Mutual became a stock brokers dream. Plenty of supply and a huge appetite from Zimbabweans looking to buy the market. As foreigners bought shares via the Old Mutual mechanism, an implied exchange rate was born, which in the end became the only realistic measure of true inflation. The Reserve Bank hated that, and in the end stopped it by effectively forcing the exchange to close last November.

Up until 2007, Imara’s pension fund strategy had been to hold as much as 35% in Old Mutual shares to offer an effective currency hedge against a declining Zimbabwe dollar. By early 2007, this strategy worried us as we felt that the risks of owning Old Mutual shares were increasing substantially. We wrote to our clients in May 2007informing them that we were reducing our exposure to Old Mutual and PPC and building our weightings in niche businesses, often monopolies, with a largely domestic orientation. Our reasons were many. Nationalisation of Old Mutual shares on the Zim register at the official exchange rate was one although we hoped that would be an unlikely event. We were also conscious of the fact that elections were looming and any positive outcome that resulted in economic reform could actually see the price of Old Mutual falling as the currency strengthened, whilst domestic shares rose. Under such a scenario, we did not want to be forced sellers of a stock that the foreign investor did not wish to buy, only to end up with cash that we would struggle to invest into domestic demand counters that would benefit from reform. Since hyperinflation resulted in all shares rising, by not owning Old Mutual was less of a risk should things change, and if they didn’t change, everything else went up too. As it turned out, the growing supply of Old Mutual shares on the Zimbabwe register led the stock to underperform the stocks that foreigners were buying and whose shares in issue were stable. The irony was that the one risk of holding Old Mutual that we had not identified was the global credit crunch which caused the shares to plummet in real terms, thereby making the shares a disastrous hedge. (It lost two thirds of its value in USD). The likes of Delta and Innscor on the other hand, to name just two, proved to be the perfect hedges as we had hoped.

With economic reform now a reality and the economy now dollarized, foreign investors are no longer bringing in Old Mutual shares but straight US dollars, and they continue to buy domestic demand counters that are cheap. Local investors can now sell their Old Mutual shares in South Africa and repatriate the funds (had that not been the case the USD price in Zimbabwe would have been far lower than in SA). Many Zimbabwe pension funds are doing just that, but with no sizable money market yet in place, the funds are being reinvested in precisely the same counters as the foreigners are buying and which our clients have owned for over a year. Meanwhile the foreign investors, who had been waiting for the domestic investors to be forced liquidators of shares for US dollars at any price, have been disappointed to discover that domestic selling of Old Mutual shares provided that liquidity! Indeed foreigners are now scrambling to find decent blocks of stock but cannot find any….at these low prices anyway.

Looking at our clients’ pension fund portfolios today that we look after, at a market capitalization of the ZSE of only $3.5 billion, the US dollar values are within 10% of where they were in December 2003, 2005, 2006, 2007 (taking OMIR exchange rate). 2004 saw the values halve in real terms only to bounce back and in Dec 2008 the market was closed. Investing in the right shares on the ZSE has therefore proved to have been a great hedge in real terms over this period. The high of the ZSE last year was $8 billion when the GPA was signed. We see no reason why we should not see that level during the next twelve months assuming economic growth continues from this low base. In other words, we would expect our clients’ portfolios to at least double over this time period, and hopefully by more.

Whilst picking stocks during hyperinflationary times was relatively easy, (the key decision was the Old Mutual/PPC weighting vs the rest) picking stocks in a deflationary environment will be very different. Whilst investors may have used replacement or asset values in the past, now investors will have to focus on more ‘normal’ valuation measures by analyzing corporate cash flows, dividends, revenue and profit prospects. Company visits, management interviews and fundamental analysis will once again come to the fore.

Furthermore, as the money markets grow, reducing exposure to equities when they become expensive, and rebuilding money market exposure will be a further critical decision to make. In short asset managers will have to work hard to achieve their clients’ expectations. Active management of portfolios will once again be the important consideration for pension fund trustees.

Zimbabwe has been an unlucky country in many respects over the past forty or so years. We hope that is now changing for the better. The country has been lucky however to have preserved its pension fund industry and its Stock Exchange, largely intact, albeit battered and bruised. That factor will prove critical in the years ahead, as domestic savings will be able to assist in the financing of Zimbabwe’s future economic growth, so long, of course, that the private sector can continue to manage those savings.

John Legat

Chief Excecutive, Imara Asset Management

We like what we hear: Now for the implementation to prove the point

noreply@blogger.com (African CEO) — Tue, 07 Apr 2009 09:10:00 +0000

Emerging market and Frontier market investors know a reform programme when they see one. After all, analysts the World over have had plenty of examples of countries implementing economic change during the past thirty years. In this month’s Notes we have therefore taken the key paragraphs out of the recent “review of the budget” and more importantly, the Zimbabwe Government’s “Short Term Emergency Recovery Programme” (STERP). We will let the reader draw his/her own conclusions. As we all know, the easy bit is to state the intentions, the hard bit is the implementation. The good news is that the budget has been approved by Parliament, the Cabinet and signed by the President, whilst STERP was publically endorsed by Cabinet and the President. For investors, we would now go a step further, by encouraging the Government to follow STERP fairly soon with a “road map” as to their intentions with regard their goals, and importantly, the time frame. We well remember Trevor Manuel undertaking as much in his first budget post South Africa’s democratic elections in 1994, when he made it clear that import tariffs would be substantially slashed (thereby giving warning to local producers to become more efficient) and exchange controls would be significantly eased, both within a certain time frame. (Just two examples amongst many at that time). New investors require the same direction today in Zimbabwe and those in the diaspora considering returning to Zimbabwe will also need to understand Government’s ultimate intentions. An indication of adopting a low flat tax regime as discussed in our last Notes would greatly encourage Zimbabweans and others to seek opportunities in Zimbabwe, as one such example.

We apologise to our local readers who have read or heard all about STERP, but we have decided to open up this month’s Notes to our international investors who are eagerly watching events in Zimbabwe. (We also apologise to them for the length of the key points – the original documents total 170 pages!). Sadly the international media continues to focus on the Zimbabwe negatives and the tragic death of Prime Minister Morgan Tsvangirai’s wife Susan, rightly captured many World headlines. Over recent years, some suspected that Tsvangirai would likely have to pay the ultimate price for democracy to take hold. Ironically, the Prime Minister has now taken that ultimate sacrifice but he himself has in fact lived to take Zimbabwe onwards and upwards. It was Susan’s death that has brought many Zimbabweans back together in a common purpose.

Below are excerpts from the ‘Budget Review’ and ‘STERP’ (highlighted in brackets, and paragraph numbers included). Reading ‘between the lines’, there are some subtle but significant points to note.

6. STERP is an emergency short term stabilisation programme, whose key goals are to stabilise the macro and micro-economy, recover the levels of savings, investment and growth, and lay the basis of a more transformative mid term to long term economic programme that will turn Zimbabwe into a progressive developmental State. (STERP)

302. The precondition for success of STERP is the implementation and execution of a sound macro-economic stabilisation programme. (STERP)

303. Starting from what is in many respects a clean slate, the following policy environment will allow the economy progressively to gather momentum(STERP).

all enterprises are free to trade in South African Rands, United States dollars or any other convertible currency;

no licences will be required to trade in foreign currencies;

there will no surrender requirements to the Reserve Bank, neither by enterprises oriented to the domestic market nor by exporters;

all taxes will be payable in convertible foreign currencies;

de facto the national budget will be a cash budget, that is to say the amount the nation spends will
be determined by tax revenues plus grants from donors;

there will be no quasi-fiscal expenditures and no printing of money;

there will be a regime of positive real interest rates.

304. This framework will snuff out Zimbabwe dollar-based hyperinflation, but with the significant downside risk of even greater contraction of economic activity than Zimbabwe has already experienced. This is because in this framework, the level of economic activity will be determined by the stock of foreign money supply in the economy. The stock of foreign money at the start of 2009 is extremely limited: to increase the GDP to an acceptable level it is vital that we:(STERP)

increase export revenues;

maximise inflows of remittances from Zimbabweans living abroad;

receive support from regional and international development partners;

attract foreign portfolio and direct investment.

Multiple Currencies with the Rand as Reference Currency
310. Government has decided that the reference currency should be the Rand. The reasons for this are partly determined by economic factors as well as the future intention of SADC to adopt a common currency, which inevitably will have to be based on the Rand given the dominance of the South African economy in
SADC.(STERP)

4.1.1. Since February this year, the Zimbabwe dollar is no longer a currency that the public and any trader will accept. Our national currency has, thus, become moribund. Financial assets denominated in Zimbabwe dollars have become valueless, thereby wiping out a large portion of national savings. (Budget Review)

In respect of the National Budget, we are immediately operating on a cash basis. We are only able to spend what we receive in tax revenues, fees for services and subventions from development partners.(Budget)

Inflation
9.2.7. More importantly, consistent with the 2009 Budget Statement, quasi-fiscal activities by the Reserve Bank are to be ceased forthwith.(Budget Review)

9.2.8. Treasury, as overseer of the Reserve Bank Act, the Audit and Exchequer Act, will ensure that these laws are strictly complied with and more decisively that the Constitution is complied with fully in so far as all outlays from the Consolidated Revenue Fund have to be approved by Parliament.(Budget Review)

Exchange Controls (STERP)
313. In order to remove restrictions on business transactions, Government deregulated restrictive Exchange Controls, and delegated export administration and payment authority to banks.

314. Individuals and companies are now free to pay for goods and services offshore as well as service external debts without prior Exchange Control approval.

315. Similarly, all applications on income related transactions such as dividends, profits and capital appreciation proceeds remittances no longer require prior Exchange Control approval.

Foreign Currency Accounts
316. Consistent with the use of multiple currencies and the need to enhance exports, corporates and individuals can now operate foreign current accounts (FCA) with indefinite retention of FCA balances. Previously, FCA holders faced a 21 day liquidation requirement.

317. Commercial banks are encouraged to expedite payment mechanisms for the new monetary environment. Customers with FCAs need to be able to pay for goods and services with debit cards and should be able to withdraw South African Rands or United States dollar notes from ATM machines.

Tax on Miscellaneous Income Deposits into Individual & Corporate Accounts (Budget Review)
12.7.1. A special tax had been proposed on deemed unproductive income deposited into individual and corporate accounts for purposes of discouraging exchange rate related speculative activities.

12.7.2. Given policy and other market developments, such a tax is no longer relevant as transactions are now in foreign currencies. (Budget Review)

Foreign Currency Surrender Requirements (Budget Review)
12.11.1. Mr Speaker Sir, the Monetary Policy Statement of 2 February 2009 contains the foreign currency surrender regimes.

12.11.2. Under this regime, all licensed traders were to sell 5% of their gross sales to the Reserve Bank at the going market exchange rate.

12.11.3. Similarly, under this surrender framework, all exporters, including gold producers, were required to sell upfront to the Reserve Bank 7.5% of their gross export proceeds in their Foreign Currency Accounts (FCAs).

12.11.4. Mr Speaker Sir, given that all businesses now transact in foreign currency, any requirement on their part to surrender a portion of their proceeds is tantamount to imposition of a tax on business proceeds. Such tax of a presumptive nature on gross proceeds erodes markup of exporters to an extent whereby some businesses are rendered unprofitable, thereby, threatening their viability.

12.11.5. To the extent that surrender requirements are a tax, it means that the matter becomes a tax issue which is the domain of Parliamentary Budget approval. In this regard, I have issued a directive in terms of Section 62 of the Reserve Bank Act advising the Board to take note of this.

12.11.6. I therefore announce the removal of all foreign currency surrender requirements with immediate effect.

Revised Expenditure Proposals (Budget Review)
3.1.1. Mr Speaker Sir, I have proposed revision of revenue projections for 2009 from US$1.7 billion to US$1 billion. Accordingly, pursuant to the balanced Budget thrust whereby expenditures are to be linked to actual revenues, I am proposing that the 2009 Expenditure Proposals be revised downwards from US$1.7 billion to US$1 billion.

Remuneration of Public Servants including Pensions (Budget Review)
13.2.2. As I have already indicated, payments to our public servants in foreign currency could only be made as from February 2009 on the basis of an allowance fixed at US$100 per member while pensioners’ allowances are only being paid as from March 2009.

13.2.4. The current US$100 foreign currency monthly allowance paid irrespective of rank or grade to all civil servants is clearly undesirable. However, given that we now project lower foreign currency revenues in the revised Budget, I have been unable to either increase or differentiate the quantum of the allowance.

Revenue Collection (STERP)
335. With a de facto cash budget system in operation, maximising every opportunity to increase tax and non-tax revenues will become the priority focus of fiscal policy.

336. Wherever possible, revenue raising strategies will be designed in tandem with supply-side policies to increase the level of economic activity and hence the amount that is eligible for taxation, not through increasing tax rates. The strategies will also include widening of the tax base and minimising leakages through reducing incidence of tax avoidance.

Pricing of Goods and Services (STERP)
257. In order to take advantage of these positive developments, The Inclusive Government has already decontrolled the price of goods and services.

Confidence Building Measures
4.3.7. Meanwhile, before the above gestates, it is important to consider disposal or rationalisation of one or two of the country’s ‘silverware’. (Budget Review)

368. While Government has full ownership and control of public enterprises, the financial and economic benefits arising from this shareholding have often been low, owing to under performance of these entities. Currently, one of the major challenges compromising efficient service delivery emanates from their undercapitalisation.(STERP)

369. Given current budgetary resource constraints, there is scope for tapping the large potential resource base through selective listing on the stock exchange as well as targeted direct foreign investor participation on a joint venture basis. (STERP)

371. The Inclusive Government will also pursue joint ventures with competent consortia of foreign and local partners to raise financial and technical resources for investment in expansion, improved efficiency and reliability, as well as liquidating outstanding and current obligations.(STERP)

NOCZIM (STERP) nb Noczim is the National Oil company
387. Consistent with the new philosophy of cost recovery by public enterprises NOCZIM will operate viably without any subsidies from the state. Hence, as indicated in the 2009 Budget, NOCZIM will be allowed to charge market prices for its products and recover full procurement costs on its sales to the prescribed market, i.e. Government and farmers.

Alternative Sources of Energy (STERP)
395. Coal bed methane is a significant national resource which has to be exploited. It can be used both as an energy source and as feedstock for petro-chemicals.

Agriculture (STERP)
79. In the medium to long term, it will be essential and critical that the country guarantees food security and self reliance. In this regard, it is essential that we address the land issue consistent with the Global Political Agreement, which provides for a comprehensive transparent and non partisan land audit for the purposes of establishing accountability, gender equity and eliminating multiple farm ownerships as well as ensuring the restoration of full productivity on all agricultural land in the interest of all Zimbabwe people. Long term sustainable viability of agriculture can only arise if there is security of tenure through among other instruments, lease hold title, land permits and private financing of agriculture as recognised in the GPA.

Security on Farms (STERP)
107. In order to promote confidence, investments and other developments on farms, as well as ensuring security of farming operations, The Inclusive Government will uphold the rule of law as well as enforce law and order on farms including arresting any further farm invasions which disrupt farming activities.(STERP)

Viability of Farming (STERP)
109. Measures to guarantee the profitability and viability of farming also centre around deregulation of the marketing and pricing of commodities and allowing farmers to sell freely their commodities in the open market and market determined prices.

110. The practice of announcing pre and post planting producer prices is therefore abolished.

111. Pursuant to this policy of deregulation has been the removal of the GMB monopoly as a grain purchaser. The GMB will, however, remain the purchaser of last resort.

Contract Farming (STERP)
117. Furthermore, The Inclusive Government will for the coming summer crop season be calling for increased contract farming.

118. In this regard, agro-processing companies are now invited to begin making arrangements for provision of inputs, financing and extension support to farmers on a Contract farming win-win basis.

Mining (STERP)
Pricing of Minerals
142. A key component of STERP in reviving the mining sector will be to ensure that international commodity prices are levied and received by mining houses. In short, the pricing gap in respect of which domestic prices lagged behind international prices is a thing of the past.

143. Consistent with this policy, no more retention on commodity earnings will be made by any authority in Zimbabwe. However, as quid pro quo the Inclusive Government will review upwardly the taxation and royalty structures in line with international standards.

Marketing of Minerals
146. In the case of Gold, the same will remain a strategic reserve asset, whose licensing and marketing will be in terms of the Gold Trade Act. However international prices will still have to be paid to producers and no amount will be retained by the Reserve Bank.

Minerals Value Addition
153. Initiatives to increase beneficiation and value addition for all major minerals including gold, platinum, nickel, copper, coal, coke, and other various non-ferrous ores and concentrate are being undertaken.

Energy Minerals
168. The bulk of locally produced coal will be devoted to local thermal electricity power generation with the excess power being exported to the sub-region.

169. Furthermore, projects to exploit coal bed methane resources will be pursued.

International Air Access (STERP)
226. Air transport plays a very critical role in tourism development. In 1996, Zimbabwe was served by 45 foreign carriers linking the destination to more than 100 International source markets. Currently there are 7 carriers serving the destination. This is attributed to the restrictive and protective air transport policies that have seen many foreign carriers being denied rights to land in Zimbabwe.

227. To increase destination access from the major source markets both long and short haul, the Inclusive Government will introduce more liberal and less protective air transport policies and offer competitive incentives to attract foreign airlines in accordance with the Open Skies Policy.

The Diaspora (STERP)
252. Whilst STERP will prioritise foreign direct investment in Zimbabwe, special attention will be given to investments by Zimbabweans in the Diaspora. The Inclusive Government recognises the massive resources financially and intellectually that this group of people can offer to Zimbabwe.

253. All efforts will therefore be made to target this group and create concessionary and attractive opportunities for their participation in the development of the economy.

254. Potential benefits to the country include improved inflows of remittances, access to technology and markets through networks established abroad.

290. The Inclusive Government, in cooperation with other development partners will, therefore, mount a targeted campaign complemented by an incentive structure to induce skilled non-resident nationals to return and serve their country.

Implementation and Monitoring (STERP)

449. As per the Agreement between the Political Parties, the Office of the Prime Minister shall, through the Council of Ministers, ensure the overall effective implementation of Government Policies and Plans as approved by Cabinet.

450. In this regard, the Office of the Prime Minister will utilise and benefit from the diverse human resource base already existing in the country, also embracing expertise outside of Government from retired public servants, business, labour, academia and civil society.

CONCLUSION (STERP)

463. The Inclusive Government faces the challenges of collapse and decay and the poverty and suffering of our people.

464. We either wallow in the wish wash of disempowering party politics or we choose STERP and make a bold step away from the mundane.

465. Indeed Zimbabweans expect nothing less and should get nothing less.

John Legat

Chief Excecutive, Imara Asset Management

Revisiting the case for the ZSE...

noreply@blogger.com (African CEO) — Mon, 23 Mar 2009 16:04:00 +0000

In typical contrarian Zimbabwean fashion, the first positive signs of emergence from a decade of economic contraction and exclusion from the international community are happening at exactly the same time that the global economy is facing its first financial meltdown and worst economic fate since the Great Depression of 1929!

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Basic economics have expedited the collapse of what will go down in history as probably the loosestmonetary policy management ever! Locally, dollarisation has propelled political and economic reform, restoring sanity and ushering in a new operating environment. We believe that the reforms thus far are irreversible, and look forward to further normalisation, liberalisation and the return of growth. In this light we have conducted extensive company visits, and in this paper outline broadly our findings on what these changes mean for companies on the Zimbabwe Stock Exchange.

Dollarisation: A deafening wake up call

Zimbabwe has turned a new leaf. Last year’s uncontrollable monetary policy loosening saw a certain, if belated end to the Zimbabwe dollar (Z$), which had long lost its purpose as a measure and store of value. The consequent formal adoption of the US$ as the primary trading currency at the end of January 2009 has been the single most significant development that has completely revolutionised the rules to the game.

The balance of power is shifting

The re‐entry into the real world has been a rude wake up call, particularly for the politicians. Without the ability to print or borrow from multi‐lateral financial institutions the government has immediately attended to patching up its tattered tax net and henceforth has adopted a cash budget. Disclosures in the latest revised budget statement indicate the severity of the funding gap, with total tax receipts falling short of payroll costs by some $23m a month…and that is only for the payroll costs. An immediate support package in the region of $2bn is currently being sought from South Africa and the international community.

That this parlous state of affairs will lead to greater economic liberalisation at a macro‐economic level is highly likely. The recent hosting of the Danish foreign minister on a fact finding mission officially marks the softening of the official tone towards the west and the international donor community. In accordance with this, we anticipate further political reform and rationalisation, which will, of necessity be re‐requisites for support.

Impact on ZSE listed companies

After years of operating in an inconsistent policy framework characterised by price controls, concessionary borrowing rates and a myriad of other short term stop gap measures, Zimbabwean corporates have finally reentered the real world. For the larger part businesses have been in survival mode and the new operating environment has presented a return to normalcy.

We have been visiting companies, trying to get an idea of how their businesses have been affected by the new environment and while these findings are not conclusive, the following broadly outlines the impact thereon:

Boom Sectors
Beverages
Tobacco
Telecoms
Food/Foodretail

Positive in the medium term
Construction
Tourism
Paper
Industrials
Cement
Property

Bust/Small impact now
Banking/Financials
Clothing retail
Insurance

Boom Sectors

The most significant boon to the domestic economy has been the growth in local disposable incomes, particularly for the civil service. The payment of salaries in foreign currency has mostly been channeled into food and basic commodities. Traditionally, these companies are strong cash generators and self financing in their own right, but are currently benefiting from this surge. These are our top stock selections:

Delta
Innscor (through Spar supermarkets/fast food business)
Econet
BAT
OK Zimbabwe

Positive in the medium term

Generally these are sectors that will recover once broader economic reforms take hold, and also hinge on inflows of donor support, particularly into the education and health sectors:

PG Industries
ART
Dawn
Peal Properties

Bust/Small impact now

These are sectors that are in dire need of recapitalisation. All local banks and insurance companies without foreign partners are likely to struggle until balance of payments support is restored. Clothing retail and all credit model driven businesses are dependent on the local banking sector for working capital requirements and are likely to languish until financing is restored.

Conclusion

These are still early days and while the fundamentals have changed significantly, sustainable growth is dependent on a sustainable set of stimuli. Key to this will be the recapitalisation of the banking system, and further afield, the reintroduction of a new Zimbabwe dollar. The country’s tentative steps towards this are promising. In the meantime, the Zimbabwe Stock Exchange is valued at an all time low of U$1,34bn, compared to a historic norm of between US$2,5bn and US$3,5bn. The short term lack of liquidity in the country is due to the reduction in the economy to the quantum of US dollars in circulation – a cash economy. This is a short term phenomenon, and we believe investors should take advantage of this excellent entry opportunity, following these first bright rays of light.

'Over a barrel'

noreply@blogger.com (African CEO) — Tue, 17 Mar 2009 09:06:00 +0000

Why is it that utility companies (both public and private) feel they must compensate for the last ten years of losses in the first ten weeks of “dollarisation’? The term “over a barrel” starts to resonate a little too strongly right now as we learn to come to terms with ludicrous price demands from service suppliers, who somehow also believe that they should squeeze us to suffocation point as a supplier.

Clearly the term “unity” remains the preserve of the political arena, whilst commerce and industry continues along a far more carnivorous “dog eat dog” path to financial enlightenment.

Well let me say this to anyone who finds themselves ready to let their greed devour their Zimbabwean customers or suppliers; the same innovative survival culture that has brought us this far, can just as creatively be applied to finding more competitive supply chains, and more responsible customers, here or elsewhere, for the playing field is now level in USD Zimbabwe.

So, we continue to strive for quality improvements every day, with our costs firmly under control and our financial systems now dealing with manageable numbers, the time has come for us to turn our attention to marketing our products and services… now there’s a concept we haven’t had to consider for a while!

I’m prepared to bet that the companies that apply their collective wisdom to creating and providing goods and services that customers want or need, at a fair price and on mutually beneficial terms, will still be here five years from now and operating successfully… whilst those that chase somewhat shorter term enrichment goals, may well find their brands disappear along with their customer’s long abused loyalty!

Ok, that’s it for the soap box this month!

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

Zimbabwe Investment Notes - March 2009

noreply@blogger.com (African CEO) — Tue, 03 Mar 2009 09:06:00 +0000

“Honourable Biti: Establish the broad macro parameters, leave the rest to the ‘market’ ”

Exactly a year ago, we presented in these Notes a long list of measures to be introduced as a Post-Election Reform programme. At the time we had no idea that it would take a further year for a legitimate Government to be sworn in. Much has changed in a year, not least the global financial and economic meltdown that will make it far harder for Zimbabwe to seek the necessary support from our friends internationally. Weaker commodity prices will also make any recovery in the mining sector that much harder.

The Economy is without doubt in a total mess and the list of challenges is almost endless and hence it would be close to impossible for any one person or body to resolve each and every issue. “Micro-Managing” Zimbabwe out of its difficulties has been tried and it has failed since the task is simply too great. By contrast, “Macro-Managing” Zimbabwe, by establishing broad parameters for businessmen, entrepreneurs and foreign investors to operate within, will result in the “market” resolving many, if not all, of Zimbabwe’s economic problems.

A year ago we suggested the following twenty measures and have updated them today using italics:

Remove all exchange controls immediately. Zimbabwe needs one exchange rate. Expect the Zimbabwe dollar to rally on such a move. We still have exchange controls but the economy has been dollarized. Legalise the use of various currencies and allow a ‘New’ Zimbabwe dollar to float freely and compete.

Simultaneously, cease monetization of Government spending. Confidence can only be restored in a ‘New’ Zimbabwe dollar if the market knows that it’s issuance is limited or finite.

Remove subsidies within the economy such as fuel, agricultural produce and equipment. This has largely been done by default.

Remove all price controls. This has largely been done by default. Prices should be regulated by competition as we are starting to see in the supermarkets. Competition needs to be encouraged.

Introduce a new monetary regime by the introduction of a Currency Board system whereby the New Zim dollar is linked to an external currency. This worked superbly in Hong Kong and many Eastern European countries. As a result, the Central Bank ceases to exist as an arm of Government. Would follow on from 1 above.

Encourage Zimbabwe’s brightest skills to return from the diaspora. Introduce a flat tax regime, whereby tax rates are fixed at 15% across the board. This includes income, capital gains, corporate tax rates etc. Make Zimbabwe an attractive investment destination. Zimbabwe has a huge opportunity to attract Zimbabweans back home. The problems caused by the global financial meltdown are negatively effecting Zimbabweans many of whom would love to come home. We need their skills and capital.

Throw away the existing Indigenisation Bill and Minerals and Mining Bill, and start again to encourage investment into Zimbabwe’s abundant resources. With weak commodity prices, we have to make Zimbabwe mining especially attractive relative to elsewhere in the World.

Re-establish the Rule of Law and in particular Property Rights so that corporates and individuals have the capacity to borrow from the banking system by offering collateral. Agriculture needs urgent attention in this regard. This is well known to most people!

Market Zimbabwe to the World to reactivate the tourism industry for the 2010 season. The World Cup is next year!

Open up the airwaves to private radio and newspapers. Introduce 3G licences; improve broadband access. This is all part of making Zimbabwe an attractive investment destination. The phones need to work so we can communicate with the World and potential investors!

Re-establish a privatization commission and engage specialist foreign investment banks to advise the new Government on the sale of such industries as telecoms, energy, airline/airports, railways etc so that Zimbabwe can negotiate with strength when dealing with potential industry buyers. Relative to last year, there are now many under-employed investment bankers who have specialized in privatization who could advise Government, now that the World’s banking system is weak. They should be cheaper too!

Reduce the civil service and armed forces as a means to cut Government spending. Seek World Bank assistance for redundancy payments as has occurred elsewhere in Africa. We suspect removing ghost workers will do much of this!

Further encourage the Capital Markets by privatizing the State’s own pension fund for the Civil servants/armed forces, as well as NSSA.

Utilise the Stock Market when privatizing state assets as a means to broaden public ownership. Indigenisation at its best. The market has now dollarized, but the costs of dealing are far too high to encourage turnover. Reduce dealing costs and the turnover will rise and all stakeholders benefit.

Engage all stakeholders with regards the introduction of a new Constitution. As we have seen in Kenya, this should not be delayed. This is now underway as a consequence of the GPA.

Remove import tariffs especially on imported capital equipment and consumer goods. Thanks to dollarization, this is imperative. Macro-manage by removing all import tariffs as part of a wider reform of the tax system. Zero import tariffs will make living and investing in Zimbabwe that much more attractive. The more people that return, the larger the tax base of new income earners and businesses. The greater the tax base, the easier it becomes to fund Government through low flat taxes (see 6 above). Currently Zimbabwe is expensive to live in relative to say South Africa or Zambia. That needs to be reversed if we are to attract the skills back and attract foreign investors.

Encourage international investors to invest in Zimbabwe’s energy sector to develop its coal, hydro and coal-bed methane assets. This will be critical as Zimbabwe’s economy recovers.

Encourage the donor community to assist in developing and investing in longer term infrastructural solutions/projects. This is starting to happen.

Seek donor funding to repair and rebuild the country’s health and education system so that everyone has access to schools and hospitals. The cholera epidemic has ironically accelerated this process.

Invest in the Police Force and Prison Services to ensure that law and order can be maintained with the necessary equipment at hand. A priority if law and order is to be re-established.

We could go on. The list is endless. The more the economy is liberalized, the more it will encourage the private sector to invest in the economy and social services. The more deregulation, the less scope for corruption. The current economy has been built on patronage which is why it finally collapsed under hyperinflation. Dollarisation has spread like wild fire but the effect of this is to shrink the economy to the level of the available US dollars (or rand) in circulation. That is why many businesses and shops are suffering from lack of demand and why the golf courses are empty. The only way to boost the economy is to boost the foreign exchange in circulation that will only come with confidence and support from foreign investors and donors. Hence the need to make Zimbabwe an attractive investment destination. If you were a Zimbabwean living in South Africa and paying income tax of 25% or more, or a businessman paying 30% corporation tax, in a country that itself could change under a new Government in April’s elections, (perhaps for the worse) moving back to a New Zimbabwe where law and order exists, where taxes are set at 15% or lower, and where the cost of living is the same or lower than its neighbours must be an attractive option if the investment opportunities exist. Such attractive macro parameters can be set with relative ease by the Ministry of Finance. Any attempt to micro-manage will simply lead to excessive stress levels for those attempting to resolve the awesome number of challenges which can be better tackled by the free market.

In last year’s Notes, we concluded: “Any new Government’s first and main priority will be to introduce a new monetary regime to destroy hyperinflation. The removal of all exchange controls is a necessary element of such reform. We need to encourage those who have left Zimbabwe to come back and assist with their skills and their capital. We need to make it attractive for them to do so, and tax reform is one of the best methods. We need to re-engage the foreign investment community for their assistance and capital. As we have said before in previous Notes, the necessary foundation for the economy will only be solid with a return to the rule of law and the re-introduction of property rights. That does not mean reversing the shambolic land reform programme, but it does mean a return to leasehold or freehold property that can be utilized by the financial system as collateral.”

Time is not on our side. Skeptical Zimbabweans and a skeptical World would be encouraged by such measures so the sooner the broad parameters are put in place, the better. We will be doing our bit.

John Legat

Chief Excecutive, Imara Asset Management

Zimbabwe 2009 Monetary Policy Statement

noreply@blogger.com (African CEO) — Mon, 02 Feb 2009 13:03:00 +0000

Local currency revalued with immediate effect, through the removal of 12 zeroes, accompanied by the introduction of the following new currency denominations: $500, $100, $50, $20, $10, $5 and $1;

Purchase of goods in foreign exchange vouchers introduced;

All corporates shall with immediate effect be allowed to pay salaries in foreign currency for their employees without prior Exchange Control approval;

FCA upfront sales to the Reserve Bank by exporters has been reduced from the current 15% of exports to 7,5%, with effect from 1 February, 2009;

All gold producers shall retain 92,5% of their sales in foreign exchange;

ZSE trading: A financial sector stability levy of 1.5% shall be payable to the Reserve Bank in foreign exchange; and each seller of shares in foreign exchange shall liquidate 3.5% of proceeds to the Reserve Bank at the going interbank exchange rate.

Download full Monetary Policy Statement

Zimbabwe National Budget 2009

noreply@blogger.com (African CEO) — Fri, 30 Jan 2009 12:36:00 +0000

Zimbabwe National Budget as presented on 29 January 2009 by the Acting Minister of Finance, Senator P. Chinamasa.

Salient statistics:

Total budget size: US$1.9 billion;
Projected revenue inflow of US$1,7 billion while an additional $200 million from external partners;
US$1.45 billion will be directed towards recurrent expenditure;
Balance will fund capital projects;
US$157.8 million allocation to the health sector;
US$149.8 million allocated to the Ministry of Education for the construction and rehabilitation of schools and procurement of teaching material and equipment;
US$47.4 million allocated to tertiary institutions for recurrent and capital projects.

» 2009 Zimbabwe National Budget (iPaper format)

» 2009 Zimbabwe National Budget (Pdf format)

hey presto

noreply@blogger.com (African CEO) — Wed, 21 Jan 2009 18:40:00 +0000

Well.... 2009 has started... perhaps not with the bang we would have wanted,
but certainly I can hear the faint sizzling of a lit fuse!!

To be honest, we wondered if we would be operating in January when we shut
up shop for Christmas, but we got back to endemic dollarisation, and "hey
presto", everything has changed again!

In an environment where the dollar we collect today has the same value as
the one we spend tomorrow, there is a sense that we can start to get back to
what we should be doing every day, managing our business rather than
consuming every waking hour trying to hedge our currency bets, and stemming
the depreciation blood flow! The down side of course is that already
suppressed volumes have, and will continue to plummet even further, but if
our capacity utilization is 10%, and we can produce that 10% in at least a
breakeven fashion then certainly we are better off.

The next trick of course is how to start using up some of the excess
capacity!!

Obviously it's not going to be utilized for this economy in the foreseeable future, so now more than ever, there is an urgent need to export!
Interestingly, from a Celsys perspective we believe that we can start to
focus appropriate amounts of time and resources to this endeavour, with
hopefully meaningful results.

I would also like to talk briefly about Celsys Print at this point. I am very pleased to report that we have made some important high level appointments at the Print Division and we have embarked on an ISO quality
standards programme to ensure our international competitiveness is more than just price based.

As you will recall, Linc Pearson joined us from Fidelity Printers last year as Technical Manager responsible for all production and quality matters. In January we also appointed a new General Manager, Adam Lemon who has been
tasked along with Linc, with taking the business to the next level of
success and beyond. Adam's predecessor, Dhiru Raja, has be handed the
biggest challenge of all, as his new role is to establish and develop
regional joint ventures for us in the security printing field. He has also
been charged with the crucial task of securing export markets.

May I take the opportunity to wish them all the very best of luck, as
together we start the process of taking Celsys out of a care and maintenance
phase and into a period of aggressive, sustainable and profitable growth.

That's it for now... Happy New Year!

Geoff Goss
Country Manager
LonZim Plc
Chief Executive Officer
Celsys Limited
Block 5
Arundel Office Park
Tel: +263 4 369160
Fax: +263 4 369179
www.celsys.co.zw
www.lonzim.co.uk

‘No trade on ZSE till next year’

noreply@blogger.com (African CEO) — Fri, 19 Dec 2008 11:10:00 +0000

The Herald

19 December 2008

THE Zimbabwe Stock Exchange Committee has warned that there would be no resumption of trade at the bourse for the remainder of this year, unless stockbrokers’ concerns are addressed.

It said stockbrokers would be unable to furnish the Securities Commission with audited financials of networth by end of day today owing to costs involved and professional resource availability at this time of the year.

On Tuesday, the commission warned that it would close all stockbroking firms that fail to deliver the required statements by the deadline.

The statements were needed to allow resumption of trade on the stock market, which has stalled for the third week running.

In a statement, the ZSE committee said it was engaged in negotiations with the Securities Commission to resolve the trading impasse but expressed optimism that the normal trading environment might return next year.

"Consultations with the relevant authorities are taking place and we are hoping that a normal trading environment will be restored as soon as practicable although this is unlikely to be achieved in the current month," said ZSE.

The Commission is now regulating operations at the local stock exchange, taking over from the ZSE committee. Normal trading on the local bourse has been negatively affected by the requirements for purchasing shares, which came into effect on November 20 this year.

The requirements stipulate that all funding for such purchases must be formally guaranteed by a bank at the highest level as a prerequisite to accepting and processing all orders.

Having regard to the settlement risk attaching to this requirement, the consequences of breach as well as the promotion of market integrity and investor confidence, stockbrokers have been unable to play their usual intermediary role of advising clients and taking orders.

"This situation is unlikely to change until settlement issues raised by the requirements have been resolved," warned ZSE.

Commenting on the clearing and settlement issue, the ZSE said the normal settlement cycles and order matching principles have not been working as they would under normal circumstances due to a variety of challenges encountered within the banking system.

"The issues are however being progressively untangled with satisfaction.

"Information on a variety of defaults is being compiled and these are being actively investigated and all available evidence is being appraised according to Securities Commission Act (24:25) section 65 and the Members rules 10.01 and 11.01," said the committee.

Analysts argued the commission was also not in a position to summarily close any stockbroking company because of standing Members Rules. This rests with the ZSE Committee.

In accordance with the Securities Act, Section 118: Rules and Section 65 of the same Act it will be observed that such Rules do not exist currently under this Act and have therefore not been Gazetted as prescribed in Section 118(5 (a) and 6).

Recourse has therefore to be made to Section 121 (6) of the same Act.

This then means that "Any rules made by the Zimbabwe Stock Exchange in terms of Section 94 of the repealed Act and in force immediately before the fixed date shall be deemed to have been made by the ZSE in terms of Section 65 and may be amended or repealed accordingly."