Zimbabwe’s accounts puzzle: Old Mutual calculates its own exchange rate for results, currency hits earnings

Old Mutual Zimbabwe currency
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Results just released by Old Mutual Limited, South Africa’s number two insurer and the holding company of Old Mutual Zimbabwe, show the impact of Zimbabwe’s currency reforms on the accounts of companies operating in the country.

Old Mutual’s results from operations (RFO), its main measure of performance, was R9.963 billion in 2018, down 4%. Apart from being the result of net reserve movements and a general sluggins economy in South Africa and elsewhere, Old Mutual said this decline was also a result of the change in the functional currency in Zimbabwe.

“We delivered Adjusted Headline Earnings (AHE) of R11,512 million, a decrease of 11% compared to the prior period. The primary cause of this was the lower RFO, lower investment income in South Africa as a result of weaker equity markets and in Zimbabwe, the change in functional currency in the fourth quarter,” the company said in results out on Monday.

Two major policy moves over the past five months have forced many companies to reassess their reporting. First, in October, the Reserve Bank of Zimbabwe separated RTGS balances from foreign currency accounts. In January, the RBZ then declared that RTGS balances and bond notes were now virtually a new currency, the RTGS dollar. Central bank said this would act as the base currency.

Zimbabwe currency: Bring out the calculator

According to CEO Peter Moyo, “consensus has developed to apply a change in functional currency for our businesses operating in Zimbabwe from 1 October 2018”, when the FCAs and RTGS accounts were ring-fenced. Old Mutual says the change has reduced both its reported profits and net asset value in 2018.

As a result, to calculate its earnings from Zimbabwe, Old Mutual has had to come up with its own exchange rate, 3.3 to the US dollar, to translate its accounts for the last three months of 2018.

Explaining its calculations, Old Mutual says: “We have estimated a RTGS US dollar exchange rate of 3.3 to 1 (RTGS rate) by assessing various inputs that impact inflation. The inputs considered in this estimate include the relative food and fuel prices and the official inflation rate. A further observable input taken into consideration was the premium at which the Old Mutual and PPC shares trade on the Zimbabwe stock exchange relative to the Johannesburg Stock Exchange.”

According to Old Mutual, the majority of its shareholder return from the rest of Africa market – which excludes South Africa – is generated by Zimbabwe. Equity markets have continued to be volatile, with a 40% rise in the second half of the year. This resulted in substantial mark to market gains. However, this was impacted by the currency changes.

“The positive investment returns generated in Zimbabwe equity markets was impacted by the translation of shareholder investment return at the RTGS rate for the last three months of the year,” says Old Mutual.

Despite strong shareholder investment return generated in Zimbabwe during the period which increased the asset base, there was a decrease of R3.1 billion or 22% in Old Mutual’s Rest of Africa segment. This was largely a result of the change in functional currency in Zimbabwe.

Old Mutual’s grim outlook

Old Mutual has a dim outlook on the Zimbabwe economy. Real GDP growth “is expected to be muted in our dominant Southern Africa markets as both Namibia and Zimbabwe face economic headwinds”.

The company said: “Although a new government under President Mnangagwa came into power in the year, economic and political instability still persists in Zimbabwe.”

RFO for Zimbabwe increased by 22% from the prior year due to strong performance across all lines of businesses, except for property and casualty due to higher claims and increased operating expenses.

Tobacco merchants TSL Limited announced recently that it had delayed release of its annual results pending guidance from the Public Accountants and Auditor’s Board (PAAB) on how to present results. PAAB secretary-general Admire Ndurunduru said the board would soon release a guide after talks with listed forms, the ZSE and the Securities and Exchange Commission of Zimbabwe.