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Eric Bloch Column

Everyone hedging against inflation



ge: JA”>TEN years ago the year-on-year rate of inflation, based upon the Consumer Price Index (CPI), was 27,6%. In contrast, in June that rate of inflation was 364,5%. The July rate of inflation is due to be released by the Central Statistical Office (CSO) today, and will undoubtedly exceed 400%.
 
The next two months will inevitably reflect yet higher rates of inflation for the combined effects of the inflation to date, of the rise in parallel market exchange rates by more than 100% in July, and of substantial increases in salaries and wages, must cause a very considerable further increase in inflation.


However, the actuality of the Zimbabwean environment is that real inflation, as distinct from that calculated on the basis of movement in the CPI, is very markedly greater. Although the 1993 inflation rate will have approximated real inflation, having been calculated on an average consumer spending basket determined in 1989, and applied by the CSO from 1990, the rates now calculated cannot be correct.


The average consumer spending basket today is very different from that of a decade ago, for the consequences of inflation upon most consumers have been that they must now expend a higher proportion of income upon such items as food and transport, and a lesser proportion upon leisure and entertainment, furniture and the like. As the former have been subject to far greater inflation than the latter, the CPI-based calculation is inevitably incorrect. The inaccuracy is exacerbated by the fact that due to massive scarcity of many basic commodities, consumers are having to resort to the black market to source their needs, or to the purchase of substitutory products at prices very different to those which constitute the CPI. The result is that inflation is undoubtedly now in excess of 500% per annum, as distinct from that cited by the CSO.


With inflation being at such massive levels, those in Zimbabwe fortunate enough to have incomes in excess of their needs (which is relatively few in number) and those with accumulated capital, are very reluctant to retain their excess incomes or capital in a monetary form, for the purchasing power thereof is progressively eroded by inflation. Effectively, their wealth is very rapidly diminishing. This is especially so as interest rates available in the money market, although considerably greater than three months ago, are at best a fifth of real inflation.


The result is that investment within the money market is, to all intents and purposes, devaluing by almost 80% per annum.


The accelerating erosion of value is increasingly motivating investors to seek investments outside of the money market, their criteria being that the investments should be such as will, at the least, appreciate in monetary terms at a rate at least equal to inflation. In other words, the primary concern of the investor is to hedge against the effects of inflation, with generation of a yield in excess of the rate of real inflation being a secondary consideration only. However, the extent to which inflation-hedge investments are available is relatively limited.


Many, in disregard for the prevailing laws of Zimbabwe, overcome the impacts of inflation by externalising out of Zimbabwe as much of their assets as they are able. To the extent that they are possessed of funds in excess of their day-to-day needs, they turn to the parallel and black markets to buy foreign currencies which they unlawfully accumulate outside Zimbabwe.


This has become a favourite inflation hedge for numerous, and especially amongst some of the leading members of government, and many within commerce and industry.


But others look to hedge against inflation within Zimbabwe. Some do so by purchasing imported goods which they anticipate will appreciate in value commensurately with inflation. Thus, although Zimbabwe’s economy is devastated and poverty-stricken in the extreme, there is a constant stream of new, luxury-style, executive motor vehicles appearing on Zimbabwe’s roads. Whilst the not-so-well-off, who cannot afford to replace their ageing, derelict motor vehicles, drive them throughout the country with broken lights, dents galore, failing engines, and bodies that are falling apart, there is an almost endlessly greater number of sparkling, new Mercedes-Benz, BMWs, Pajeros and other 4 X 4 vehicles, to name but a few.


Similarly, others are investing in aircraft, computers, electrical appliances, large-screen television sets, and so forth. Not only do none of these contribute materially to the economy, other than insofar as the distributors of such goods are concerned, but they divert from the parallel market much-needed foreign currency which would otherwise be available for imports of fuel, food, agricultural, mining and industrial inputs, and the like.


The craving for hedges against inflation has spectacularly impacted upon the prices of shares on the Zimbabwe Stock Exchange. Virtually all shares have appreciated in value (based on selling prices if not underlying asset values), but that is especially so of the shares of those companies whose revenue streams include substantial foreign exchange. Companies who have major export performance, and those who are highly active in countries in Africa with no exchange controls, or only very limited constraints on foreign exchange remittance, are most attractive to the inflation-hedging investor.


The perceptions, correctly held, are that the foreign currency exchange rates are likely to move substantially in tandem with inflation, with resultant increase in company earnings in line with inflation, and a corresponding increase in the market value of the shares. The investors are also focussing upon shares in those companies which, although not significant generators of foreign exchange, are purveyors of goods or services which are priced in relation to inflation.


So great has been the attraction of quoted shares as an inflation-hedge that the market values of almost all shares listed on the Zimbabwe Stock Exchange have soared to almost incomprehensible highs. Under any other circumstances the astounding appreciation in market values would be suggestive of a very virile, thriving economy, whereas in practice the economy is writhing with agonising ills which are intensifying daily. It must be anticipated that as the market rises further, some will be motivated to realise profits, with a consequential partial decline in market values. However, after a period of “correction”, those profits will presumably be reinvested and hence the values will rise once again, as they will also do once the economy is set upon a genuine and continuing recovery path.


The search for appropriate hedges for inflation has also focused upon the property market. This has in part been facilitated by many property-owners being willing to dispose of properties at below normal market values, if paid for in foreign currencies. Therefore, those seeking to hedge against inflation have sourced foreign exchange within the parallel and black markets to enable them to buy properties at discounted values, whereafter the properties appreciate as building costs surge upwards.


In normal economic environments it is sound business policy to minimise stockholdings to levels that suffice to ensure effective, continuing operations, but not to allow stock levels to exceed such volumes as are so required. But in a hyperinflation environment, conventional business wisdom is cast aside. Provided that the stocks are of a nature which does not have a limited shelf-life and are not subject to obsolescence, the stance of most businesses today is to maximise their stock-holdings, in an awareness that they are effectively appreciating in value. This is particularly so in the case of enterprises that have abandoned the principles of First In, First Out (FIFO) and Last In, First Out (LIFO) in computing selling prices. They now resort to Next In, First Out (NIFO), ensuring that sales will yield sufficient to fund stock replacement.


All these actions are very prudent on the part of those resorting to them, but do not contribute to development of a positive economic recovery, for investment is actually needed into the establishment of new enterprises or the expansion of existing ones. But that will only come about when inflation is brought under control, and when the economy is set upon an irreversible path of recovery.

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