R>As the parallel market continues to gallop, Central Bank governor Gideon Gono has kept the lid on the official market, a move that has worsened the situation.
The parallel market has been artificially pegged at $250 to the US dollar, giving the false impression that the local currency is stable.
However, on the parallel market the local currency has continued to crash. By December 31, the dollar was trading at around $2,600-2,900 against the greenback, well above a rate around $250 that prevailed during the last five months of the year. On the inter-bank, the dollar has traded at $99 to the greenback since January 24, when Gono introduced the volume-based exchange rate.
The local currency had opened the year at $82 on the official market. Experts warn that it could crash further, to end the second quarter of the year at between $460 000-$500 000/US$1 on the black market.
“The worst is yet to come. It’s on a roller coaster and it could be worse than before,” said an analyst with a local bank.
The real crunch, he said, would come after the tobacco proceeds had been used up. Tobacco production was projected to decline this year, due to few hectares planted. Last year, tobacco earned US$206,8m from 67,6m kg.
This week, dealers were quoting the Zimbabwean dollar at anything above $7,000 for the British pound, depending on volumes, while the South African rand and Botswana pula were trading at $470 and $700 to the dollar respectively.
Analysts said the volume-based exchange rate – introduced by Gono in January, only to be scrapped in July – was the reason why the local currency remained artificially pegged throughout the year. According to the new volume-based exchange rate, volumes below US$5m did not trigger any change on the inter-bank rate, while volumes within the US$5-$10m saw the rate move by +1%.
The US$10-$15m range will in turn see an automatic adjustment to the exchange rate either side of 1,5% and volumes exceeding US$15m will be rewarded with a 2% adjustment. Under this system the dollar made only one movement from 99 to 101 against the US dollar.
Analysts said the new exchange rate management system failed because it represented Reserve Bank interference in the system. It was an attempt to create a false sense of stability.
Economic consultant John Robertson said the absence of significant foreign currency inflows would further weaken the dollar on the black market and trigger massive price increases, mostly on imported products.
Robertson said the volume-based exchange rate failed because it became unsustainable and resulted in the over-valuation of the Zimbabwe dollar.
“The impact was disastrous on smaller companies with less cushion and no external operations,” said Robertson, adding: “Unless something is done soon, most of these companies will close shop.”
He said the rate at which the Zim dollar was losing value would continue pushing up the inflation rate, currently at 1281,1%.
CBZ poised for takeover
CBZ Holdings Ltd awaits the approval of the Competition and Tariff Commission following its acquisition of Beverley Building Society (BBS), it emerged this week.
The company said negotiations between CBZH and Andrew Weir and Company, for the acquisition of the entire issued share capital of The Forrestdale Trust Limited (the company that owns all A class permanent ordinary shares in BBS) had been successfully concluded.
The acquisition could see CBZH becoming the biggest bank on the Zimbabwe Stock Exchange. The bank’s share has been trading between $200 and $220 since last week. Sources said CBZH’s purchase consideration for BBS was $1 837 500 000 while the value of the net assets purchased was $1,57bn as at 30 June 2006.
BBS will continue trading under its current name.
Investors shun bonds
INSTITUTIONAL investors ignored the three-year local registered bonds, aimed at raising $160bn, floated on the money market by the Reserve Bank last week, taking up $14bn or about 8,7% of the long term paper on offer.
Analysts said the bonds were met with a poor subscription because of the current high inflation environment that makes investments in the long term unattractive.
The poor performance leaves authorities hard pressed to come up with measures that will make long-term paper much more favourable to investors and shift government’s debt burden from the current costly short term profile to manageable long term.
Payments of the $14bn were made on Tuesday last week while the allotment took place on Wednesday.
Fixed rates hit TSL
TOBACCO Sales Floor Limited has lamented the current ‘fixed’ exchange rate for weighing down operations at two of its subsidiaries.
Announcing the group’s financial results for the year to October 31 2006, TSL said the fixed exchange rate had negatively affected the performance of group subsidiaries, Cut Rag and Hunyani.
“This policy will continue to undermine the viability of exports. It is expected that the responsible authorities will address the exchange rate policy as a matter of priority,” said TSL.
Hunyani’s export strategy put it in a favourable position to benefit from a review of the exchange rate, the group said.
The shortage of hard currency also affected operations at TSL’s Agricura and Propak. TSL said the biggest contributor to group profits, Agricura, suffered reduced volumes due to the critical shortages of foreign currency. Operations at Agricura were also affected by reduced demand for agricultural chemicals.
The shortage of foreign currency saw Agricura volumes dropping 26% compared to the same period last year.
TSL’s Bak Storage registered a volume increase of 1,155%. Other TSL group subsidiaries that performed satisfactorily were the Chemco Group of Companies and flower producer Luxflor.
TSL said it had managed to increase its market share from 39% in 2005 to 42% last year.
Group turnover rose above inflation at 1,134% while profit after taxation at $4,372 912 000 was 1,262% up on last year. Basic earnings per share leapt almost 1000% to $10 on the previous year. The group has declared a $1,70 dividend per share on top of the 20 cents dividend per share declared last year (23 cents in 2005) and this brought the total final dividend to $2,19 per share.
Equities trading last week opened high, but slimmed through the week.
Export counters, however, traded stronger in anticipation of devaluation by the Reserve Bank of Zimbabwe, on this week’s eagerly awaited Monetary Policy review.
Apart from export counters, investors were positioning themselves with large corporate counters to hedge themselves with stable counters such as Pretoria Portland Cement (up 3,000), Old Mutual (up 500), Meikles (up 300) and National Foods (up 200).
Counters to lose were those with little or no export generation such as Econet (down 500), Delta (down 60) and SeedCo (down 20).
The money market opened $16bn dollars short and was forecast to close at around $14bn, with government expenditure catering for the deficit condition.
Liquidity conditions remained tight, with 90 Day NCDs and 90 Day BAs being indicated firmer between 200%-325%.
Call rates remained unchanged from between 3% to 5%, while interbank overnight accommodation rates were 360%. The Central Bank on Friday introduced a 365-day Treasury bill tender, and no bid had been forthcoming yet.
Other Zimsun Limited has declared a script dividend offer to its shareholders, recommending to either receive their dividend entitlement wholly in cash or to receive shares in lieu of the dividend entitlement. This offer was made at a price of $40 a share.
Outlook Buying shares on the Zimbabwe Stock Exchange remains the most feasible option for investors at the moment, as interest rates are likely to remain, yielding a negative real return with inflation wrecking havoc in the 1,200% range.
The bullish run being experienced is likely to continue until at least next week, with exporting and mining counters likely to continue their bearish trend, with perceived benefit from anticipated exchange rate devaluation.
Investor’s recommendation: Equities Versus Money Market = Equities
Complied by Hensley S Chamboko, Chief Executive Officer, BusinessWeekly Newspaper, [email protected] www.bw.co.zw
Disclaimer: The views and assessments made in this article are solely the writers views, and do not necessarily reflect the views of BusinessWeekly Zimbabwe Newspaper or any of its subsidiaries. You are encouraged to further seek professional advice should you with to invest, based on the information above.