By John Legat
The introduction of Zimbabwe’s own currency, the ZWL, in February 2019 has been a disaster as many economists, as well as ourselves, had predicted.
Since it was launched the ZWL has fallen from its initial level of ZWL2.5 to the US dollar (US$) to almost ZWL16.77 to US$1 by the end of 2019 using the official interbank rate. The black market rate ended the year at ZWL23 to US$1, a difference between the two rates of 37%. Prior to February 2019 the government’s official position was that the currency was 1 to 1 with the US$.
The effects of the decline in the value of the ZWL upon Zimbabwe’s banking, insurance and pensions sectors have been devastating in real US$ terms.
In short, the local capital markets will find it hard to fund any meaningful investments as we start the next decade, implying that only foreign capital has that ability. Sadly, foreign investors are no longer much interested in Zimbabwe although they continue to keep a close eye on events should the investment climate change.
The danger, therefore, is that government will step in but financed through the printing press, which as we all know will undermine the ZWL further. As we will explain below, the domestic capital markets are no longer able to fund government; recent undersubscriptions in Treasury Bill auctions is further evidence of this. In our view, this is a real risk for 2020.
To put our domestic capital markets into perspective in real terms, we shall draw our data from the RBZ Monthly Economic Bulletins and from the IPEC Quarterly reports both based on September 30, 2019 data.
Asset values decimated
At that time the official interbank rate was ZWL15.2 to USD 1 and the black market rate was ZWL19 to USD1. The IPEC report was excellent and contains much data. The pensions industry consists of Insured Funds (eg, Old Mutual/First Mutual etc), Self-Administered funds (most of our clients) and Stand-alone Self- Administered funds (eg, MIPF, ZAPF, NRZCPF).
At the end of September, the value of these pension funds combined was just under ZWL10 billion, but in US$ terms at the interbank rate, this amounts to just US$622 million.
The contributions from employees into these funds for the nine months was ZWL413 million or US$27 million. If we dig deeper into the data, we find that of the US$622 million, US$244 million was invested in equities with US$225 million invested in property.
A total of US$47 million was invested in prescribed assets in some form, with around US$28 million invested in cash or money market instruments. The remaining assets could be classified as “other” such as mortgages, staff loans, external assets (NRZCPF only), guaranteed funds and pension fund arrears (US$40 million on their own!).
Analysing the consolidated income statement and stripping out fair value gains on investments held (not cash items), total income amounted to around ZWL975 million over the first nine months against total expenses of ZWL349 million giving a surplus of ZWL626 million which is the equivalent of US$40 million.
Annualised this would amount to US$53 million.
In order to meet the 10% prescribed asset level target, these combined pension funds would need to invest US$15 million of their cash into prescribed assets. They have no other liquid asset to call upon except for equities, but these too are illiquid; on a good day the market trades just
Property is likely totally illiquid in this environment without significant write-downs being incurred to force sales through. Putting the pension fund industry in perspective then, available liquidity for new investments amounts to well below US$30 million and at today’s black market rate less than US$20 million at best.
Insurance and values
Moving to the insurance sector and again using IPEC data as at September 2019, the total assets of the sector were valued at ZWL10.8 billion or US$700 million.
Interestingly, this asset base jumped from ZWL6 billion at the end of June 2019 to ZWL10.8 billion largely due to a revaluation of property assets by 313% over that three-month period. As a result property accounted for 47% of total assets of the insurance sector.
This surprises us for two reasons. Firstly, we question the value of the properties being used as it would appear that the ZWL value is calculated simply by multiplying the “assumed or preferred” US dollar value of the property by the interbank rate, which would be wholly unrealistic and in our view lead to a gross overvaluation of property values (the same practice occurs in the pension industry).
Second, by increasing the total asset values by undertaking such a revaluation pushes the required amount that must be invested into prescribed assets that much higher; the compliance level being 15% of total assets. As such, the insurance sector now needs to invest more funds into prescribed assets; had they not adjusted property values, this would not have been required.