. . . The more it stays the same
Four months into 2019 have lapsed, but the same challenges that hampered business operations in 2018 are still playing out. This is despite the many changes that Government and those in authority have tried to implement in order to boost economic recovery.
As Zimbabwe Stock Exchange listed companies raced against time to release the long delayed December 2018 financial results, there was a familiar theme in both their narration of the operating environment and the outlook. Even as the stock market recovered in April, there has been constant concerns about a number of risks that could derail the performance of the underlying businesses.
Most of the chairmen’s Statements that accompanied company results clearly illustrated the kind of uncertainty that many investors still see.
There are competing forces at play, making it very difficult to know what is going to happen next. Anyone reading statements that accompanied results will see that confidence is still very low as business is not certain on what the future holds, let alone the current operating environment.
Sifting through most of these statements reveals that there are two factors investors grappled with in 2018, and also likely to keep company executives awake over the course of 2019 – foreign currency shortages and high inflation. These developments have a negative impact on product supply and the cost of doing business leading to consumer price increases.
RioZim summarised it well, with chairman Lovemore Chihota saying:
“Notwithstanding the implementation of progressive policies aimed at opening up the Zimbabwean economy for both local and international investment, and concerted effort to achieve the same by Government, the year 2018 proved to be an extremely challenging year economically characterised by acute foreign currency shortages and severe inflationary pressures.”
Foreign Currency Shortages
It’s safe to say the biggest contributor to volatility in the last 16 months and the months ahead is the limited availability of foreign currency. Every single statement that accompanied results for the year to December 2018 highlighted the challenges businesses have been facing in accessing foreign currency.
For cement manufacturer Lafarge, foreign currency shortages resulted in delays of up to six months to replenish critical spares for the plant, an undesirable situation. The situation was even grimmer for gold miner RioZim and beverages manufacturer Delta. RioZim suffered a 13 percent drop in gold output in 2018 after losing two months of production due to foreign currency shortages.
In fact, the miner had to involuntary shutdown of all mining operations at the company’s gold business units in dire need of foreign currency for the procurement of milling plant consumables.
What is even worrying is that even miners like RioZim say the export earnings it is retaining, remain far below the stipulated retention levels which were set by the central bank — this points to failure to implement set policies. While this happened in 2018 Delta’s plight shows the challenges are still persisting. The beverages maker reported an 89 percent drop in soft drinks’ sales volume as access to foreign currency remained elusive despite the introduction of a formal system where economic players are supposed to buy US dollars for critical imports. According to management, the sparkling beverages business was virtually closed during the last quarter to March 2019 due to non-availability of imported raw materials.
The recently introduced interbank market, touted as a panacea to foreign currency challenges seem to have faltered as it is being managed. Most corporates have simply failed to access meaningful foreign currency from the formal market.
This, again, is confidence sapping. After foreign currency shortages, inflation was the most talked about economic risk by business executives. Nedbank chairman Aqualine Chinamo said inflation which closed 2018 at 42,09 percent and reached 66,4 percent in March 2019, is likely to have knock on effects on the cost of doing business at a time when export competitiveness is key to “our revenue generating capacity.”
Inflation according to ZB Financial Holdings created immense cost pressure on the group while at the same time presenting a real risk of achieving negative returns on investments. Instead of focusing on how to efficiently grow the business, management is now forced to focus on capital preservation in the execution of its strategies.
In the eyes of Stanbic Bank, though Government announced various policy measures that are meant to stabilise the economy, it (the economy) has not responded well to these measures and key challenges remain the same. ZB Financial Holdings also share similar sentiments saying normalizing the economy in the medium term businesses will be hounded by the short-term transitional dislocations which include a high inflation outturn and adverse liquidity conditions, factors which are likely to result in balance sheet contraction in real terms.
Unfortunately, this is the report card being sent out to the rest of the world and it’s one that is most likely to be frowned upon by potential investors.