Liquidity white elephants

investment_inflowsWelcome to Liquid Lunch on Fridays, a frank monthly business column for everyday business people in Zimbabwe. Jimmy is a Director of Africa focussed investment platform Schmooze Frontier Markets

Ok lets talk turkey, liquidity, or the lack there of, has been at the tip of the everyone’s tongue from the government, to business people and banks.

When as a business you go to your bank to ask for a loan and they tell you they are happy to lend, but require you to first deposit an amount equivalent to what you are asking for, then you know there is a lack of liquidity in the market! Note I said there is a lack of liquidity rather than no liquidity.

At Schmooze FM we get to speak to those on both sides of the fence, businesses needing capital and investors looking to put their capital to use. In this article I’d like to shed light on some of things businesses and the country as a whole can do to open up the flow of capital that the country needs to grow.

Firstly, I’m going to address a couple of white elephants in the room that are often cited as causes of a lack of liquidity. Zimbabwe’s credit scoring and sanctions aside, political risk and the indigenisation legislation have been accused of holding back investment into Zimbabwe.

I think its too simplistic to conclude that, and would even go as far as saying those issues are red herrings to some extent. Regarding political risk, the reality is that international investors to whom investing in Zimbabwe is of the slightest interest have more or less accepted the fact that there will be political risk in Zimbabwe and they tend to price that into the transactions they are likely to take on. In fact this is not unique to Zimbabwe and almost every country classed as a ‘frontier market’ (new

emerging market) is deemed to have an inherently high level of political risk. For example Nigeria, Vietnam, Tunisia and many others.

Higher investment returns

What this means for local businesses is that they need to be prepared to offer higher returns on investment as that is the reward investors in frontier markets seek to compensate for the chance they are taking on the market.

Regarding Zimbabwe’s indigenisation legislation, again strictly speaking this should

be a red herring in terms of whether investment in Zimbabwe happens or not. Some

equivalent ‘indigenisation’ laws in developed countries are even more draconian when it comes to shareholding restrictions. For example the US government accountability office states that foreign entities are not allowed to own or control more than 25 percent of the voting interest of any US Airline. Restrictions also apply to acquiring more than 25 percent of a US bank, where the company must receive prior approval and be limited in the types of non-banking activities it undertakes.

What is required with indigenisation in Zimbabwe is communicating with clarity and

consistency on what the government will and will not do, where restrictions apply and to whom.

Confidence comes from consistency and clarity in implementation, and until that happens a policy that should be an enabler for local business people hangs as a grey cloud of over the economy.

Hyper-inflation hangover

That’s the macro-stuff spoken for, lets also talk about a few things individual businesses with potential can do to make themselves more attractive to investors.

Firstly there is a need to fight the post-hyper-inflation hangover. Despite the switch-over to multiple currencies from the Zim dollar, a lot of businesses, were and some still are, charging inflated prices for goods and services. This has led to a sometimes ridiculous distortion in the value of the US dollar. On one end of the scale you have civil servants earning US$200 a month but unable to afford anything, while on the other you have middle and senior management in severely loss-making companies earning more than their counterparts in the developed world.

We’ve seen this manifest in company valuations, where companies seeking investment suggest a valuation that is driven more by the need to maintain an unsustainable salary structure and not by the revenue or profit the business is generating. This goes down like a lead balloon with investors coming from environments where cutting costs and increasing revenue per employee is the order of the day.

Its not to say that you should pay yourself peanuts, but more to say that your proposal will stand head and shoulders above the rest if it demonstrates that your business has a cost structure, valuation and funding requirement that’s clearly supported by sales and profits. Manage costs, focus on establishing a consistent and profitable customer base and it won’t be long till you’re enjoying a liquid lunch.

Contact the author: [email protected]

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