By Roger Aitken*
Zimbabwe’s adoption of the South African rand (ZAR) as its main transaction currency to replace the US dollar in the country’s multi-currency system will “encourage” foreign direct investment according to an investment specialist in Zimbabwe at one of the world’s largest independent financial advisory organizations managing billions of dollars.
The move, which could come as soon as in the next few weeks, could help the country reduce domestic prices and raise its international competitiveness.
The assessment from South African-born Shane Helberg, Area Manager of Zimbabwe, Botswana and Mozambique at deVere Group, which has around $10bn under advice from 80,000 mainly expatriate clients globally, comes after reports that the development is around the corner.
His comments follow presentations made on 6 June by representatives of the Bankers’ Association of Zimbabwe and the Confederation of Zimbabwe Industries to the Parliamentary Portfolio Committee on Finance and Economic Development, where it was stated that the adoption of the rand would be one of the measuresrequired to address the cash shortages facing the country.
And, Zimbabwe certainly needs an investment boost. This year has witnessed an escalation of cash shortages in the country, which is mostly a US dollar-based economy after domestic currency hit the skids back in the 2008 after hyperinflation gripped the nation.
Economy & Hyperinflation
Zimbabwe witnessed the first hyperinflation of the 21st century, which at its peak in mid-November 2008 reached an incredible monthly rate of 79.6 billion percent. At this point it took prices just 24.7 hours to double.
The economy went into free fall following a campaign to seize white-owned commercial farms. And, recent years saw a move from a broad range of currencies to an almost dominance by the US dollar. Today the Greenback accounts for around 95% of all transactions in the country.
At the heart of the matter for Zimbabwe is a dire shortage of foreign investment. Shifting to the South African rand could help the authorities gain time and allow them to initiate a much needed shot in the arm in terms of implementing policies that are investor friendly.
Helberg, who served with the British military for five years before joining up with deVere in the Zimbabwean capital Harare, commenting says: “Zimbabwe’s adoption of the Rand as the main trading currency within the country’s multi-currency system should be championed.”
As to who will champion it, reports have pointed to the Zimbabwean and South African governments reaching an agreement during the recent continental summit in Ethiopia.
The South African president Jacob Zuma has also been quoted as saying: “I’m very much impressed by such a great and historical event that will be witnessed between the two countries both economically and socially.”
“Whilst the rand perhaps is not as weighty as the US dollar for international trade as it is more volatile against major currencies, it must be noted that the dollar has not been effective in arresting the freefalling economy in recent times,” remarks Helberg.
Zimbabwe introduced a multi-currency system in 2009 to help prevent unofficial trading. In addition to the US dollar, the country allows the use of currencies including the rand, yuan, pound and the euro. While that helped control inflation, it also left the government short of cash to buy essential imports and pay its bills – 80% of which involve civil servants’ salaries.
Stability and certainty is always welcomed by foreign investors and especially so in emerging markets. And, not all emerging markets – especially in Africa – can be considered homogenous.
Primary Currency: Benefits
Using one primary currency, the rand, for commerce is likely to be beneficial for a number of key reasons. “Firstly, it’s is better to move to using one single semi-convertible currency than a multiplicity of currencies at the moment as it reduces confusion and uncertainty,” says the South African.
Move To The Rand
Should the move prove to the Rand be successful, Helberg contends that “we can expect further levels of foreign investment and in turn more expats moving to Zimbabwe.” A steady rise in foreign investment into country will represent a clear mark of success after such a move.
Clearly, international organizations and people bring with them a raft of potentially enormous associated economic benefits to any host country.
“Zimbabweans and expats already in the country will be thankful that a single currency could replace the present variety of currencies used for the added economic stability it will likely generate,” note Helberg in Harare.
Secondly, the measure should also help boost trade links with South Africa, Zimbabwe’s major trading partner. For many years, South Africa has been Zimbabwe’s single largest trading partner.
According to statistics from the Reserve Bank of Zimbabwe imports from South Africa in March 2016 represented 22% of total imports. On the export front, South Africa accounted for 78% of the nation’s total.
The future development is especially important for Zimbabwe as it will make China, amongst others, more confident about investing in the country if it helps stabilize the economy.
It has been reported that China is expected to channel more than $20bn worth of investments to Zimbabwe and South Africa. And, Helberg posits that this “arrangement might have helped spur on the agreement” on rand use between the beneficiaries.
Currently the majority of Zimbabwean manufacturers are importing raw materials from South Africa. In addition, Zimbabwe imports household and basic goods from South Africa as the local industry is still struggling to meet demand. Similarly, Zimbabwean supermarket shelves are found to have around two-thirds of imported products mainly from South Africa.
Zimbabwe’s main industries are Mining (coal, gold, platinum, copper, nickel, tin, diamonds, clay, numerous metallic/non-metallic ores), steel; wood products, cement, chemicals, fertilizer, clothing and footwear, foodstuffs and beverages.
Thirdly, such a move will increase Zimbabwe’s competitiveness in broader global terms as it will make exports cheaper. Also prices in Zimbabwe will reduce.
“When the rand becomes the de facto currency of Zimbabwe, the country’s economic woes could seriously start to diminish” he also suggests. And, this according to the South African would “drive confidence in Zimbabwe” as being a place to do business and invest.
On the property front, emerging and frontier markets – including in Africa – presents unique and individual challenges for property occupiers and investors. And, highlighting that countries across Africa cannot be considered as homogenous, a report published last year by commercial property and real-estate consultants Cushman & Wakefield rated Zimbabwe ‘high risk’.
In a risk analysis of the top 42 emerging and frontier markets around the globe, while Cushman & Wakefield’s annual ‘Emerging and Frontier Markets’ (2015) report ranked five African markets in the top 10 globally – with Botswana overall number one as the “most transparent” of emerging economies – Zimbabwe ranked a lowly 39th just one spot ahead of Angola.
The principal office market in Zimbabwe is the capital city Harare, which has a population of around 1.5 million. The report noted the “weakening economy and on-going political uncertainty” had led to reduced demand from international occupiers over the past few years and higher vacancy rates in the city centre.
The focus for most occupiers is on suburban locations, with cost reduction and consolidation remaining key trends. In terms of the rental outlook for 2016, this report forecasted Harare’s USD/sq.m/year level at $144.00 ($120.00), a decline of 17% over the previous year. Demand was found to be still highest for smaller-sized suites, with higher quality accommodation letting more quickly. However, larger floor plates were taking much longer to let.
deVere is one major global brand that is currently using its resources to develop its presence in the country with its strategic and ambitious growth plans for the longer term. Helberg reveals that the firm intends to “take on more financial advisers and support staff” to meet the anticipated demand across Zimbabwe and wider southern Africa throughout 2016/17.
The rand was trading at around ZAR14.78 against the US dollar at 17.34 UTC today, with its low over the past 12 months being 12.25 and a high of 16.88. Prior to the Brexit vote USD/ZAR was at 14.40 but has receded now by 2.63%.