Zimbabwe investment climate presentation

Managing Director of Amigo Partners - Grant Flanagan

Published: 15 November 2013

This serves to highlight an opportunity for investors seeking yield that presents itself in Zimbabwe. A most important consideration with regards Zimbabwean debt is that the country is fully dollarized whereby all commercial transactions take place in a foreign currency. The preferred currency, and that which all contracts are denominated in, is the United States Dollar and as such there is no domestic currency risk. This is important as it removes the reliance on the responsibility of the Sovereign to manage foreign currency reserves in order to repay debt.

Zimbabwe historically had a deep and diverse capital market, with active equity and fixed income markets. On the fixed income market, primary issuers included the sovereign, state owned enterprises, municipalities and corporates, offering credit diversity and most importantly provided a yield curve. The fixed income market now is only just beginning its recovery.

In keeping with its African peers, it suffers from a lack of liquidity and small issuances as demonstrated by the 2012 three year Infrastructure Development Bank of Zimbabwe bond which raised $30m with a coupon of 10%. Given that total deposits in Zimbabwe are around $4bn and the estimated demand for credit exceeds $12bn (twice the size of the equity market) there is huge potential for the market to return to its former standing. Some secondary market activity is already occurring so opportunities should become more accessible as a yield curve emerges and markets deepen. Meanwhile yields remain high enough and durations short enough to justify investors holding issuances to maturity.

The most interesting immediate potential exists in exposure to corporate debt. According to the African Development Bank (July 2013), Zimbabwean merchant banks weighted average lending rates to corporates as at the end of May 2013 were 17.02%, a 250bps increase on the rates being offered in May 2012. Whilst the issuance of paper by corporates has been limited post hyper-inflation, where issuances have taken place yields have been as high as 20%.

For the investor the question is whether or not, in a world devoid of yield, investor demand for interest has overridden the risk of capital losses. In the case of Zimbabwe we believe the answer is no. Being dollarized provides foreign investors with the opportunity to earn US Dollar returns at yields normally reserved for domestic currency issuances, which even when adjusted for risk we believe makes for an attractive proposition.

We remain excited and very positive about Africa generally and Zimbabwe specifically. That is not to say that we are unquestioning optimists, rather we are realistic optimists. For too long Afro-pessimism has been dominant and we believe you need a positive mind-set to succeed in Africa. Over the past decade winners have outnumbered losers in Africa.

With improving infrastructure, better technology, growing urbanisation and the rising trend of the "return of the African diaspora", this will continue. The investment case is complex and substantial challenges remain but that is the opportunity and now is the time.

Zimbabwe Investment Climate
- Grant Flanagan, managing director, Amigo Partners