By month-end Zimbabwe’s year-to-year inflation rate will have topped 1 000%, according to calculations by the regionally represented Imara financial-services group. Fungai Tarirah, chief investment officer of Harare-based Imara Asset Management Zimbabwe, says inflation benchmarking by some of the country’s larger companies actually puts the rate as high as 1 600%.
He adds: “A month-on-month increase of only 16,6% will get us to 1 000% inflation, though if we maintain the month-on-month average of 22% seen so far in 2006, the year-on-year reading will reach 1 051.0%.
“In-house inflation computations from some companies canvassed by our research unit range from 1 100% to 1 600%, depending on the import content of the goods and services under review.”
The effectiveness of management’s response to the hyper-inflation challenge has become the critical factor when measuring corporate value and performance.
Tarirah notes: “The maxim ‘cash is king’ tells only part of the story. Cash generated by business must hastily find its way into raw materials, fuel, spares, capital expenditure or some other tangible asset before it loses value.
“The value of a Zimbabwean dollar is halving every 29 days, if official inflation is to be believed. Only debtor balances that attract at least 23% a month in interest are of any use.”
As inflation accelerates, other activities slow down.
Tarirah explains: “Cash and near-cash assets deliver sub-inflationary returns in the medium-to-long term, forcing business to seek alternatives. Increasingly, companies are reluctant to sell their product, opting to hold onto stock or hoard finished goods, selling only what they need to meet monthly obligations.
“As all participants along the value chain strive literally to pass the buck, management’s ability to avoid ungainly cash positions remains a key factor when selecting stocks.”
As hyper-inflation continues to erode the value of the local currency, safety is sought in real assets by businesses and investors alike.
Exports provide no escape.
Tarirah comments: “Numerous exporters have been increasing local-market volumes at the expense of exports, largely because of the foreign-currency remittance regime.”
The exchange rate has stagnated at Z$100 000 to the US dollar for some time, yet the cost of US dollars rose 108% on the parallel market in the first quarter of the year alone. At the same time, the effective rate on export proceeds rose only 17%, squeezing export profitability.
Tarirah says: “Inputs that go into export manufacturing are denominated in Zimbabwe dollars and have to be paid for, something the foreign currency merry-go-round cannot manage.
“It thus makes more sense to sell on the local market where pricing is not constrained and companies can factor in the cost of inputs. This undoubtedly aggravates the country’s deteriorating foreign-currency situation.” — I-Net Bridge