African Ceo's Weblog by AfricanShareholder

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Meanwhile we are left to contend with the severe limitations of our outdated infrastructure and legislation and I have been asked to address the aforementioned audience on the subject of strategies to increase margins in an environment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."

African Sun Limited analyst briefing, 3 December 2008

noreply@blogger.com (African CEO) — Wed, 03 Dec 2008 22:01:00 +0000

African Sun Limited released it's abridged financial report to shareholders and stakeholders for the year ended 30 September 2008.

Financial highlights:

Room occupancy up to 41% from 40% in 2007
Operating profit margin up to 54% from 24% in 2007
Basic EPS at Z$19,608
A dividend of Z$229.72 per share declared, payable either in cash or scrip

Attachments
› African Sun Limited website
› Full abridged results in pdf
› Analyst briefing presentation
› Audio interview with Shingi Munyeza
Listen to short interview with Shingi Munyeza, CEO African Sun Limited

Celsys first in Zimbabwe to publish conformity statement in compliance with King 2

noreply@blogger.com (African CEO) — Wed, 03 Dec 2008 14:57:00 +0000

It is rare to find listed companies in sub-saharan Africa complying with the regulatory obligations to disclose the main areas of non-conformance with best governance practices in their annual reports as enunciated in the King Code on Corporate Governance 2002 and their relevant country governance codes.

Celsys Limited, in its recently released annual report for the year ended 2008, announced the implementation of a mechanism for its members and senior management to continuosly appraise and improve corporate governance and investor relations practices. Page 14 of Celsys' annnual report highlights the areas of material governance practice non-conformance, the reason for non-conformance and the action to be taken by the Celsys Board. Celsys is a relatively small company measured by market capitalisation and has announced practical resolutions to the areas of non-conformance having due regard for the resources available to it

"Celsys seeks to provide its investors with profitable exposure to a diversified range of specialised telecommunications and IT opportunities that enjoy significant current and latent growth prospects in emerging African markets."


› Celsys investor website
› 2008 Annual Report
› Corporate governance section

WARS are FOLLY

noreply@blogger.com (African CEO) — Mon, 01 Dec 2008 08:29:00 +0000

I probably don't have to tell you that nigh on every business in Zimbabwe is staggering towards the annual shut down for a bit of respite from this twister of an economy. How it is possible that we still have no political resolution, or injection of economic common sense is beyond me, so we continue to dance along the tightrope, which really now appears to be burning up behind us.

Be that as it may, we have a responsibility to do what we can in the best interests of our stakeholders, and to that end, we somehow manage to keep our staff employed, and customers supplied and our creditors paid.

We have made the great leap of faith into the world of FOLIWARS this month, albeit with only certain of our products, as the RBZ felt that the sale of airtime and security printed documents, should not be in any currency other than Zimbabwe Dollars and at a controlled price! Now there's a thing! Interesting word FOLIWAR. In my view all WARS are FOLLY, but here's hoping this recent initiative is not! Time will tell.

Also in the 'Good News" section I am pleased to advise that our partnership with FMNA (see last months Blog) is already bearing fruit and we have been part of the first licence sale in Lesotho and anticipate the next one to be here in Zimbabwe. Although the commission on the licence fee is most welcome, the real opportunity for us lies in the on-going revenue generated from the messaging traffic, all of which is US$ based. Of course there's nothing for nothing and we will have on-going account management responsibility for our sites and are also undertaking the role of IM support centre for FMNA's Chatbar product. If this all seems like Follywords to you, take a peek at www.chatbar.com and www.fmnsoft.com.

If you are reading this, it means you are still alive, and that's a good thing. I hope you have a relaxing Christmas break and if you are outside the country looking in, keep hoping that the change is coming soon, and if you are on the inside looking out, well done for getting this far!

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 Wild West

noreply@blogger.com (African CEO) — Tue, 21 Oct 2008 13:18:00 +0000

Blimey what a rough ride we're having.

This ongoing political impasse (euphemistically put I thought) is certainly not helping our economy, but we're not going to let that upset this wee blogger now are we!!

Having released the Celsys full year results to June 2008, I thought it would be important for me to spoil a good story with a few facts surrounding questions that arose at our recent analysts briefing.

First of all, Celsys does not print Zimbabwe Dollars, so please don't drag us into that debate any further. Secondly, yes we had a tough year, but in real terms, ie measurable US$ equivalents, we had revenues of over a million dollars and a profit before tax of some 20%.

Admittedly it is predominantly a paper profit, comprised of exchange gains following a very generous move by LonZim that converted a foreign currency debt to a fixed Zimbabwe dollar one.

Fairy Godmothers don't really come around that often, so we should be most appreciative of this gesture of goodwill!

Subsequent to the year end however there has been a flurry of activity that I trust you will also find of interest.

First of all, we are delighted to welcome Linc Pearson to the Celsys Print Team. Linc recently retired from Fidelity Printers where he has spent the last 28 years in charge of production and quality. He joins us with the mandate to take Celsys Print to the highest international quality standards available as we position ourselves for significant regional expansion.

There is also news at Celsys Comms, who have recently signed a regional partnership deal with FMN Africa that during the course of 2009 should create a renewable foreign currency income stream for the division. FMNA has a proprietary technology that enables email, instant message and sms communications, seamlessly to and from GSM standard mobile phones, without the need for any application on the device.

Celsys has exclusive rights to the technology in Zimbabwe and non-exclusive rights in the sub region. We are currently participating in trials with two well known mobile networks in the region and will be operating the IM support centre on behalf of FMNA from our premises in Harare.

Also in the Comms division, we have been invited by another very well known mobile operator to put together a mobile payphone solution for them in one of our neighbouring countries, and I hope to be able to bring you more on that before the end of the year.

So you see, it's tough, but it's not all bad! Watch this space as they say in the movies…and let's face it, it is a bit like the wild west at the moment isn't it?

Geoff Goss

CEO - Celsys Limited

Zimbabwe Hyperinflation

noreply@blogger.com (African CEO) — Mon, 20 Oct 2008 13:00:00 +0000

Here are a couple of useful links to those following hyperinflation and the exchange rate in Zimbabwe. The figures are astounding....

ZimbabweanEquites.com - Year to Date: -65.67 Trillion %

Zimbabwe Inflation: 5.77 Trillion %

World Bank Africa Chief Economist Launches New Blog, AfricaCan.worldbank.org

noreply@blogger.com (African CEO) — Tue, 23 Sep 2008 06:15:00 +0000

WASHINGTON, September 22, 2008 – The World Bank Africa Region on Monday announced the launch of a new blog from its Chief Economist Shanta Devarajan. The blog, AfricaCan.org, will serve as an online forum for the sharing of ideas about Africa's development.

The objective of the AfricaCan blog is to create a platform for (1) conversation around the issues of sustainable growth and development in Africa, and (2) outreach to help promote analysis and evidence about what is working and what isn’t on the continent.

The blog will include guest commentary from Devarajan's colleagues at the World Bank and will feature posts in English and French.

“There is no shortage of economics blogs out there, but this is one of the very few you will have to turn to if you are interested in a serious debate on African development,” said Dani Rodrik, the Rafik Hariri Professor of International Political Economy at the John F. Kennedy School of Government at Harvard University. Rodrik’s own popular weblog features “unconventional thoughts on economic development and globalization.”

Devarajan invites comments from students, academics, fellow economists and bloggers, members of government and civil society, and anyone interested in ending poverty in Africa. Journalists are encouraged to quote Devarajan directly from the blog.

“Africa Can is a place for all those who care about Africa’s economic development to gather and comment. The debate on Africa’s economic growth and poverty reduction should not just be held in boardrooms and parliament halls but in classrooms, tea shops, and village meetings, where the people who are most affected can contribute,” Devarajan said.

Devarajan joined the World Bank's Africa Region as Chief Economist in January 2008 after five years in the Bank's South Asia region. While in South Asia, he launched End Poverty in South Asia, a blog aimed at creating a conversation around how South Asia can end poverty in a generation.

“The End Poverty in South Asia blog was a great success for the region. It drew together many voices on South Asia's development, voices not just of assent but of discord and debate. It livened up the discussion and drew a whole new audience for the Bank,” said Praful Patel, former World Bank Vice-President for the South Asia region.

About Shanta Devarajan

Shanta Devarajan is the Chief Economist of the World Bank’s Africa Region. Since joining the World Bank in 1991, he has been a Principal Economist and Research Manager for Public Economics in the Development Research Group, and the Chief Economist of the Human Development Network, and of the South Asia Region. He was the director of the World Development Report 2004, Making Services Work for Poor People. Before 1991, he was on the faculty of Harvard University’s John F. Kennedy School of Government.

The author or co-author of over 100 publications, Mr. Devarajan’s research covers public economics, trade policy, natural resources and the environment, and general equilibrium modeling of developing countries. Born in Sri Lanka, Shanta received his B.A. in mathematics from Princeton University and his Ph.D. in economics from the University of California, Berkeley.

For more information, visit:

http://africacan.worldbank.org

Opportunities, opportunities, opportunities

noreply@blogger.com (African CEO) — Wed, 03 Sep 2008 09:46:00 +0000

So I found myself on stage the other day, asked to speak at the ABAZ Just Business conference in Zimbabwe on the subject of the investment climate in this country. You can see the slides from the presentation here.

Despite all the doom and gloom it turned out to be quite easy to see the opportunities that are likely to unfold in a resurgent Zimbabwe and it is most pleasing to note how well Celsys is positioned in this regard. I won’t pretend that we are making a fortune in the present environment, but it is clear that we are well positioned to take advantage of the growth prospects of the future.

IT and Telecoms are the next generation of infrastructure, that along with Financial services, form a tripod upon which emerging and recovering economies are built. Technology is such that with the right attitude and money, an emerging economy can simply leapfrog many tiers of development and go straight to the cutting edge, skipping out all of the painful in-between stages that other economies have passed through.

Sounds simple enough.. but what is the catch?

Well, in my mind the catch is very simple too… you can have the latest and greatest tools, technologies and infrastructure, but if you do not possess the skills and knowledge to take advantage of them, you may as well remain in the comfort of your dark age.

Now is the time to do something about skilling up in preparation for the change that is inevitable. We boast about having one of the best educated populations in the region, but education per se is only the start of the skills development process. We certainly have the material to work with, but are we investing enough of our meagre resources in giving our people the essential skills they will require in a new competitive environment? I don’t think so.

And this will be my hobby horse for the coming year at Celsys. Having secured our financial safety with the backing of LonZim, I am now setting about ensuring that our valued people are given the right set of knowledge tools that they need to survive the current turmoil, thrive through the change and excel in the future.

Wish me luck….

Geoff Goss
Celsys Limited CEO

LonZim Country Manager

2008 Top Company Survey Awards (Zimbabwe)

noreply@blogger.com (African CEO) — Mon, 25 Aug 2008 12:24:00 +0000

Companies within our newly formed Group recently won the 2008 Top Company Survey Award (Kingdom Bank Financial Holdings Limited), the Banking Sector Winner (Kingdom Bank Financial Holdings Limited), the Agro-Processing Sector Winner (Tanganda Limited) and the Retail and Distribution Sector Winner (Meikles Africa Limited).

Every year this impartial third party survey of listed companies in Zimbabwe is carried out by prominent members of the financial community. Subjective and objective criteria are applied to Zimbabwe's listed companies to determine the "winners" of various categories. This annual review, carried out for many years now, seeks to reward excellence in a number of areas which prima facie would suggest that the businesses awarded with prizes are the most successful and therefore sustainable. A brief review of the awards over the past 10 years show that many awardees have fallen by the wayside for various reasons, which, most commonly, include the adoption of unsustainable business practices.

From my perspective, through the awards we receive, the investment community's recognition of the efforts that we have put into creating the new KML Group and the excellence of their constituent parts is an important part of cementing our new identity (both from within and externally) and communicating our long term investment case. Our philosophy within KML currently is to continue investing for the long term and I feel that the appraisal criteria for 2009's top companies awards recognise more prominently companies' long term performance and sustainability practices. After all it’s only those companies that can see the future that will survive in the long run. Once again the KML Group will look forward to participating!

Nigel Chanakira

Zambia - from strength to strength

noreply@blogger.com (African CEO) — Fri, 11 Jul 2008 15:01:00 +0000

We visited Lusaka at the end of last month. Quite a contrast from events in Zimbabwe! The Zambian economy has been powering ahead whilst that of Zimbabwe has been contracting at an even faster pace. Yet despite this and despite the fact that the population of Zambia is now larger than Zimbabwe’s, its agricultural and manufacturing base remains small by Zimbabwe’s standards and tiny relative to Zimbabwe’s previous prior peak at the end of 1990s. Then we should not forget that Zimbabwe has been in decline for ten years whilst Zambia was in freefall for twenty five years!

It’s amazing the change that we noticed since our last visit just six months ago. Confidence is running high amongst businessmen, the currency has been strengthening (up 20% so far this year against the US dollar), inflation is being kept in check despite rising global fuel and energy prices as a result, investment levels continue to grow and the stock market is thriving with two IPOs listed this year. Like many African countries that have embarked on economic and political reform over the past decade, the only clouds on the horizon, apart from the few in the sky, are the potential constraints imposed by lack of infrastructure. Zambia has been fast outpacing the growth in power generation capacity as is the case for many other African countries.

The huge foreign direct investment into the mining sector in recent years will start to have a major impact from next year. Zambia’s first two uranium mines begin production from 2009 adding important diversification from copper, Zambia’s largest export. Uranium is three times the price of copper. The new copper mines enter production in 2010. At its peak in the 1970s, the country produced 700,000 tonnes of copper. 2008 output should be back to 650,000 tonnes, rising to over 1,000,000 tonnes in 2010 as the new mines come on stream. Over 50% more production which will help shield the country should commodity prices peak in the future. Furthermore, there has been investment into the value-added end with the construction of copper smelters. In 2008, the Government introduced reform into mineral taxes bringing Zambia more closely into line with other countries. As a result, Government fiscal revenues will grow dramatically over the next few years and will likely result in a fiscal surplus. Added to a trade surplus and a balance of payments surplus, Zambia’s currency is likely to continue to rise. The Bank of Zambia does not attempt to peg the Kwacha unlike many other commodity countries. Being landlocked, it’s hard for Zambia to be a manufacturing hub. What industry there is supplies the growing domestic economy so no need to worry about manufacturing exports when setting currency policy. Foreign exchange reserves have jumped from US$300 million in 2005 to US$1.2 billion currently and US$1.5 billion expected for year end. That equates to 12.5% of GDP of US$12 billion.

Real incomes are growing rapidly and with them, consumption growth. We have been concerned about the effects of rising fuel and energy prices on consumption growth generally in Africa but so far our investigations have not provided much evidence that this has been the case. As economic growth accelerates, real incomes rise bringing a greater part of the population into the formal sector. In Zambia, fast moving consumer good growth is running at twice GNP growth which itself is running at 7% or so. High volume growth is being reported by many industries. MTN Zambia, a relatively new entrant to the Zambian mobile market has seen its subscribers jump from 120,000 to nearly 500,000 in a year. Cigarette, beer, and cement volumes are all growing faster than expected.

The agricultural sector is also experiencing strong growth and is benefiting from rising global food prices. Yet Zambian agriculture and farming is still smaller than that of Zimbabwe as the former has come from a very low base. That is despite the fact that the population is larger than Zimbabwe and considerably richer at the moment. Total pig production is not far greater than one large Zimbabwean farmer’s production today. Wheat production is estimated at 200,000 tonnes which is far below Zimbabwe’s peak production ten years ago. As a result, the agricultural sector has far further to grow. Private sector investment into irrigation, sugar plantations and now into palm oil will greatly assist the sector in the years ahead.

The stock market has also been one of Africa’s better performers in recent years in part helped by the strength of the kwacha against the US dollar thereby boosting US dollar returns. The market itself remains relatively under developed largely as it is one of Africa’s newest markets. There has been a lack of new issues coming to the market and so depth has been limited. That is until this year as Government seems more willing to encourage and promote the market through privatizations. So far this year CEC, the private sector energy company has joined the market and in June, Celtel Zambia, the country’s largest cell phone manufacturer was listed, becoming in the process the largest listed local company with a market cap of US$1.3 billion. Later this year Government will be privatizing the state bank, Zanaco, using the stock market. Excluding dual listed shares, the capitalization of the market totals US$5 billion for 18 listed companies. The liquidity remains poor and the diversity of sectors is limited as compared with Zimbabwe which is one of Africa’s oldest stock markets. At the Old Mutual implied rate, the Zim market is valued at a mere US$3 billion, yet it has over 80 listed counters covering a broad spectrum of the economy.

A visit to Zambia reminds us of the enormous potential of Zimbabwe should we ever embark on an economic reform programme. The infrastructure maybe tired here but it still exists and can easily be fired up again. Harare and Bulawayo could do with new shopping developments as we have seen in Lusaka over the past ten years (Westgate was a good start all those years ago!), and the entry of South African retail chains would be welcome. The stock market is clearly undervalued relative to its peers such as Zambia. Equally a visit to Zambia reminds us of just how frustrating policy in Zimbabwe has become. Change for the better could be so easy, yet it’s been made to be so very difficult!

For those ‘Titanic fans’ of our Investment Notes of years gone by: The Titanic has now sunk. There are a small number of lifeboats left drifting filled with shocked, injured and traumatized passengers. One of the lifeboats has the Captain and his senior officers on board, those same people who irresponsibly drove the ship at high speed into the iceberg that ultimately sank the great ship. As the sun begins to rise, a sense of relief is felt on the boats, with hope that nearby ships from Europe and America could soon provide assistance. The Captain looks very concerned and helpless as it becomes apparent that his lifeboat is sinking. Those in the other lifeboats, sensing that their help is required, look the other way as their boats are already full. A chuckle is heard from one of them. Too bad.

John Legat

Chief Excecutive, Imara Asset Management