A positive outlook for Delta

18 May, 2018 - 00:05 0 Views
A positive outlook  for Delta Clive Mphambela On Wednesday, one of the country’s largest companies, Delta Corporation announced plans to price its entire beverage product range in US dollars. The announcement triggered a social media frenzy and a loud outcry, with most people decrying the move. Government has also weighed in, describing the proposed changes as “unacceptable and illegal”. However, Delta’s argument, sound in both economics and law, says the company needs to trade in, “multiple currencies” so that it can be able to secure critical imported raw materials The strategic change by Delta is in direct response to critical foreign currency shortages, with most companies in Zimbabwe now struggling to keep business operations flowing due to raw material outages. There is a long pipeline of unmet import payments at the banks and the list is growing. However, economists joined the debate and many think the move by Delta is a necessary evil. A common view among economists is that Delta has made the right move. “Delta products are a luxury and the Government should not be responsible for finding foreign currency for Delta. If Delta can source its foreign currency from its customers, then let it be,” a colleague said yesterday. Before the official adoption of the multi-currency system in January 2009, the Zimbabwean economy had been battered by hyperinflation, high and unsustainable budget deficits; a growing balance of payment deficits; acutely low foreign currency reserves, and thus foreign exchange shortages, low industrial capacity utilisation; extreme levels of financial disintermediation and shortages of the local currency (then the Zimbabwe dollar Z$ cash). The economy suffered a massive skills flight, and the few companies that remained endured low levels of staff moral, acute foreign exchange shortages, very low effective demand which also led to low levels of production and thus diminished productivity across all the productive sectors of the economy. Real incomes fell sharply due to increasing unemployment levels and this was followed by increasing household vulnerability and rising poverty. Informal sector activities became the mainstay of the economy and as the economy witnessed an upsurge informalisation of business activities, a conducive environment for tax evasion was created severely undermining efforts by Government to broaden the tax base and minimise revenue leakages. These are the issues that the new Government must now quickly address in order to re rail Zimbabwe’s economic train which has been derailed by a series of negative expectations. The widespread fears that Zimbabwe is heading into another hyperinflationary phase has led directly to the loss of value and confidence in the RTGS or electronic representation of the US dollar. The RTGS is now viewed largely as a local currency and the rising spectre of inflation in the economy, has forced the reduction in planning horizons (short-termism) by both businesses and households leading to speculative and hedging behaviour. Rising inflation has pushed up the costs of doing business for local companies and thus a loss of competitiveness, as domestic inflation is now seen much higher than that of the country’s trading partners. The increasingly uncertain environment is leading to postponement of key investment decisions and many companies are currently faced with real risk of closures or having to scale down operations. Inflation hedging has become the prime occupation and agenda of the corporate sector, with every entity seeking to lock up its productive resources in illiquid physical assets (property and vehicles), trading stock, equities, and foreign currencies. Households and individuals are also doing the same with ominous consequences for the economy. The environment is becoming so difficult that normal economic transactions and systems are breaking as different economic agents seek out ways to preserve value of their hard-earned incomes and companies pursue capital preservation strategies that exclude the use of electronic currency whose value is seen to be evaporating at an extremely fast rate. Prices are now quoted directly in foreign currency or indexed to parallel market rates between the RTGS and USD and multiple prices are now in use depending on the medium of payment used in the transaction (i.e. transfer rate for electronic transfers, Bond Note cash rate and US dollar Cash rate etc.) Foreign currency in particular the US$ is now used primarily as a store of value (asset substitution) and less as a medium of exchange (currency substitution). The business of changing money on and off the streets is thriving, especially among the unemployed youths and the sophisticated elites. However, the market distortions that have become pervasive, especially the arbitrary changes in the rates of exchange have reignited the debate on policy alternatives that can stabilize the economy and provide a viable medium of exchange and store of value. That option is to allow the re-dollarisation of the Zimbabwe economy, without losing the value of the current stock of RTGS money. To understand how this can be done, let us take a short walk back in history. On December 6, 2008, The Harare Chamber of Commerce, Tax Management Services (TMS) and the Coalition for Market and Liberal Solutions (COMALISO) held a Breakfast Forum on dollarisation in Harare where the Reserve Bank of Zimbabwe, which had in October 2008 made ground breaking proposals that paved the way for dollarisation of the economy, when it announced the introduction of Foreign Currency Licensed Wholesalers and Retail Shops (FOLIWARS) purposes, thus legalising currency substitution. Prior to this announcement foreign currency was predominantly used as a store of value with people buying US dollars as a store of value for subsequently converting the Z$ which, was still exclusively the legal tender. Now we have a unique opportunity to allow two economies to emerge a US$ denominated economy and an RTGS driven one. We can learn from the past when the Reserve Bank had selectively legitimised the use of foreign currency when it introduced Foreign Currency Licensed Wholesalers and Retail Shops (FOLIWARS) in October 2008. Prior to this the use of foreign currency had been legalised for the purchase of fuel coupons under the Direct Fuel Imports Scheme. The FOLIWARS and the fuel coupons system had shortcomings which, the official adoption of the multiple currency system sought to address. These distortions come at great cost and we are losing as an economy by allowing the “incorrect pricing” of vital resources such as foreign currency. Speedy resolution of the currency problem becomes decidedly one of the critical ingredients for broader macroeconomic reforms that are urgently required for the economy. The status quo is that the mu lti-currency system is not only functioning sub optimally, but is also driving the economy in quite the opposite direction. Primarily, the current state of the current multi-currency system is responsible for the dislocations in the foreign exchange market which manifest on two fronts as spiralling of parallel market rates on one hand and worsening foreign currency (Nostro and Cash) shortages in the formal market on the other. The source of the dislocations above is non other than the foreign exchange system itself that is badly structured. The pseudo peg of the RTGS and Bond Note against the real US dollars at one to one IS SIMPLY NOT working and must be addressed if we are serious about economic recovery. The currency framework is no longer amenable to piecemeal solutions and patchwork, but the Government, through the central bank, must be bold enough and seize the opportunity to implement comprehensive reforms that are necessary for the normal functioning of the banking and financial system and therefore the sustainability of economy going forward. Growing exports alone will not solve the structural problems that are hurting the foreign exchange system. The Reserve Bank governor’s thrust for supply side interventions will not yield fruit as long as fundamental market based mechanisms for price discovery are lacking in the system. As things stand, efforts aimed at stimulating the supply side, through subsidised foreign exchange for importers at the expense of exporters are creating longer term disincentives for Exporters whilst creating an artificial demand for foreign currency from net importers. The result is that we are dissipating value through a forex “sinkhole” which rewards users of foreign currency at the expense of generators of the same. The second problem as alluded to, parallel market rates are attracting foreign exchange from the formal banking system into the informal banking system. The streets are lined end to end by forex dealers whose job is now effectively to push up rates to create margin opportunities. The forex and cash crisis can only be resolved through a bold and far reaching currency reform initiative led by the Government through the Reserve Bank of Zimbabwe. My take is that addressing the currency problem is not divorced from general macro stability issues. Therefore the currency reforms programme must be at two levels. First there must be a sustainable macro-framework or fabric and then secondly there must come a basket of legal and policy reforms required for long term monetary stability. Critical factors include the following: Fiscal Consolidation — There must be government expenditure realignment and adjustment in order to address monetary disturbances that are emanating from fiscal imprudence. Bond Note surrogate currency must be demonetised as they have created a thriving parallel market. The coins can be retained or even increased to alleviate adjustment problems for those transactions of low value. The country’s debt problem must begin to be addressed, following a clear program with a defined end game. Zimbabwe can and should adopt a new currency regime that involves a comprehensive review of exchange controls especially export surrender requirements. As part of the confidence boosting measure, the banking sector has been allowed to introduce a new set of Hard Currency Foreign Currency accounts where funds deposited into these new accounts by individuals and corporate and NGOs etc. from a cut-off date are kept in nostro or cash on a fully matched basis. However, for this framework to work, these Special FCAs must be protected by law, and customers should be able to utilise these in an unfettered fashion. However, national priorities should still be taken care of, NOT from export surrender requirements, but from appropriate import taxes that should be payable on certain classes of goods in Foreign currency. These dynamics imply that the current RTGS money should be urgently ring-fenced and be allowed to trade down over time, through the interplay of market forces between electronic RTGS US dollars in the banking system and real or nostro dollars. This will require a raft of legal instruments and policy reforms needed to facilitate migration from the current illusion of dollarisation to a new currency regime that restores the integrity of the multi-currency system. The process must be supported by the Demonetisation of the Bond Notes and it is no doubt that implementation of the above measures will not come without serious pain of adjustment. The ongoing foreign currency liquidity challenges can only be resolved in the short term through enhanced access to lines of credit, sustained growth in inward remittances; portfolio investment flows and grants and in the medium to long term, through the growth of exports, which themselves are a function of greater investment and productivity. The fiscal reforms which were announced by the Minister of Finance and Economic Development are necessary for macro stability, but will also require pragmatic currency reforms that will underpin and even drive sustained economic growth going forward. Last but not least, currency reforms should not be viewed as a substitute for deeper institutional reforms that are needed to improve economic performance of Zimbabwe. Without the necessary credible and holistic economic and institutional reforms backed by strong political will at both the design and implementation levels, it is unlikely that the economic recovery, transformation and growth agenda will be achieved in the near future, nor will we achieve our vision 2030. Re-dollarisation is a necessary evil, but must be only be accepted as a first step towards creating the necessary conditions for the eventual return of a stable local currency. The writer is an economist and the views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer may be associated with.

eBusiness Weekly

Business Writer
Delta Corporation’s net earnings are expected to jump 16 percent to $103 million in the financial year 2019 on anticipated volume growth, despite competition from Pepsi, which is likely to cut the group’s market share, according to forecasts by analysts.

Indian Varun Beverages, manufacturers of Pepsi, broke ground for a mineral drinks plant in Zimbabwe in November 2015 before commencing operations this year in March, cutting Delta’s long-held monopoly in the soft drinks business.

Market watchers, however, contend a good command in market share still puts Delta — biggest company on the Zimbabwe Stock Exchange by market capitalisation — in a competitive position ahead of peers.

Additionally, measures by management to contain costs and remodel products in line with the evolving styles and market trends, should result in higher sales, better margins and will be a defence measure for the beverages manufacturer.

In light of this, revenue is seen growing a further 12 percent to $640 million in the financial year 2019 on positive economic outlook.

During the year to March 31, 2018, Delta reported an 18 percent growth in revenue to $572 million on firm demand.

“We revise our forecasts based on the positive results and now expect revenue to grow a further 12 percent to $640 million for FY19 on a slightly more positive economic outlook. We expect a 16,3 percent increase in net attributable income to $102,91 million, up from $88,51 million,” said stockbrokers IH Securities.

Earnings per share are seen increasing to 8 cents with an EBITDA margin of 23,8 percent.

The year 2018 is also an election year, which is expected to increase demand for alcohol at rallies and other gatherings during campaign processes.

Resultantly, volumes should increase across categories although at a slower rate than 2018.

IH Securities forecast lager volumes to register 20 percent growth year on year with prices remaining stable as part of the Delta’s strategy.

Sorghum beer is also forecasted to grow by 5 percent. Market watchers, however, say despite competition from Pepsi intensifying and grey imports that still find their way on the market, Delta still remains strong.

“We believe Delta has the economies of scale and distribution to maintain significant but lower market share, naturally forex will continue to be an issue for both Delta and its competitor Pepsi,” said IH.

The Pepsi plant bottles one of the world’s most popular fizzy drink, Pepsi, including leading brands Mirinda, Mountain Dew and 7up.

While Delta may be unfazed with competition from Pepsi products, priced lower than its brands, pressure points are likely to stem from foreign currency shortages.

The operating environment, though with a positive sentiment and outlook, is still limited by foreign currency shortages, a situation likely to remain in the near future. This will compromise the beverages maker’s ability to service its market.

Indications are that its associates, African Distillers Limited, Schweppes Zimbabwe Limited and Nampak Zimbabwe were all constrained by foreign currency shortages to import essential raw materials especially for packaging.

Delta currently needs between $60 million to $75 million to meet foreign obligations a year and have been struggling to get this allocation from the central bank.

This has resulted in intermittent shortages in some key raw materials, affecting mainly the sorghum beers and sparkling beverages.

Sparkling beverages take up 50 percent of these foreign currency requirements as the imports include the concentrate as well as packaging.

Another listed firm, Dairibord Holdings Limited also indicated foreign currency had a major knock on its operations and ability to meet demand.

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