There are barriers, but investing in Zimbabwe could pay off long term

The evidence of Zimbabwe’s ailing economy is everywhere: massive unemployment, numerous companies going to the wall each month, a weak annual economic growth rate, and high day-to-day living costs.

Since President Robert Mugabe’s Zanu-PF party won the 2013 general election, a relatively stable economy has begun to decline, to a large degree over fears the ruling party will use its parliamentary majority to implement in full its controversial indigenisation policy.

Last August, Zimbabwe’s central bank revealed that foreign investment into the country had fallen by 59 per cent to $67 million in the first half of 2014, and maintained that the plunge partially reflected investor concerns over government policies.

Zimbabwe’s economic stagnation is also reflected starkly in Harare, the capital, where numerous business parks stand empty. It was widely reported last year that at least 10 firms were closing each month because of a lack of access to working capital.

With the unemployment rate now estimated at around 85 per cent, creating jobs is paramount, but the World Bank is pegging Zimbabwe’s gross domestic product growth rate for this year at just 3.2 per cent, below the level required to create significant employment growth.

As essential food items such as wheat and maize are not produced in enough quantity to satisfy demand, imports are required, which leaves cash-strapped locals at the mercy of the volatile global markets.

People are wondering how government intends to keep its election promise of creating two million jobs, and politicians are cognisant that, turning the economy around, is the best way of keeping protesters calling for change from parliament’s doors.

Attracting investment is essential, and, with this in mind, the Zimbabwean government has indicated that the indigenisation policy is being reviewed and tightened in an effort to ease investor concerns around it.

Introduced in 2007 in the mining sector, the indigenisation law states that foreign firms operating in the country must sell a 51 per cent stake of their business to local partners to help reverse the economic imbalances created by colonialism.

Critics of the government’s black economic empowerment policies warn that, like land reform before it, the indigenisation programme is primarily a vehicle designed to facilitate Mugabe’s patronage system, on which he relies to stay in power.

"[Foreign] investors will be allowed to recover their initial capital investment, an appropriate return on investment and operational costs before the sharing of production outputs or profits," information minister Jonathon Moyo stated last May in an attempt to clarify how the policy will work in practice.

Since early 2014 trade delegations from Britain and France have travelled to the southern African country to assess the situation, and review potential investment sectors.

Business Ireland Southern Africa (BISA), a representative association, also opened a Harare chapter a couple of years ago with two main objectives: to engage with potential investors coming into the country, and to link up with other BISA chapters in the region around cross-border trade.

Local pitfalls

Jim McComish, an architect from Northern Ireland who is the Harare chapter’s current chairman, says that, practically speaking, the organisation wants to help investors avoid potential local pitfalls that could undermine their efforts to successfully enter the market of their choice. The chapter currently has 20 members who have experience in the construction, agriculture, micro and macro finance, and hospitality sectors.

“Our organisation is website-driven so that people abroad can make contact quite easily with us, and we are currently putting together a Doing Business guide for BISA so that individuals or companies can take some literature away with them from the very start,” he said.

McComish believes there are currently opportunities in infrastructure provision, construction, tourism and agriculture, although he conceded the latter is currently on hold.

So given government’s indication that it is willing to tone down indigenisation, is now a good time to invest in Zimbabwe? And if it is, what sectors hold the best possible chance for a successful investment?

Harare-based commercial farming consultant Charles Taffs believes that to understand where the opportunities in Zimbabwe's economy lie, one needs to sieve through what has happened since the government's land reform policy was fast-tracked in 1999.

Commercial farmland accounts for 7.2 million hectares in Zimbabwe and, in 1999, the 4,300-strong commercial farming sector was the main pillar of the economy, he says, its value chains supporting many other industries.

But, under land reform, the government took ownership of all commercial land and, by removing it from the market, crippled both the commercial agriculture sector and industries linked to it. Now only farmers who can offer urban assets as collateral are able to raise the capital necessary to farm from the banks.

“Around 45 per cent of all raw materials that serviced the industrial and manufacturing sectors came from agriculture, so when they were removed from the market, industry and manufacturing collapsed,” said Taffs, who added the services and industrial sectors also suffered the same fate as they added value to commercial farming outputs.

“In terms of broad commodity production levels, in 15 years we are now at 40 per cent of where we were,” he said.

The banking sector has gone a similar way, maintained Taffs, as 80 per cent of all loans granted to Zimbabwe prior to 2000 were backed by land.

So when the value of land was removed from the market, the vast majority of banks were left with no collateral value against their loans.

“So what have we seen? A simultaneous collapse of the banking sector. Banks started lending money unsecuritised, which led to a lot of bad debt. They were unable to recoup this so the smaller banks started to fail and then there was a knock-on effect,” he explained.

In April, South Africa's Business Day newspaper reported that data compiled by stockbrokers MMC Capital showed the banking system was still in trouble, with three Zimbabwe-based banks posting losses in 2013, and five last year.

MMC said a sample of the 2014 full-year results for banks attested to the fact that the deterioration in economic activity in Zimbabwe was leading to worsening non-performing loans.

Taffs believes that, if the issues around property rights can be resolved, there are huge opportunities for investors. The country has no internal debt and much of the infrastructure is intact.

Hyperinflation

The hyperinflation that existed prior to Zimbabwe dropping its own currency in 2009, in favour of using the US dollar, whipped out most people’s debt as well as their wealth. It is estimated that by mid-November 2008, Zimbabwe’s inflation had spiralled to 79.6 billion per cent per month.

“If we can come up with a comprehensive plan that deals with the land issue and puts this asset back in the market, you’re not only going to mobilise its inherent value, you are going to mobilise the inherent value of existing structures, which is many billions of dollars. Respecting property rights is the key to kick starting the whole [economic] revival,” he insisted.

But until this issue is resolved, commercial agriculture will remain on hold; the flip side, Taffs believes, is that it could bounce back quickly because the sector’s infrastructure is still in place.

“Farmers built thousands of dams and most of the irrigation systems are sitting idle.

“They could be revitalised and made operational very quickly if people could raise the capital to do so,” he concluded.

Economist John Robinson says that, on indigenisation, the concern is government is providing conflicting messages regarding how it will be implemented, which makes it hard to give investors the certainty they need to commit.

“There is a lot of talk about toning down the policy but only when the legislation is changed to reflect this will investors be convinced,” he said.

He also maintained that while, in theory, there is nothing wrong with indigenisation, practically speaking it is a difficult policy to implement as most Zimbabweans do not have the money needed to pay for the 51 per cent of a company’s shares they would receive as a beneficiary.

Minerals in the ground

In the mining sector, some international companies have made substantial investments in recent years in line with the indigenisation policy, only to be told later by members of government that the minerals in the ground would account for the beneficiary’s 51 per cent of the operation’s balance sheet, Robinson notes.

Despite the current situation, he believes there are substantial opportunities in mining, especially platinum, and if a company is willing to take a long-term view, they could do very well.

“Look, the situation here is bound to change at some point. But the country has to get through the administrative aspects of restructuring these policies and parliament has to change the acts that brought them into existence.

“If you have the courage to take the long-term view, there are great opportunities in mining and tourism,” he maintained.

But, for now, despite the interest from Europe, it appears investors are minded to take a wait-and-see approach.

BISA’s McComish confirmed that no investors had yet contacted their organisation, while Taffs and Robinson say there is little evidence of major investor activity on the ground.