Zim coup; wither markets and business?
The army is firmly in control in Zimbabwe after taking over state institutions and placing the President under house arrest on Tuesday night. That the ongoing exercise is a coup is unmistakable despite technicalities around the military’s execution to the contrary, which makes it a “soft” coup. The military, still recognising Mugabe as head of State, has stated that it is not interested in taking over the government but is bent on difusing elements within the ruling party, which elements it believes have infiltrated the presidency, whatever that means. As the prime business and finance focused publication on Zimbabwe, it is imperative and compulsive on us to analyse this Black Swan occurrence’s implication on business and capital for the benefit of our readers. On the onset, capital by its very nature reacts to political and economic sanity and the two variables often vary directly. Consequently it follows that capital attraction and retention is a function of political and economic sanity, all else being equal.
In recent years capital flight in Zimbabwe in the form of foreign portfolio divestment has increased relative to inflows and for the first time since dollarisation 2016 recorded a net foreign outflow position on the ZSE of $80 million as investors reacted to the introduction of a local currency amidst falling fundamentals such as the forex crisis and a creeping inflation. In 2017 the trend has prevailed with foreigners becoming more desperate to divest and less attracted in investing on the local bourse. A measly $50 million in foreign inflows were recorded between January and September while over $100 million exited Zimbabwe through foreign disposals over the same period. The disposal figure could have been more had it not been for the forex challenges in Zimbabwe that are discouraging forex outflows. FDI on the other hand softened by 30% to a measly $295 million in 2016 compared to Mozambique’s FDI of $3.87 billion in the same year. Likewise the fundamentally unsupported spike on the local bourse currently standing at over 300% year to date, reflects desperation by local money to avert risks that are both political and economic.
Capital therefore responds to economic and political realities, and in a bid to safeguard their investments investors take appropriate positions to manage their risk exposures thus resulting in movements in markets. On Wednesday the ZSE’s industrial index lost -1.4% which was the sharpest intersession decline in 2 months. Although mild relative to the sharp -10% bloodbath which followed Mugabe’s 2013 reelection announcement, it is significant in that it came at a time when the bourse has trekked northward for over 9 consecutive months, with minimal breathers along the way, even as the breathers never gravitated nearer to the -1% level. Likewise the limited upside in alternative asset classes and the inflexibility to move money elsewhere has left investors hamstrung with equities therefore resulting in minimal downside propensity. From a commodities perspective where Zimbabwe is a major producer, price fluctuations may be realised in commodities such as chromium and Platinum in the short term. Zimbabwe is the world’s third largest producer of Platinum and developments such as supply disruptions in light of political chaos may push the price of that commodity higher. On Wednesday the commodity’s price went up by almost 1% to $933.1/ t after the coup news.
Our view is that Zimbabwe is at cross roads politically and economically. The coup, at its best, is likely to result in a transition government leading up to the next general elections, which may come even closer. A smoother temporary transfer of power and the ensuing transition government composed of key political stakeholders is likely to nerve investors and reduce uncertainties while simultaneously improving confidence, at least in the very short term (a time before the next election). For this option to consummate the parties involved will have to reach an amicable consensus. Success of this scenario may economically imply a very short term slowdown on excessive government private sector borrowing against a prior predicted increased election borrowing and spend. Closely associated to this, is money supply growth, which automatically follows a highly geared government spend. Consequently fears of hyperinflation may subside helping stabilize the money market as well as the general price levels in the economy. If these key economic variables are tamed, confidence may retain in the economy and capital markets stabilize. This stabilization will however entail a downwards correction of the current crisis induced ZSE rally. Sustained of this trend hinges on the legitimacy of the forthcoming election.
The worst case scenario which business and investors should factor and price-in is that the ongoing coup may fail if Mugabe decides to play the long game and a bloodbath may follow instigated by regional military intervention or a local uprising although the later is highly unlikely. In the instance where the army forcefully takes over with little resistance, a legitimacy crisis will follow, where the international world will not recognise any unconstitutional structure led by either the army or a transition body, propped by the former against the blessing of the incumbent democratically elected President. Under this scenario, business will drastically slow down and the pace at which investors exit Zimbabwe will increase, capital will become more elusive, much to the chagrin of the local financial services sector and an implosion of the USD parallel exchange rate will follow. Looting, especially of minerals, is common in such instances of chaos, the period may even tend to be more protracted than most would have budgeted. Mining companies, which are the lynchpin of the economy, will cautiously cut-back production and forex receipts will successively plunge. The current export drive will come to wrought and the forex situation will automatically become more dire. Given a historical postulation of preferences, this may appear to be more tantalising and a tempting gamble for political players desperate to maintain power but its net outcome is often zero sum and detrimental to either parties and the economy at large. It is this scenario which businesses and investors should budget for. Loss mitigation measures should be therefore be promptly invoked and these broadly entail risk de-concentration or diversification of operations or portfolio where practical, slowdown on aggressive expansion and high retention of cash and near cash resources.