Discounted opportunities on the Zimbabwe Stock Exchange! Really?

The Zimbabwe stock exchange has had a very bad patch lately, very bad indeed. Since the beginning of March, the industrial index has retreated by 4%, whilst the mining index has slipped much more, having lost a whooping 8%. The losses are huge, more so considering the very stable inflation outlook and the good stream of December 2011 results that are coming into the market. Fidelity Life, Dairibord, Pearl Properties and Innscor, among other companies, have posted impressive results that should have ordinarily had lifted the market. But negative sentiments largely emanating from bickering policy makers on key policy aspects continue to cast a big shadow on the future ability of corporates to continuously generate good earnings.

Analysts and investors would generally converge in wide ranging opinions that a handful of the companies on the stock exchange are trading below their net asset values and when evaluated against the tight liquidity conditions in the market and heightened negative sentiments, these opinions could be true. Discounted opportunities can be found here and there, but the general opinion that the market is trading at huge discounts could be, but just faulty.

Pearl Properties, currently trading at a market capitalisation of $41 million is an interesting counter on the stock market! Its December 2011 balance sheet depicts a strong property portfolio of $110 million up from $86 million in December 2010, thanks to some aggressive mark-to-market gains of $20 million. Its net asset value is very strong at about $107 million. The share price, according to these figures, is therefore trading at a huge discount considering that the market values it at $41 million vis-à-vis the net asset value of $107 million. Who would not want to buy $1 by just paying $0.38 on Pearl shares? But a closer look at the income components, especially the fair value adjustment gains, reveals a weak link on the strength of Pearl’s revenue generating model. Yes, the company has done well under the circumstances to achieve an occupancy rate of 78%, but the net income from the core business translates to a P/E ratio of only 10x. The huge asset portfolio of $110 million can therefore only be valued to the extent to which it generates positive net cash flows for stock holders.

Thus, the ‘discounted’ opportunities in Pearl Properties are only on paper as its true ability to generate tangible earnings remains constrained by the state of the economy and quality of the property portfolio. The market valuation of Pearl Properties can therefore be assumed to be fair and reasonable, and the same applies to many other listed companies on the market that, at face value, may appear to be trading at huge discounts.

Whilst investors remain The money market remains the best investment choice in Zimbabwe at the moment, with cumulative yields in excess of 63% since dollarisation in 2009. The persisting liquidity challenges, which to some extent have been compounded by the deteriorating asset quality within the banking sector as noted by the RBZ, continue to sustain the high investment interest rates of around 16% per annum that are obtainable in the market for those with huge parcels of investible funds.

Recent results from listed banking institutions reveal the tight net interest margins that are prevailing in the sector around at 50%, a revelation of the very stiff competition for liquidity among the banks especially at a time the market had been without efficient inter-bank transactions due to the absence of quality paper to use as collateral. These prevailing high money market yields put Zimbabwe’s money market among the best yielding markets in the world in dollar terms. However the ability of the market to continuously attract more offshore funds chasing these high returns remains constrained by policy uncertainty, especially regarding the tenor of the multiple currency system.

Whilst money market investors continue to bask in the glory of good returns, the borrowers have been finding the cost of funding balance sheet very high and unsustainable. Zimbabwe needs continuous fresh capital inflows to fund the recover process of the economy, and indeed the existing high interest rates on the money market should act as good enough an incentive in attracting high risk capital inflows from financial centres around the world where interest rates remain very subdued around 1% per annum. On the contrary, the much desired economic recovery cannot be achieved with the existing high rates of borrowing, especially for industry that is willing to embark on long-term capital projects.

A balance would therefore need to be struck to ensure that the investment interest rates remain attractive to the global investors, whilst at the same time ensuring that the pass-on rates to the borrowers do not over-burden an already fragile economy. A policy framework that is predictable, transparent and consistent would usually provide the anchor upon which the important market variables will converge to create a vibrant efficient market mechanism that promotes growth.

New Mining Fees - Noble Intentions, But...

The recently gazetted mining regulations under statutory instrument 11 of 2012 have instigated constipation. And many miners, mostly the small scale indigenous miners feel the government is misdirected and has abandoned them. They are justified, to some extent. To successfully register an ordinary gold claim measuring 10 hectares, small scale miners would need to part with $500 for the prospecting licence, $20 for the map, $200 for the claim certificate and anything up to $500 for the prospector. The total would be at the minimum, $1,200. For chrome, small scale miners will need to pump at least $2,600 in regulatory fees before registering an ordinary block. Small as the figures may seem, the background of those that get into small scale mining relegates them to a position where they may not be able to venture into mining legally again. Very few new small scale miners will be able to register claims.

By the stroke of a pen, the lives and livelihoods of many small scale miners and their wider communities in Makonde, Mt Darwin, Sanyati, Shamva, Mazoe, Gwanda, among other areas, have drastically changed for the worst.

Not only are the small scale miners going to find the heat unbearable, but the big mining companies as well. The platinum claims application and registration fees have been hiked significantly to $3 million! The diamond sector sees one needing at least $6 million to register claims. A quick scan of Zimbabwe Stock Exchange listed companies' balance sheets reveals that no more than 5 companies (excluding banks) have net cash positions exceeding $6 million. In any case, most corporates are highly geared and cumulative losses since dollarisation in 2009 top $710 million. It is therefore obvious that more than 90% of listed companies on the ZSE cannot raise $6 million in free cash flows and therefore may not participate in the diamond mining even if they had interest to diversify into the same.

Right issues have performed dismally in the past, and local shareholders have no capacity to raise cash to fund their existing businesses. Therefore given the scenario where the new regulations are barriers for even listed companies to take part in alluvial diamond mining in Zimbabwe, the most plausible explanation for those that will undertake and indeed pay the $6 million largely point to cunning indigenous investors that do not mind being fronts and stooges of foreign capital as long as it take them into the lucrative alluvial diamond mining. And life goes on!

The notion that diamond mining is capital intensive is only a myth as far as alluvial diamond mining is concerned. Ordinary people with sticks and shovels could discover alluvial diamonds in Chiadzwa, mine them illegally and make fortunes, of course with little benefit to the wider society of Zimbabweans as a whole! The government can therefore not argue that the hike in fees is to screen investors and afford those with capacity to mine to take part, at least for alluvial diamond mining.

The government has therefore created huge barriers to entry largely across the board in mining and the majority of indigenous people, whose wealth was destroyed by a decade of hyper-inflation, will be at the worst footing to enter into mining. And indeed the whole aspect of indigenisation, according to those feeling left out, becomes a zero sum game. The BEE programme in SA has largely failed in the mining sector as it created a few island billionaires who many believe are indeed fronts and stooges of foreign capital. The indigenisation of the mining sector in Zimbabwe, unfortunately, will get the same tags.

But the government’s overall motive is not at all wrong. The mining sector in Zimbabwe, in particular coal, dolomite, platinum, natural gas and others, are largely in the hands of largely. The nation continues to suffer critical power shortages when many coal concessions have been granted. But again the fact that the exchange control regulations and the restrictive pricing regime of the last decade made it difficult for long-term investors to pump money into large scale projects, especially energy projects, cannot be ignored. Nevertheless it doesn’t take away the fact that the majority of those granted concessions the last few years have not been speedy enough to begin meaningful utilization.

Makonde, for example, is known for good quality gold and most of the mountains in the area have old German gold mines with very deep, dangerous but lucrative shafts that were abandoned around the late 1930’s when German miners responded to the WW2 call up. However most areas around Gambuli extension are in the hands of speculators that pegged huge blocks they are not utilising, denying other serious miners that may be interested in doing meaningful gold mining and contributing to the good of the economy. The annual ground rental fees at the ministry of mines had gotten so low that people did ‘air pegging’, ending up pegging pieces of agricultural lands and dams because the cost was very negligent.

The recent move therefore to hike fees in the mining industry is, to some extent, a step toward the right direction. The government should in fact consider increasing the ground rental fees as these are largely linked to production and would deter investors from being largely speculative by holding on to mining claims they have no capacity to utilise. Had the government not taken the steps to dispossess De-Beers of the Chiyadzwa claims countrywide, up to this day no alluvial diamond mining would be occurring in Manicaland. De-Beers would still be holding onto its EPOs and treasury would not be getting the annual $600 million in budgetary support from ZMDC, the government company that is partnering with private investors in diamond mining.

The annual licence renewal fees for gold miners, be it small scale, at $400 per claim, are not too huge after all to cause massive outcry. A small scale gold miner on 10 hectares and doing mining should honestly afford $400 licence fees per annum, just one third of an ounce or rather 10 grams of gold. Miners doing gold mining and not affording to extract 10 grams of gold per annum to afford them to meet the annual ground rental fees should quit and rather try tobacco farming. Mining, being an extractive industry, is not for the lazy and laid back. Pretenders should therefore leave space for serious miners who have capacity not only to make money for themselves, but create significant employment opportunities and contribute considerable amounts to the fiscus in royalties and corporate tax.

The government stance to put pressure on miners to encourage production should therefore be applauded. Although the government recently hiked royalties on platinum and gold, and has huge interests in diamond mining, all these come to nothing if the overall mining output remains very low. Mining sector in Zimbabwe contributes to about 6% of GDP and 65% of total share of exports. To industrialize and graduate to being a developed country, Zimbabwe needs to harness its mining activities and graduate from most of the hand-to-mouth mining activities scattered around the country. Shamva, Zvishavane, Hwange and Redcliff are all towns that came out of successful mining companies that employed thousands of people and transformed the lives of many more Zimbabwean through direct and indirect linkages to the economy. It is high time therefore that the mining sector is corporatised to set a good foundation for growth and accelerate the status of Zimbabwe to being a developed country.

In general the mining game has changed the world over, with countries such as Guinea, Australia, Zambia, Ghana, Namibia and Zimbabwe all now wanting a bigger share and say in how their resources are exploited. This has come in the form of increasing taxes such as in Australia and Ghana. In Australia, that is expected to rake in an addition $8 billion this year. Others have hiked royalties such as in copper rich Zambia, from 3% to 6% on copper mining, whilst Zimbabwe and Guinea are garnering for shareholding in mines at 51% and 15% respectively. The Zimbabwe government nevertheless needs not be too overzealous to the extent of pushing out indigenous miners and pave way for foreign capital, crooks and mafia in an unjustly way. Although the mining sector earned $4.6 billion in export earnings since 2009 and can do more should many serious players come in, most of the money remains banked off-shore and Zimbabwe continues to suffer liquidity challenges that have slowed economic recovery.

The majority of the policy makers do not understand that the big figures of mining exports do not necessary translate to increase in GDP as the mining sector contributes only a paltry 6% to GDP notwithstanding exporting over $2 billion per annum. A very balanced approach needs to be struck that should see speculators relinquishing their speculative positions to enable serious players to embark on meaningful mining activities whilst at the same time not creating a situation that chases indigenous miners out of mining and paving way for destructive foreign capital made up of crook, thugs and mafia.

ZISCO - ESSAR DEAL A MONUMENTAL MESS

Since August of 2011 when the Zisco-Essar deal was announced in the various media, there have been many conflicting media reports regarding the actual status of the deal. Essar Africa Holdings Limited (EAHL) is reported to have committed an investment of approximately US$705 million into, among other things, relieving ZISCO of its liabilities. This, as reported, forms the basis of the Zisco-Essar deal (the “Transaction”).

Media reports further state that two new entities would be created, the NewZim Steel Private Limited (NZS) and NewZim Minerals Private Limited (NZM). These, we are told, will be owned 40%:60% and 20%:80% by the GoZ and EAHL respectively. This transaction violates the indigenisation laws of the land but however, with good reason, many Zimbabweans would not have bothered much as long as it furthered their interests in a transparent and beneficial manner.

Zimbabwe boasts of abundant mineral resources. We have the second largest reserves of Platinum in the world. Equally, at an estimated 33 billion tonnes, Zimbabwe has arguably the largest iron ore reserves in the world. The government has been progressive in private-public sector partnerships lately. We see the indigenisation of the diamond sector set to bring about $600 million into the government coffers in 2012, an immense benefit to ordinary Zimbabweans coming out of the mineral resources that, if left entirely in private hands, would not be trickling to the benefit of every Zimbabwean. Similar initiatives in the mining of platinum and indeed localisation of the smelting will surely bring immense benefit to Zimbabweans.

Gone are the times when the IMF and World bank wood-winked resource-rich third world countries into giving up their resources almost for nothing to developed countries under the false pretence of being progressive. The crisis in the developed world today confirms beyond doubt that indeed economies that do not produce real goods cannot sustain themselves for a long time. It is getting clearer each day that indeed human beings on earth live on goods and commodities everyday, and the service industry is just there to smoothen the production and availability goods and commodities to ensure the survival of mankind.

As such, every transaction of national importance involving mineral resources should be given proper and due consideration to ensure that the interests of Zimbabweans and indeed the future generations are safeguarded to avoid any potential prejudice. The fact that Zisco has been lying idle for a long time should never be used as an excuse by the government to deprive Zimbabweans of their right to fair disposal of the underlying assets.

Three key aspects are very important about the deal. Firstly, the deal is the biggest disposal ever concluded by the state post independence. Secondly, it was negotiated at a time when the government had full knowledge of the various indigenisation initiatives currently underway in the mining sector. Thirdly, ZISCO assets are largely national assets that serve the very broad interests of Zimbabweans whilst being represented at the shareholding level by the state.

Given the above submissions, the disposal of any government shareholding in ZISCO, more so a majority shareholding, should be systematic and transparent to ensure that the interests of all stakeholders are appropriately safeguarded. A transaction involving the disposal of a significant shareholding in a deal where the underlying assets involve an estimated 33 billion tonnes of iron ore (above $100 billion) surely needs some high level of transparency and accountability. Indeed there should be a deliberate effort by the Minister responsible, Professor Welshman Ncube, to make public all the key elements of the transaction so that Zimbabweans can, with full information, adjudicate if indeed their interests have been safeguarded. Common sense says that it is virtually impossible to get unanimous approval of the deal from all Zimbabweans, and all the same, it would be unreasonable to call for a referendum on the same. But nevertheless, a transparent framework of the bidding process and subsequent disposal of national assets should be made pubic at one point in time. Confidentiality and non-disclosure aspects that generally accompany such similar transactions can surely not be used to deny the public the right to know how national assets are being disposed of, and in whose benefit.

The media has been full of the dark side of ZISCO pertaining to how much it owes foreign banks, local banks, employees, Zimra and so on. Zisco, so it has been painted, and rightfully so, is in trouble and needs to be resuscitated. But one thing has never been made public, and that relates to the assets of ZISCO. The injection from Essar, we read, will assume all the debts of ZISCO in exchange for shareholding, plus some cash injection that takes the total consideration to $705 million. Common sense says that a company cannot be sold on the strength of its liabilities, and as such, the over-emphasis of ZISCO’s liabilities and the subsequent disposal of Government shareholding on that strength raises more questions than answers on the whole transparency and fairness aspects of the deal.

Zimbabweans need to be furnished with at least three independent valuation reports of the iron ore and limestone reserves that are owned by ZISCO directly or otherwise at Ripple Creek, Mwanesi and Buchwa and other related mining claims owned by Zisco. The disposal of any mining assets cannot be done without geological and valuation reports of the ore reserves. Rivesdale Mining Limited, listed on the Australian Stock Exchange, prospected for coal in Mozambique and ascertained 13 billion tonnes of coking coal reserves in Benga and Zambezi. Tata Steel, Rio Tinto PLC and CSN, among others, bid up to $4 billion on the IPO in 2011. These companies bid up to $4 billion for the Mozambican coal reserves because they knew there was 13 billion tonnes of coking coal at stake. What iron ore reserves are we talking about at Zisco? Does it need to be a secret to a few cabinet Ministers when the owners of the assets, Zimbabweans at large who are the ultimate beneficiaries of the government shareholding in Zisco, are in the dark?

Of course without making the assumption that no drillings were done to ascertain the reserves during the Transaction, it is very important that independent valuation reports of the ZISCO mineral reserves and other assets be made public for Zimbabweans to understand the value being given up in ZISCO in return for the cash injection and debt assumption by Essar. That forms the basis upon which a conclusion can be reached on whether the deal was reasonable, fair and transparent. From a casual analysis, Essar, with their massive experience in the steel business, definitely knew what they were buying into by assuming significant shareholding in NewZim Minerals Private Limited and splashing $705 million into the deal. But there are huge doubts on whether indeed the Government of Zimbabwe, on behalf of Zimbabweans, acted on correct information in agreeing to the deal. If it did, then surely it has to be made public.

There are media reports that a 260km long slurry pipeline would be build from Chivhu to Mozambique to pump iron ore. There is potential prejudice to Zimbabweans in terms of loss in Value Added Tax, Corporate Tax and Pay-as-you-earn running into hundreds of millions of dollars every year if this is allowed to be an integral part of the Transaction. Equally, the valuation of unprocessed ore is very subjective and there are potential loopholes that could allow transfer pricing, resulting in Zimbabwe potentially losing billions of dollars. Whilst it is common knowledge that selling unprocessed iron ore to the Chinese is a very lucrative business the world over, many questions therefore arise on whether the Government of Zimbabwe could equally not just have sold part of the iron ore reserves to extinguish debt and later court partners from a point of strength.

Taxation aspects are a big issue in such big mining transactions. The explicit and implicit taxation concessions granted under this Transaction need to be made public as well. Resource rich countries such as Zimbabwe, Zambia, Nigeria and so on continue to lose billions of dollars in potential revenue from unbalanced tax concessions that do not take into account the depletion of the natural resources. Even nations such as Australia, whose markets and business laws are viewed by many as progressive, have lately been reviewing their taxation levels on mineral resources.

A number of media columnists and ordinary Zimbabweans, through the various media houses in Zimbabwe, have questioned the fairness of this deal, but unfortunately no official response has been given. Of course it is not that persons appointed to public office respond to all concerns that are raised in the media, but surely concerns involving 33 billion tonnes of iron ore belonging to Zimbabweans deserve a formal response, failure of which recourse to the courts of law may be the only way to elicit responses on such matters of utmost national importance and prejudice.

Big deals, big mistakes

The year 2011 has been a year of big deals. One of the biggest deals, the Essar deal, remains in controversy to this date. Having gotten 54% of Zisco in a special bargain, well above the 49% shareholding that is normally reserved for foreigners, Essar believes it can get more. There are reports of its planned iron ore slurry pipeline to be built from Chivhu and Kwekwe all the way to Beira. Why would Essar want to pump unprocessed ore out of Zimbabwe at a time players in the chrome industry are being forced to add value? How much will the country lose in terms of VAT, income tax, jobs and so on if iron ore is going to be processed outside Zimbabwe?

How does one put market value to unprocessed ore being pumped out of Zimbabwe for taxation purposes and do we have capacity to deal with transfer pricing issues that could potentially prejudice the country of billions of dollars? Does it ever make sense that big mining companies do not pay that much in corporate tax in the country they extracts the resource, whilst the tax is paid elsewhere? In the US, GlaxoSmithKline PLC, a UK drug maker, settled $3.4 billion for its transfer pricing sins, and the US government is always taking to court suspects of prejudicial transfer pricing. Zimbabwe could do much more for its minerals that are exported with very low values. If the values of the ore reserves of Zisco are in excess of $50 billion, why therefore would Essar get 54% in the first place as a special case in violation of the indigenisation laws? There are just but many questions on the Essar deal that remain unclear and indeed the deal is big, with big mistakes as well on part of the Zimbabwe government.

Steal from me and I will fix you!

Having well understood and appreciated the contribution of the diamond revenue in transforming the Zimbabwean economy, Minister of Finance made two important decisions in the last budget. The first was to acknowledge that indeed the diamond revenue in Zimbabwe, just like in Namibia and Botswana, is very critical in determining scope and direction of GDP via the government revenue route. He revised the revenue estimates upwards by $600 million to $4bn. If diamonds bring $600 into the fiscus, what is the government getting directly from gold and platinum whose combined exports are estimated over $1.6 billion annually?

Hiking royalties, according to Hon Biti, could bring the desired cash into government coffers since the government has no notable shareholding in the mining of these two key minerals where not much accrues to the government as compensation for the depletion of the natural resources other than the obvious PAYE and corporate tax. He hiked royalties from Gold and Platinum to 7% and 10% respectively as if saying ‘steal from me and I will fix you’. In Zambia, copper exports are expected to top $8.4 billion this year, but the mining sector contributes a paltry 11% to GDP. Worse still, bank deposits remain below $5 billion whilst cost of credit has remains very high above 30% per annum on the back of a volatile exchange rate.

These factors put Zambia in a difficult scenario of failing to finance infrastructure projects to develop the country yet it will export copper worth over $20 billion in the next 4 years. The fact that the copper exports proceeds remain offshore is the major curse of Zambia, and indeed it will remain poor a country notwithstanding the huge resource endowments in copper. Zimbabwe and Zambia may need to borrow a leaf from Austria. In Australia, 85% of the mining industry is foreign owned. To compensate the Australian for the depletion of resources, the Australian government imposed new taxation levels that, in effect would take the cumulative taxation levels to as high as 57%, making Australia miners the highest taxed in the world. Surplus profit will be charged at 30% beginning January 2012. That is expected to add an additional A$4bn every year, which money will go towards infrastructure projects and pension.

The Chamber of Mines in Zimbabwe has a different idea. It opposes the increase in royalties and believes the mining sector is contributing more to the economy through investment in health, education and housing. That fact is not deniable, but does the Chamber of Mines believe that building toilets and schools in the remote areas for their employees’ benefit is good enough to off-set the royalties? If a big mining company sets up operations in the bush and builds a road to get there so that they can extract the resources, and equally builds a clinic so that their sick and injured workers get attended to as per the law, would one honestly call that ‘significant’ in contributing to the development of the economy?

That a very sick argument, and indeed the President of the Chamber of Mines, Mr Chitando needs to understand that royalties address the wider spectrum in the distribution of national income from key resource endowments as opposed to localised benefits to a few people. The government will be receiving at least $100 million each year from the recent hike in royalties from Gold and Platimun, and surely the mining sector, on its own volition through building classroom blocks, toilets and clinics, cannot be expending as much annually for the wider benefit of the economy. Indeed the Minister of Finance was spot on.

Mathematics, a difficult subject after all

The last person you expect to get numbers wrong is the accountant, moreso the Ministry of Finance lest other ministries are allocated disproportionately higher votes in error. The economy is growing, no doubt about it. Economic growth is estimated at 8.1%, 9.3% and 9.4% for 2010, 2011 and 2012 respectively, so the official position stands. GDP tops $8.3 billion, $10.1 billion and 11.9 billion for 2010, 2011 and 2012 respectively. These figures from the budget do not tally at all, so will all the statistics that use GDP as the base reference. The mathematics is very bad, even if the nominal GDP figures are deflated using the average inflation. The ordinary person does not need to know the implicit GDP price deflator that is used to arrive at the GDP figures, but the bottom line remains that the figure as published in the budget are somewhat not correct unless what we refer to nominal GDP is probably GDP at purchasing power parity.

Nominal GDP growth from $8.3 bn to $10.1 bn is 22%. What is the figure of the real GDP in billions that then that gives us the official growth position as stated of 8.1%? Taking the 2009 GDP estimate to be correct, would it not be the correct position to say our GDP as a country is $7billion for 2011, not the $10.1 billion we are getting from the Ministry of Finance? Mathematics has always been a very difficult subject since the beginning of time, and indeed when it comes to national statistics, more attention needs to be given to such so that planning becomes much easier for everyone.

BARBARIANS AT THE GATE!!

The year is coming to a close and most things are indeed counting down to 31 December, from financial year ends to calendars and so on. But in the business world, so much remains unclear and unresolved. A huge number of big companies in Zimbabwe still suffer from high gearing levels, and there is no indication that the cost of borrowing will climb down significantly in the new year. The debt burden will most likely increase and indeed worsen for some corporates whose business models have not been generating sufficient cash to service the big loans sitting on their balance sheets. The flow of credit has significantly improved in the economy, but that has not translated to ameliorated risks in the economy.

Banks were sitting on $1.6 billion worth of loans in January and that has increased significantly to about $2.7 billion currently. A casual analysis of these statistics will indeed conclude that more credit has been flowing into the economy and that should have seen a massive decrease in cost of credit and ameliorating wider economic risks. But alas, the cost of credit has remained pricey, in extremes of 60% per annum whilst economy-wide risks have been amplifying as big companies such as RioZim struggle to remain afloat, whilst some of the flag-bearers of yester-year such as African Sun continue to post huge losses. Therefore a closer analysis of the huge piles of debts sitting on corporate balance sheets and the obtaining high cost of credit will reveal that indeed the build-up in the quantum of loans to $2.7 billion is, to some significant extent, a result of ‘interest’ cost build up other than the real flows of fresh money into the credit markets.

The stock market, which to some extent is a market that measures the pulse of the economy, has concluded already this year that earnings are poor and there is no need for optimism. From a replacement cost valuation perspective, most of the companies on the Zimbabwe stock exchange will appear to be trading at a huge discount. African Sun for example, with all its beautiful hotels constructed by brick and mortar and the ever smiling front office personnel, cannot be surely valued at $7 million by the market! That is not enough to build one 5-star hotel, moreso for a hotel group with some good brand and unquestionable goodwill? But a closer analysis of its liabilities and net cash-flows tells a completely different story about its ability to generate positive earnings. And in the ensuing guesswork, the market cannot be faulted for valuing African Sun at just $7 million, a hotel group that has posted cumulative losses of $17.6 million since 2009 and with no clear sign of when it will return to profitability.

Indeed that adjustment mechanism to the normal environment has been very difficult for African Sun whose balance sheet, like those of many of big corporates in Zimbabwe, continue to struggle with high costs of funding and stubborn operating costs. The high cost of funding and runaway operating costs are indeed the barbarians manning the gates to profitability for most companies in Zimbabwe.

Low inflation, a misleading achievement

Although inflation has averaged less than 5% per annum, and will likely remain subdued in the coming year, the challenges pertaining to operating costs increasing much faster than revenue for the majority of corporates remain the biggest headache in running businesses in Zimbabwe. Dollarisation has brought sanity in the consumer goods market to the satisfaction of policy makers, but it has not safeguarded the real costs of doing business, the real dilemma facing companies today in striking the balance to increase revenue whilst remaining profitable. The real costs of doing business have been ballooning, from labour to energy costs. Gone are the days in 2008 and before when real wages averaged $8 per month whilst energy and all other costs were indirectly subsidised by the government through the excessive printing of money to cover the huge budget deficits.

The ever increasing minimum wages and the very difficult labour laws pertaining to retrenchments means that companies will continue to carry excess staff at a time capacity utilisation and productivity levels do not warrant such staff numbers. Funding options available to undertake retrenchments remain very narrow and dangerous, more so when the credit markets are tight and corporate profitability still very low. Even parastatals such as NRZ and Air Zimbabwe have hit very difficult times being saddled with excessive staff levels that are not doing anything but still getting paid.

The airline industry is a troubled one globally, with American Airlines, one of the biggest in the world, having filed for bankruptcy two weeks ago to seek protection from its own employees and creditors. All network carriers in the US have been hopping in and out of chapter 11 bankruptcy to remain afloat. Air Zimbabwe has over $1,300 employees manning just 5 planes, half of which are rarely up and running always. Filing for bankruptcy could indeed be the only way out for Air Zimbabwe so that it starts on a good plate unless the government and new technical partners marshal massive resources for its bailout.

With elections looming and civil servants not having been accommodated for a pay-rise in next year’s budget, the complete resuscitation of the national airline may find sympathisers, but the money may not just be available. Evaluating all these huge operational challenges and inefficiencies bedevilling companies reveal a sad picture that indeed inflation in Zimbabwe could be among the lowest in Africa, coupled with prudent fiscal policies and very stable exchange rate regime, but still running profitable companies remains the biggest challenge in this country.

ZIMBABWE BANKING SECTOR: GOOD BANKERS BAD DECISIONS

Wisdom has it that losses lie where they fall. But for banks in particular, losses can fall anywhere in the economy but still end up lying on their bank balance sheets! The recent schemes by bankers to convert debt into equity or any such related debt-restructuring schemes at Lobels and Rio-Zim, among other companies, point to a worrying trend in the market for the banks. The period 2004 -2005 can be remembered by many bankers in Zimbabwe as a time when finding good sleep was a rare find because of the liquidity crunch that prevailed. Some six banks went under curatorship during the period and a score of others got relief from the Troubled Bank Fund. With the way big deals have been turning sour for some of the banks recently, one can only but feel pity for a sector that is still to recover fully from the massive capital erosion of the hyper-inflation period.

The idea that Zimbabwe needs progressive banks that are willing to lend and help the economy tick is hard to argue with. Dollarisation that was adopted in February 2009 has surely brought about all the celebrated economic stability in Zimbabwe. But it has equally brought about serious liquidity challenges that have resulted in companies scrambling to get credit. Therefore the banks have a very vital role to lend reasonably and ameliorate the risks in the economy. Unfortunately the process of lending in an economy fraught with a host of downside risks is not easy, and indeed the high loan to deposit ratios of most of the banks around 100% cannot escape the unfortunate plunge into some serious bad debt traps.

The biggest mistake by bankers has been to assume, very erroneously indeed, that we have blue chip companies that can get all the credit they require without providing collateral. That thought process has now come to haunt the banks. Most listed companies have always adorned the 'blue chip’ jacket status. It is very common among bankers to fall for the false perception that listed companies are stable, well run and have predictable earnings and hence can get unsecured credit. Just a look at the sheer number of companies that delist every year on the JSE in South Africa, and the countless numbers that file for bankruptcy in the US should on its own be a good indicator of the challenges companies face even when operating in stable environments.

The fact therefore that inflation has averaged below 4% since 2009 on the back of strong economic growth should not, at any time, be an indicator of stability and predictability on corporate balance sheets. If anything, the fact remains that more companies will file for bankruptcy in the first five years of dollarisation than in the 8 years to 2008 of hyper-inflation. And if the deputy sheriff and the messengers of court were business to be listed, indeed this would be a time when their earnings would always be exceeding market expectations and delivering excellent value.

The dollarisation of the economy has seen a number of ZSE listed companies hitting very hard times, with some companies such as RedStar delisting in a whirlwind of huge debts. Steelnet, a listed company, is now under judicial management and it is hard to believe that, notwithstanding the huge losses it posted in 2010, some lenders indeed saw the ‘blue chip’ light in Steelnet and extended loans to it. Although the losses have finally fallen on Steelnet, they are indeed lying on some banks’ balance sheets today in town. Many other listed companies have come up with synthetic re-capitalisation schemes designed to buy them another day in the market, but the fact that their operating models are no longer viable means that sooner or later they will meet their destiny and close shop.

This reality that some listed companies are just like tuckshops, and at times with worse fundamentals than growth-point butcheries has been very difficult to accept for the banks. And resultantly bankers have piled unsecured credit onto the balance sheets of such listed companies. More than 60% of listed companies in Zimbabwe are in dire debt situations. It is normal to find high gearing ratios for companies in Zimbabwe since they are re-building their balance sheets that have been eroded by inflation. However considering the shallow debt markets and intense global competition, it has been indeed very difficult for some of the companies to remain efficient and competitive.

At a time the US government has seen its credit ratings being downgraded, with the Euro-zone joining the sovereign debt crisis band members, the only logical thing for banks is to understand that things are changing always. What was fact yesterday can be a fallacy today and equally, what is fact today can be fallacy tomorrow. Therefore one of the safe ways to safeguard capital positions is never to lend unsecured, nomatter how "blue-chip" a company may sound and look. It would be a very wrong perception to conclude that there are no blue-chip companies listed on the ZSE. The fundamentals of some listed of companies such as Econet, SeedCo, Innscor etc are not in doubt.

But equally these same companies can never be expected to remain solid especially should their engage in massive debt-build up just because debt is favouring them in the market. And for lack of a credit reference bureau, most banks end up pilling debt on the same companies not knowing how much other banks would have plunged in. And as it is turning out, the big borrowers only disclose their true indebtedness to the market when they start defaulting, and only at such times do the banks begin to realise how deep and how many of them would have plunged. The situation can be likened to the joke that talks of 10 brothers and cousins all courting one woman. They are all invited to the woman's house one evening and each told to undress, be quiet and given a chair to sit on and wait patiently in a dark room for their time to meet the woman, only for the light to be switched on and all the 10 seeing glaring at each other and sharing the embarrassment.

The coming together of the banks in rescuing some of the big giants such as RioZim and Lobels is not at all a bad initiative. The economy needs big companies that can be able employ large numbers and contribute significantly to GDP, and indeed the profiles of some of these companies fit into this category. Equally, the banks need to do these restructuring schemes with the big companies that owe them money especially if they are not adequately secured since they are riding on tight capital positions that cannot take huge write-offs lest they cease to be compliant with the capital regulations. But there are indeed better ways in which banks can contribute to the economy without necessarily having made decisions that come back to haunt them.

Unfortunately most of the losses in the economy end up sitting on bank balance sheets, especially when they lend unsecured. Even with collateral, sometimes the markets just cease and still the losses end up sitting with the banks. The 2007-2008 global financial crisis even haunted the banks that had mortgage securities when the values of the same securities plunged. Even in Greece, the banks are no longer safe not because they lend to the private sectors, but because they are sitting on sovereign bonds that the Greek government may default on. Sounding like a zero-sum game, lending is indeed a difficult process and safeguarding capital can be the most difficult job for bankers especially in a market as tough as Zimbabwe’s.

In hindsight, its easy to see how the banks make bad decisions, and bankers always take the blame when they make wrong lending decisions. The blame will never be on the borrower because the banks are always assumed to make good judgement before they lend. An objective analysis however reveals that some of the big corporates in Zimbabwe are engaging in acts of reckless over-trading on their balance sheets by pilling up creditors and debts without proper disclosure. At a time the Zimbabwean economy is enjoying strong GDP growth and very stable inflation, it is easy for the banks to under-estimate the underlying risks in the economy. And surely the biggest embarrassment would be for any other bank in the market today to follow the footsteps of Renaissance Bank and collapse due to a culmination of bad judgments.

Crossing the Grumeti River, The Bankruptcy Test

Every June, for those with a huge passion for wildlife, is a beautiful time to watch the world’s biggest wildlife migration in Serengeti, Tanzania. There would be so much excitement among the animals, especially the 1.3 million Wildebeest, the 400,000 Gazelles and over 50,000 zebras, among the over 2 million herbivores that endure the 250 km journey. The Masai Mara, in South-Western Kenya, would be the coveted destination as the search for pastures will be generating the excitement and hope. But with the promised land so far with many dangers and pitfalls, not all will make it. The lions, leopards, cheetahs, hyenas and other predators wait for their turns as easy prey come along. The long hunting nights will be over, at least for a while. And indeed the Grumeti river crossing is the pinnacle of all. It will be beginning of the Crocodile Meat Festival. Crocodiles need not ambush the prey, but they just wait as prey comes trampling on them as the hordes of animals cross the Grumeti river, indeed the beginning of the festival.

The Great animal migration in Tanzania to Kenya and vice versa, the endless pilgrimage in water and pastures, reminisces the current journey Zimbabwe companies are taking from the hyper-inflation environment into the dollarized era. The folk-stories at Renaissance Bank, the travails of Lobels Bakeries, the humbling of Rio Zim, the troubles of Steelnet and the jetlegs at Air Zimbabwe, among many struggling companies, mirror the dangers of crossing the Grumeti river. The 5 years to 2008 that was characterized by high inflation created, unfortunately, a very poor breed of management among some corporates in Zimbabwe.

Institutional recklessness, which indeed was an important element for one to survive during high inflation, has unfortunately been carried over to the dollarized environment. And its claiming scalps! The many rivers of inflation that criss-crossed the Zimbabwe business environment, the blessed rivers of life then, would absolve all who cared to get baptism! And all bad decisions and debts would be washed away with the current! The government and all who borrowed in local currency before February 2009 were forgiven when the economy dollarized. They are all free today of their past ZW$ obligation, and the great migration, among pomp and fun-fare, started towards dollarisation. The promised land of dollarisation had adverts showing highways devoid of price control, exchange control regulation and with free access to foreign exchange! And indeed it was a good journey into the promised land.

Unfortunately crossing the Grumeti river has never been easy. Surviving a biting liquidity crunch has not been easy for AIG, Lehman Brothers, UBS, Northern Rock and many other EU and American companies. Governments in the EU and US fell over each other pumping billions of dollars to ease the crunch and save their economies. It therefore clear how much bleeding and disaster it is for Zimbabwean companies in taking debt dosages with interest rates above 20%,and at times over 35% per annum.

Crocodiles of bankruptcy now patrol these same debt rivers that once had the waters of salvation during hey days of inflation when borrowing was fashionable. Today all that carelessly go for a dip are mauled. Red Star, PG Industries, Steelnet, Lobels, Rio Zim, to name but a few giants, have not escaped the jaws of the debt crocodiles. The burden of interest cost on debt has compromised the strength of their cash flows. Many such troubled companies as Rio Zim may have solace and excitement in putting press statements about how conscious they are about their gearing position. But press statements, for what they are, are just statements. They don't change poor operating models and soon, corporate egos that could swim during inflation will find buoyancy the most difficult thing to maintain in the still waters of dollarisation that, unbeknown to those attempting to cross the Grumeti River, has huge undercurrents and crocodiles that will sweep them away.

Unfortunately the banking sector has no capacity to carry the excesses of sick companies, neither do creditors. Bankers are grappling with their own problems with regards non-performing loan, reported last recently above 30% of loan books. These are bad decision coming back to haunt otherwise good intentions by bankers that, in retrospect, were recklessly implemented. But as always, bankers get blamed for all bad debts, whilst the borrowers get very little remorse. When a debt goes bad, it’s the banker that made a bad decision, not the borrower! And indeed many borrowers in Zimbabwe still court the hyper-inflation mentality of yester-year where they borrow recklessly with no intention or repaying back the money. This is over-trading with criminal connotations! And indeed the recent press reports by some policy makers making gestures that seem to condone the behaviour that encourages borrowers not to repay their debts is very regrettable.

The market mechanism is very clear in dealing with the weak and inefficient. Even the natural animal habitat has a very efficient way of regulating the numbers, including that all human beings die at some stage. We can’t live forever, save for our souls. Its time therefore that policy makers and entrepreneurs contend with the possibilities and indeed realities of companies going under, no-matter how big. But bankers will always be at the centre of most storms in crises because the notion, an erroneous one, will always exist that they have to give everyone money. And considering the small balance sheets and tight capital positions with most banks in Zimbabwe, bankers are better off shunning big deals. It’s very unfortunate that the big companies need big monies to restructure, but when they collapse, they go down with the banks that would have stepped in to assist. And indeed the market and jury will be right to pass a verdict condemning the banker for having lacked prudence and oversight.

But that is however not the desirable path for Zimbabwe that has unemployment rate above 60% and desperately needing a vibrant middle class to pull the economy up. Although Italy and Germany would have economies centered on small companies, Zimbabwe desperately needs a handful of big companies that make a huge difference in employment number. Unfortunately globalization has come and its there to stay. A chat with Republicans in America will reveal how much they don't like the Chinese for having stolen millions of American jobs by providing cheap goods that have driven hundreds of big US companies out of business. Many companies such global brands as Motorola, BMW, Apple, Nokia etc now outsource and at times set up plants in low-cost production zones around the world. Terry Gou’s Hon Hai company, the biggest contract manufacturer of electronics in the world with its biggest plant in Shenzhen, China, exports over $50 billion worth of goods to such companies as Apple, Nokia, Sony, Dell and a host of others. The competitive issue therefore nowadays is not really about cost and availability of capital alone as many in Zimbabwe companies believe. It’s much broader, encompassing supply chain efficiencies, productivity, technology, labour and everything that affects the final total cost and quality of products. Why would a men's suit cost $20 retail in China and yet a poor quality one cost $90 in Express Stores? A tie would cost $0.30 in China whilst getting one locally in Enbee for a school kid is around $5! Don't we export the cotton to China? Would the huge price differential be explained by the high cost of capital alone?

Definitely capital is important to set up the machinery and secure all important production elements, but there is much more that needs to gel with capital availability to make a producer very competitive, the very reason why even countries with cheap and available capital such as the US have been seeing companies relocating to China and other low cost countries. And the problems confronting Zimbabwean companies seem to be converging in huge numbers: inefficient and expensive labour, poor infrastructure, energy challenges, weak domestic market and of course lack of capital. Indeed the road towards bankruptcy is still very wide, and many more companies, inasmuch as it hurts, are taking their steps towards their destiny. It’s a way the market operates, and as others close, new ones get born. The major temptation that is hastening the whole bankruptcy dilemma is overtrading – thus borrowing more than what the balance sheet can sustain and accruing creditors at a very fast rate with only but hope that probably a miracle will happen to correct the situation. And unfortunately miracles of such nature have since gone with inflation.

LISTED COMPANIES - NOT SO BLUE AFTER ALL

The last week has been indeed a very important one for not only investors, but equally for policy makers in gauging the direction ofthe economy. Most listed companies and banks in general have been publishing their results which, to a large extent, have been impressive. The adage that ‘size does not matter, what matters is how you use it’ has been put to test once again, and indeed some ‘seemingly’ big institutions such as ZB Holdings and PG have failed to use their perceived size to generate positive earnings for investors with full year losses of $2.6 and $9.2 million respectively.

Among the banking stocks, CBZ Holdings, with a remarkable trading P/E of 6x, is one of the most attractive counters on the market after it bagged $22million in profits in 2010. The market capitalization levels of companies on the ZSE continue to show interesting valuation aspects, with highly geared companies getting the lowest confidence. Interfresh, after having made a profit of $3.7 million, albeit heavy reliance on revaluation gains amounting to $7.3 million, is trading at a market cap of $1.5 million! Where on earth would one find such a cheap stock whose market cap is half its annual profit? Shouldn’t Interfresh be the most attractive counters onthe ZSE? A closer look at its balance sheet reveals a worrying debt component in excess of $5 million. Indeed the market has been discounting such stocks that do not exhibit strong positive cash flows that can potentially extinguish debts that are sitting on their balance sheet. And equally important, its revaluations at $7.3 million versus a loss from operations at $2 million point to a very long road ahead of Interfresh towards return to real profitability backed by positive cash flows.

Therefore, considering the very slim possibility that Interfresh will declare a dividend in the next three or so years, investors will find it hard to see value in the stock, and indeed its market cap at $1.5 million is probably a very true reflection of the value of the company. PG Industries is one such listed company that has equally suffocated under the debt burden and inefficiencies since dollarisation and has, expectedly, lost the keys to open the doors to profitability, churning a massive $9.2 million loss in 2010. Having struggled with a debt that had ballooned to $10 million just before its right issue in December2010, PG’s subsequent proceeds from the $11.2 million right issues had very little impact in changing its falling fortunes. Unusually high losses typically put struggling companies’ going concern in serious doubt, and surely the market does not wish to see another Gulliver,Redstar or Bindura in PG. PG has failed to re-align operations tosatisfy the modesty and efficiency that is called for in a stable environment with low operating margins, and resultantly it has not managed to steer clear of trouble.

And a fragile cash-flow position and unsustainable operating costs have haunted it for long. The market will not, however, give PG the proverbial nine lives of a cat and unlike the Zim-dollar environment, the losses that PG is making are real and it has to move quickly to plug the leakages. Its shareholders, having recently capitalized it, inadequately though, may not be having the same appetite and ability to inject more money to fund an unviable business model.

And the local lenders, having burnt their fingers in PGs before (such as BancAbc), will likely want to keep their distance from such a big company whose magnitude of losses are enough to bring down a couple of small banks in town. Therefore the future of PG rests with the ability of the board to demonstrate above-usual leadership skills by learning two key aspects on managing a business in a stable environment - keeping costs down and optimizing debt.

The advent of dollarisation has brought in very low inflation (nowbelow 4%), liquidity crunch, real costs of doing business and thinoperating margins. Some of the weaknesses of business models that survived under hyper-inflation where costs were subsidized have now been exposed. Common blame has now been on the inaccessibility and high cost of capital, but the bottom line remains that no more subsidies exist in this economy for poor business models and the time has come for managers to take full responsibility for running their businesses. The tragedies of PG Industries, Redstar, Gulliver and Steelnet, among other listed companies, show that indeed some business models need to change or perish. Unlike in 2006-2008 era when borrowing was the most lucrative activityon any company’s balance sheet, the costs of borrowing in the dollarized environment are real and many companies, including listed ones, have lost the ‘blue chip’ status.

Indeed bankers and creditors who will lend goods and services without security to listed companies just on the strength of it being listed may learn the hard way that all that sounds, looks and smells blue is not blue after all. Banks therefore have to remain very vigilant in such circumstances to ensure that they do not carry the burden of economic losses via exposure to high non-performing loans of inefficient companies. Zimbabwe corporate environment is navigating through a very important phase of creative destruction, and banks, for their very important intermediation role that keeps credit flowing to facilitate trade, need to remain vigilant and safeguard their capital.

BARCLAYS BANK – NONSENSICAL ARROGANCE, COSTLY ALOOFNESS

Good signs of progress

The reporting season is upon us and there is little doubt that the economy has turned around the corner, at least for companies that are managing to navigate through debt traps and keeping costs down. The impressive results coming out of Innscor, Dairibord, Cafca and Truworths, among others, reveal a growing impressive profitability path. These are clear signals of domestic demand improving at are markable pace although the numbers are not reflecting clearly in theGDP growth figures that remain somewhat depressed. The Innscor Africa’s goods train, whose coaches are representative ofthe broader FMCG segment of the economy, has notched a massive 22%increase in revenue for the six months to $255m, a very clear andbroad sign that indeed domestic demand is strengthening.

Inasmuch asgovernment coffers are showing a gloomy picture, at least for now considering treasury revenue for the first two months of 2011 has fallen below the target by about 40%, the broader economy-wide risksare tapering-off. By growing its pre-tax profit 2.3 times more thanthe corresponding growth in revenue in 2010, Innscor has exhibited significant cost containment measures, and indeed the continued expansion and refurbishments should bolster earnings significantly inthe future considering the consumer purchasing power that is increasing at a sustainable pace. However, considering the significant cash that Innscor generates, the group should actively optimize the same and reduce the temptation to grow the debt exposure that compromises future earnings and liquidity.

Profitable Banks, a good economy

The banking sector, which is the barometer of the broader economy, isyet to publish most of its results but Barclays Bank Zimbabwe hasalready opened the fair with dismal performance, posting a loss of$1.4 million for the full year to December 2010. BancABC’s local operations have realized a modest $3.6 million profit over the same period, a significant turnaround from the losses of 2009. And indeed the share price rose 18.6% soon after the results announcement, a showof confidence in the banking group. Cabs Building Society, on the other hand, has exhibited important efficiencies in the six months to December 2010, needing only $6million to run its very huge branch network, a very important and practical case study for other banks to learn from. Barclays struggled with operating expenses at $33 million in 2010. For the six month,Cabs went on to make an all important $5.5m after tax profit(excluding property revaluation gain). The decent profits coming outof banks are good indications of moderating risks and that signal better times ahead for the economy. This will generally translate to cheaper, longer and flexible credit becoming available.

Across the border, South African Banks, sitting on deposits of $359.8 billion asof December 2010 and loans of $306.1 billion, have equally improved on their profitability. ABSA, the biggest bank, made an operating profitof $1.3 billion for 2010. Barclays Bank Zimbabwe somewhat exudes significant elements of itsglobal DNA. The Barclays Bank Group has generally been the conservative type, having been one of the few banks that did not receive government bailout funds in the UK at the height of the financial crisis in 2008. But it has however remained largely profitable, and for 2010, Barclay’s Plc pre-tax profit rose 30% to £6billion. Barclays Bank Zimbabwe has however taken conservatism to theextent that has not only frustrated investors, but has equally seenits deposit market share plummet significantly to as low as 7% in 2010 from as high as 15% in June of 2006. These figures reveal market confidence that continues to slip from its palms and indeed, with its aloofness, Barclays is gravitating towards the pool of the small banks in town, the tag it rightfully deserves. But does size really matterin banking? Indeed it does given the narrowing net interest margins and surely bigger banks are better placed to make decent profits than smaller ones.

Managing banks in difficult economic times is not an easy task considering the need to safeguard liquidity and solvency whilst at the same time contending with an expectant economy looking for easy and cheap credit. At a time most of the banks are increasing credit facilities to customers to assist the economy that is desperately in need of credit, Barclays Bank Zimbabwe has rather decided to remain very conservative. The preamble to its 2010 financial statements is fraught with glaring contradictions that probably seek to pacify investors that are tired of the same old justifications for poor performance. Although claiming to be negotiating the ‘environment with minimal adverse impact to customers, employees and shareholders’, the very figures in the financial statements flatly refute these assertions. Its loan to deposit ratio, at a paltry 23%, is the lowest in the market that averages 65%. Banks generally keep more cash toward the end of the year as a strategy to ensure that their credit rating levels are favourable from the liquidity perspective, and Barclays seems to have embraced the idea wrongly, if at all it was the intention. It is not surprising therefore that, after having failed to adjudicate credit risks appropriately and ending up sitting on piles of cash under the guise of safeguarding liquidity, Barclays Bank Zimbabwe has failed to identify the road to profitability, posting aloss of $1.4 million for the 2010 full year. Worse still, this isafter it had received $6.5 million in restructuring assistance for the retrenchment of 206 employees from Barclays Plc.

Does it not cross the ‘minds’ of Barclays Bank Zimbabwe, listed for that matter, that levying bank charges of $19 million vis-à-visinterest income of a paltry $4 million is a sign of excessive risk-averse behavior, being insensitive and more importantly failing the vital intermediation role that the banks are supposed to play? Comparatively, BancABC Zimbabwe’s interest income, at $16 million, is decently much higher than its non-funded income at $10.7 million and when compared to Barclays’ income structure, Barclays leaves a lot tobe desired.

Barclays needs to learn the importance of keeping its costs down so that even when it decides to toe the line of a conservative lending approach, it would not inadvertently incline heavily towards non-funded income as the main income source to remain afloat. Of course Barclays bank will not probably be the only bank that will show excessive dependence on non-funded income. But the fact that it purposefully keeps its lending too low (the lowest in thesector) puts itself in the path of well deserved criticism. Indeed it would be disastrous for the economy as a whole if CBZ and BancABC, among other big banks in the market, had the same mentality of conservative lending as Barclays’.When a bank the size of Barclays is so scared to lend, hallucinating bad debts stalking it from every corner, the logical conclusion therefore becomes that the ‘robust risk management framework’ that the bank so claims to have is either non-existent or incorrectly specified. Is this not the same bank that saddled its balance sheet with non-performing 2-year special TBs back then in 2006 and 2007 when it consistently failed to apply its excess liquidity to good use and the RBZ would wipe the same and lock it up for 2-years? And indeed ithas been losing market share, moving toward the middle-tier banks but more worrying still, not understanding how to make profit. In its results publication, Barclays Bank Zimbabwe also bemoans the‘slower than initially anticipated’ economic recovery.

By deciding to be very conservative in its lending, the bank is indeed amplifying the same economic risks its running away from – the act of a bank entangled in an inextricable web of self delusion. The individual decisions of a bank the size and stature of Barclays have a big impact on the perception and quantification of country risk. Lines of credit usually come through banks. Therefore when banks such as Barclays are very conservative in lending locally, continuing to be wary of risks in the economy, only courageous foreign investors will take the bold step to see the opportunities and proceed to establish lines of credit for the country.

And Barclays therefore does not only become a pain to investors holding on to its stocks, but equally to a local banking sector whose fortunes on lines of credit become mis-interpreted by foreign investors who may naturally incline toward Barclays’ exaggerated negative view of the economy. After all has been said, the income structure and lending attitude of Barclays Bank seriously compromises its role in the banking sector and being a big bank, Barclays may need to take very important lessons from equally big and profitable listed banks such as CBZ and BancABC and meet the expectations of investors and the economy as a whole.

Investigating foreign banks- noble idea, but...

Spreading like a deadly flu bug in winter, policy makers around the world are increasingly getting insecure without the levers to manage the allocative process of resources in their respective economies. In the UK, Vince Cable has been vocal in pushing for reforms that would compel banks to lend more to small British businesses that have suffered from lack of credit, failure of which the banks would be taxed more. And indeed the 50% tax to be levied on the banks themselves for bonuses above £25,000 is punitive enough considering the very big insatiable appetite for bonuses by bankers in Europe.

In the USA, having been burnt by the large banks gobbled hundreds of billions in fiscal bailout costs, the USA Fed Chairman, Ben Bernanke said “that a combination of tougher oversight and tighter capital requirements will take away the attractiveness” of banks getting too big to fail. This bears testimony to the fact that even in the USA, where capitalism and free markets ought to have originated, policy makers are getting worried about size issues in the banking sector. And indeed they are right.

The National Indigenisation and Economic Empowerment Board (NIEEB) in Zimbabwe is reportedly in a bid to investigate foreign banks that are supposedly not lending generously as their indigenous counterparts. This is not the first time that some banks have been accused of being unpatriotic and selfish. During the hyperinflation environment of between 2003-2008, banks were labeled the biggest enemies and saboteurs of progress for their roles in fueling the then illegal parallel foreign currency market and instigating stock market exuberance.

This time around, the accusations have changed, but the views that the some banks are not championing the good cause of the economy remain strong. The banks in Zimbabwe, having been the worst affected by hyperinflation, worse being a tightly regulated industry, have been under pressure from the regulators to comply with stringent capital requirements. The banks were arguably the worst losers during hyperinflation, for that which they held as trading assets, the ZimDollar, was that which lost value by the minute. And the indeed the death of the ZimDollar in 2008 bears testimony to the indescribable suffering and loss that the banks have gone through on their capital positions.

Had it not been the mischief of bankers in investing in properties and other value-preserving assets, today many would have struggled to meet the minimum capital requirements. And having survived, trading in an environment with low liquidity and acute credit risks after the dollarisation saw the bank treading carefully on, with the loan to deposit ratio at 33% in April 2009, justifiably so. By October of 2009, it had improved to 49%, but still low compared to regional standards and falling short of the requirements of the economy. NIEEB accuses foreign banks of not lending, their crime being that of collecting deposits from the struggling domestic economy and keeping them on their nostro accounts, like any other local bank of course since all this is foreign currency, in the process benefiting foreigners in the economies where these deposits sit. In the process, the watchful foreign banks whose country exposure limits are set outside the country, remain cautious and have kept their lending very limited, impacting largely on the loan to deposit ratio that currently sits around 62%.

The calls for banks to lend more towards the economy are very noble, for without reasonable flow of credit, the recovery process will be long and very fragile. The domestic credit markets are on the short-end, creating a huge dislocation for most corporates that need long-term debt to restructure their physical capital structures. And that failure to get long term debt, coupled with inefficient labour market and other structural ills, has seen the majority of domestic companies failing to compete favorably with regional and international low cost producers. The implication of this on unemployment and government revenue is a crucial aspect to tackle, and without important reforms that influence bank behaviors to tow the line of national vision and economic policy, Zimbabwe will wear the tag of the sick-man of Southern Africa longer than necessary.

Banks that are hesitant to lend stand in the way of progress, and indeed the unpopular quantitative easing that was adopted by the EU and USA in bailing out banks during the global financial crisis of 2007-2009 was specifically to ensure that credit would continue to flow in their economies to sustain growth and jobs. And the calls for foreign banks in Zimbabwe to be reasonable in their lending policies are therefore not far-fetched. The reasoning is straightforward. If some of the foreign banks in Zimbabwe have country exposure limits on loans they issue at any particular point in time and therefore stifling credit creation, they should equally have limits on the deposits that they take so that they allow those progressive banking institutions that wish to lend enough room to mobilize deposits and play their part in the re-building of the economy. It is retrogressive that country limits are placed by banks on loans they issue yet there are no limits on the deposits that they take.

Policy makers therefore need to come up with regulations that discourage such behavior. The Chinese state-owned banks protection experience has been influential in driving Chinese growth to this day where China is a global superpower, notwithstanding persistent biased criticism from such institutions as the IMF. The Chinese banking model is a very good learning point for developing countries, and indeed without sufficient levers to influence the behavior of banks toward lending, China would not be an important global player today.

Whilst it is true that the ongoing economic reforms in Zimbabwe cannot be implemented successfully without the support of banks, and that banks need to be more reasonable in their credit granting, it is equally important to note that the risks in the economy remain high, and indeed the economy needs healthy banks that will be able to stand the test of time. The Chinese example given earlier on how toxic assets on bank balance sheet have not derailed Chinese economic progress challenges this notion, but the striking difference will always be the huge surplus reserves that China has piled up that have been employed by the state to subsidize the seemingly unhealthy big state banks that have not taken the foot off the accelerator in lending.

The recent global financial crisis was instigated by the pile-up of toxic loans, and today the whole world join hands in condemning global bankers for having been speculative, irrational and stupid. For all the bad loans, never has the blame gone to the borrowers. Bad borrowers for that matter!! The bad borrowers have been exonerated, and the good bankers then that gave them easy credit take to the stand on charges of being greedy, naïve and reckless. The same taxpayers that benefited in the glut of easy credit don’t want to part with a dime in safeguarding the ‘bright’ weather friends, and indeed the fierce public protests and resistance that met bank rescue plans in Europe and US point to the fact that no matter how good banks make easy credit accessible, blame will never be on bad borrowers, but rather on the banks for making bad lending decisions.

And if the indigenous banks in Zimbabwe that are lending generously ahead of their foreign-owned counterparts begin to suffer huge bad debts and massive capital erosion, the blame will never be on the bad borrowers and the fragile economy. It will pin on their decisions, and sadly, unlike in the EU and USA, the Zimbabwe government has no fiscal space anymore for bailouts.

The scenario therefore that some foreign banks in Zimbabwe find themselves in is very delicate and precarious. But the economy has to move one and the time has come for everyone to play ball, including foreign banks even though they may be seeing other imaginary risks.

NIEEB, instead of looking at, and taking the fight to defiant banks alone, should rather take the government to task. If the objective of the Zimbabwe inclusive government is to influence the flow of credit in the economy, it should equally be concerned about the distribution mechanism that allocates deposits among the banks. Why would a serious government concerned about credit growth, knowingly aware that the indigenous banks are friendlier in generating credit, make payments for goods and services to such providers that do not bank with the indigenous banks? And would such a government and its Parastatals and other quasi-government institution ever award a tender to any service provider not banking with an indigenous bank? Is it too difficult to learn the BEE policies in SA whereby it is so difficult to conduct meaningful business if one is not compliant?

The government is the major spender in the economy today and Minister Biti’s budget later this week will confirm the same. And surely there could be other ways that the government, via NIEEB, can do to ensure credit flows more freely than taking the first step in supporting the cause of reasonableness by not banking with those banks that are viewed, correctly or otherwise, as hostile to the aspiration of reasonable credit growth. If the government is scared to stand and practice what it believes to be right, who will? Its time therefore that our government practice what it preaches, and indeed the $7 million seed capital injected by the government to kick-start the lender of last resort functionality at the RBZ, though a good step, is a pittance considering bank deposits above $2 billion. If therefore its genuine lack of fiscal space, why doesn’t the Minister of Finance, Hon Biti regulate therefore that banks whose loan-to-deposit ratios fall below a prescribed level remit a certain percentage of their deposits to the RBZ to augment the lender of last resort seed capital pool in a sweeping arrangement reconciled weekly or otherwise?

This will ensure that the economy continues to benefit from the same deposits the banks that are hesitant to lend hold. Policy makers need to be objective and unapologetic for the good cause of the economy that will create jobs and growth. Asked if the government of Britain was not worried by threats by some banks about leaving Britain, Vince Cable had an assuring answer. He said: "We have to make the British economy safe and we can't be blackmailed by constant threats (by banks) to walk away." Even in Australia, after it proposed an excess profit tax of 30% on iron ore and coal miners to benefit from its endowments, protests by BHP Billiton Ltd, Rio Tinto Ltd and Xstrata plc were futile and now they have been reported to have signed agreements in support of the new tax rate.

Zimbabwe Diamonds - Noble objective, sad betrayal

The ongoing Zimbabwe diamond mining saga that has seen the arrests of some Core Mining and ZMDC officials has attracted a lot of attention and opened a new chapter on the role of the state in diamond mining activities. Equally, the new licenses that have been reported awarded to Anjil, and Pure Diamonds and Sino-Zimbabwe continue to point to one sad story – the story of Zimbabwe losing confidence in its own people and indeed the inclusive government of Zimbabwe, against the spirit of true and unbridled economic empowerment, has been caught flouting its own commandments. If the inclusive government of Zimbabwe is already party to two licenses currently extracting diamond in Chiyadzwa, why would it be too slow and dull to learn and impart the knowledge to local partners in new licenses?

Worth noting in the new licenses is the fact that the element of foreign companies, or the need thereof to partner with such, has continued to take centre stage in the awarding of licenses in the diamond extraction in and around the Marange area. Whilst the inclusion of foreign companies in the diamond mining industry or any other industry in Zimbabwe is not a bad idea, it is so much bad and distasteful to imply and indeed act in confirming that Zimbabweans on their own cannot mine diamonds in the Marange area. Who does not know that the Marange diamonds are largely alluvial? Isn’t this the same place that lit Mutare with loads of US$ when illegal ‘panners’, armed with sticks, shovels and carry bags, extracted diamonds worth millions of dollars? And indeed they got the gems, and the story of the alluvial Chiyadzwa diamonds and the miracles thereof has been told, recited and indeed documented.

Why would the government therefore, against its own spirit of empowering its people, award and continue to award licenses to ‘foreigners’ to extract alluvial gems that sticks, shovels and picks could unearth? Alluvial diamonds, for what they are, remain and will always be alluvial diamonds, not requiring state of the art machinery to extract. Alluvial diamonds generally stem from diamond-rich kimberlite rocks that would have been eroded over time by rivers, with the diamonds being deposited downstream. Artisanal mining techniques have mined the Chiyadzwa diamonds, of course not to the broader benefit of the Zimbabwean economy, and indeed alluvial diamonds, in the general interests of Zimbabweans, should be left for Zimbabwean to extract. There is general talk, erroneous equally, that Zimbabweans alone cannot extract alluvial diamonds and would indeed need foreign partners with deep pockets to buy bull-dozers, excavators, front-end loaders and security fence to be able to extract diamond. This notion is regrettably ill-informed, unfair and indeed a prejudicing one. Since when have bull-dozers, excavators and so on been expensive when compared to the return on investment from alluvial diamonds?

For the record, the Zimbabwe's financial sector has capacity to syndicate more than sufficient resources to which-ever Zimbabwean would be looking for the capital to extract diamonds in the Chiyadzwa. Recently three banks, FBC, ZB Bank and Agribank have been in the market to raise a combined $37 million to finance the next agricultural season. Will it ever rain this coming season or we will have the worst drought? Notwithstanding that there are serious risks in funding agriculture, more so in an environment that is illiquid and dominated by big foreign banks that impose regrettable country risk limits that have been stifling the growth of credit in the economy, these three local banks have put up a commendable act. Whether they raise all the money or part of it is beside the point. What therefore makes the government believe that there is no local funding for alluvial diamond extraction when, in fact, poor ordinary Zimbabweans could, after years of hyper-inflation, amass the capital to extract the gems via sticks and shovels? What foreign expertise would be needed besides compliance issues with the Kimberly Process? Does Zimbabwe not have deposits sitting on bank balance sheets at over $2 billion today, with $1.3 billion of these in loans and advances? Why therefore would banks not lend to Zimbabwean companies in alluvial diamond extraction that does not require huge initial capital outlay?

The beneficiation of the diamonds is one area where Zimbabwe does not have expertise, and few would question the wisdom of the Zimbabwean government in awarding licenses to foreigners partnering local companies with the technical know-how and markets.

The time has therefore come when Zimbabweans need to be honest about themselves, their capabilities and actions that will take Zimbabwe forward in a non-prejudicial manner. Sarkozy, the French President, addressing the European Parliament in 2008 said; “I don’t want EU citizens to wake up a few months from now and discover that EU companies belong to Non-EU capital which has bought at the lowest point of the stock exchange”. Isn’t this economic patriotism where the EU protects that which is theirs, barring Middle-East and Chinese investors to grab EU assets at their lowest prices? Is it not Elysee Palace, the official residence of the French President, that is dreaded by big companies in France whenever they engage in big deals with non-French companies? In February of 2009, Eutelsat board members were summoned to Elysee to answer why they had chosen a Chinese ‘Long March’ rocket to launch a satellite instead of using a French firm, Arianespace. Why would therefore Zimbabwe, for its prized diamonds existing on the surface and not needing sophisticated underground equipment, enlist foreign capital that will see money leaving this country to sit in foreign banks and finance foreign interests?

Isn’t Australia proposing an excess profit tax of 30% on iron ore and coal miners? Surprisingly, after futile protests, BHP Billiton Ltd, Rio Tinto Ltd and Xstrata plc have been reported to have signed agreements in support of the new tax rate. Is this not Australia benefiting from its resources in a win-win situation? Why then would Zimbabwe, for what it can do successfully with its local capital and expertise, cede rights to foreigners in alluvial diamond panning? In the UK, Vince Cable’s ranting on excessive bank profits and threats to those banks not lending to British companies reveal the growing insecurity of governments worldwide concerning the ability to manage banks and financial resources in order to continuously influence the growth process. Equally, the Chinese state-owned banking sector protection experience that has been influential in driving Chinese growth to this day where China is a global superpower, notwithstanding everyday criticism from such institutions as the IMF, is an important learning point in global economics. On the same issue, the 01 September statement by the Fed Chairman, Bernanke “that a combination of tougher oversight and tighter capital requirements will take away the attractiveness” of banks being too big to fail bear testimony to the fact that any serious country today needs to have some significant influence in the way resources are allocated in the economy, be it in banking, mining or otherwise.

The Minister of Youth and Economic Empowerment, Mr Kasukuwere, and the President of the Affirmative Action Group, Super Mandiwanzira, have grabbed headlines championing the cause of able Zimbabweans in charge of their destiny, but surely their motives and what they stand for become very weak when licenses to alluvial diamonds extraction need foreign partners. The excuse that the foreign capital on alluvial diamond extraction does not have controlling stake is not a good one, and indeed Zimbabwe needs to re-look at its economic vision. Emotions have always boiled about foreigners owning shops and other small retail businesses suffocating local Zimbabweans. In the same breath, why would foreigners be allowed to take part in alluvial panning? If we can’t bar foreigners in alluvial panning, lets equally not bar foreigners in retail businesses. The law has to be fair to all foreigners, and more importantly, make sense. The Minister of Finance, Tendai Biti, will soon be presenting a fragile budget statement, with or without a deficit. Government revenue remains weak, and surely short of coming up with pragmatic changes to the taxation levels on key minerals such as diamonds and platinum, the fortunes of this economy will remain weak for long, and Zimbabweans will have themselves to blame. This new sad chapter therefore in the extraction of Chiyadzwa diamond is regrettable, and indeed the inclusive government needs to quickly re-look at its economic strategy.

Brains Muchemwa is CEO of Oxlink Capital (pvt) Ltd. Feedback: brainsmu@gmail.com. Disclaimer: The comments, sentiments and statements made in this article are that of the writer and do not, in any way, reflect the views of Oxlink Capital (pvt) Ltd.