With the current multicurrency regime set to legally end in 2025, banks are reluctant to lend long term due to uncertainty. In their latest note to investors, Imara Asset Management CEO John Legat and Shelton Sibanda, Chief Investment Officer, say a return to a ‘mono-currency’ will damage the economy further. We publish excerpts of their views on what may lie ahead:
Now that elections are behind us, it is our hope that focus should now move to the economy. There is so much work for government to do in liberalising the economy and the monetary system to spend time perennially stuck in electoral mood.
At the moment, there are no clear signals and hence we feel disinclined to make predictions until we have more certainty as to government’s political and economic policies. Resolution of the currency issue, particularly the tenure of the multi-currency, will be critical with the current 2025 sunset clause a major deterrent for long-term funding and increasing the cost of capital for firms.
The pace and magnitude of dollarisation have clearly accelerated. We believe that the USD economy, and with it the informal economy, will continue to grow whilst the formal ZWL economy will shrink relatively. This has severe implications for government tax collections.
A strong informal sector driven by agriculture, mining and diaspora remittances should continue to help keep consumer spending strong. This should be good for local businesses and indeed for the majority of listed companies on both the ZSE and VFEX. We are expecting both stock markets to rebound from their current lows having significantly lagged currency devaluation and inflation.
We are in an uncertain environment at the moment; we have a new Government and some new ministers but we are not sure whether that will signal new economic policies or more of the same. The Ministry of Finance has largely been left alone in the recent Cabinet manoeuvres which suggests some continuity in direction. But the key question remains over the currency regime. The previous government stated through a Statutory Instrument that the USD would remain in place until the end of 2025, running alongside the ZWL.
Long-term investors wish to know what happens after 2025 which, after all, is just around the corner from here. With the very tight ZWL liquidity in the system since July, dollarisation has further accelerated.
For our part, we are making the bold assumption that the USD will remain in place for a good while yet. We may be thinking far too logically when we take this view. The Government and the Minister of Finance banned the use of the USD in June 2019 having formally launched the ZWL in February of that year at a rate of ZWL2.5 to USD1. Very quickly the economy collapsed and with it the new ZWL which ended 2019 at ZWL17 to the USD.
The first COVID lockdown in March 2020 further hit the economy, prompting the RBZ to allow the use of the USD again. The recovery in the economy was immediate. So, in our view, it would be an illogical policy move to ban the use of the USD again, especially as it is far more widely used today than it was in 2019.
The current multi-currency regime has also benefitted local corporates a lot and we are convinced they would also welcome the sustained use of the USD in the local economy. Interestingly, due to better USD generation as a result of intensified dollarisation, reference to the auction system has largely disappeared for a number of our investee businesses. For VFEX-listed entities with a large/sole dependency on local USD sales, a return to a mono-currency regime could be even more devastating.
We expect some further clarity on the multi-currency tenure and/or the government’s preferred currency regime before the end of the year, or at least during the budget presentation. Practically and for it to make sense, we also expect the 2024 budget to be presented in USD terms.
Nothing official has been mentioned yet, but increased chatter of a mono-currency regime is for all intents and purposes negative. The sooner this issue is resolved the better. We prefer the multi-currency regime to continue and, as a result, look forward to the upcoming 2024 budget presentation for further guidance and hopefully, some robust reform measures that will tackle head on our economic challenges.