Zimbabwe Review

Reflections on Zimbabwe

Vulture investors banking on Mugabe’s fall

Posted by CM on December 12, 2007

For Zimbabweans, it is naturally hard to think beyond the present day to day economic hardships and political repression. As the opposition parties continue to weaken in their division and Mugabe’s government to strengthen its military hold on power, there appears little prospect of immediate relief.

But no matter how entrenched it appears today, the Mugabe era will come to an end. It is much easier to see this and try to strategise for a different time from a distance than it is today from ground zero with all its immediate pressures. This is what many investors are doing in readiness for the inevitable end of Mugabe’s time, even though that end will not necessarily guarantee normality in the short term. It is an indication of how much the source of Zimbabwe’s problems have been placed in the person of Robert Mugabe by some.

Here’s an example from Ethical Corporation of how some investors are waiting in the wings ready to swoop in for cheap, potentially lucrative assets in preparation for better times in Zimbabwe:

Banking on Mugabe’s fall

Vulture investors are ready to swoop on Zimbabwe’s cheap assets, but they are playing a risky game.

Zimbabwe has been in economic free fall since 2000 when the country’s ruler, Robert Mugabe, began his chaotic land reform. The policy was a disaster, largely obliterating the farming sector of a nation once dubbed the “bread basket of southern Africa.”

The country’s decline under Mugabe is plain to see. Unemployment is at 80 per cent and inflation at an estimated 7,000 per cent. A third of the country’s 13 million population has fled (three million of them to South Africa), while nearly as many of the remainder survive on international food aid.

But some outside speculators see commercial opportunities amid the poverty. Dubbed “vulture investors” they are ready to snap up Zimbabwe’s farms, industrial property and mining leases at considerable discounts using foreign currency. The vultures plan to buy now, sit tight, and await the end of Mugabe’s rule.

A typical vulture fund is London-based Lonrho. In October it launched LonZim, a “Zimbabwe investment fund to meet strong demand from around the world.” Australian-born chairman David Lenigas says most of his fund’s initial investments will be in property. “Commercial property is cheap as chips,” he observes. “The infrastructure in Harare is fantastic, but it’s fire-sale prices.” He sees other potential wins in resorts and game parks, hoping that once Zimbabwe’s economy recovers, the tourists will return.

One of Lonrho’s first purchases in late September was technology firm Celsys, for $5.45 million. Celsys owns Zimbabwe’s only Nokia repair facility and is the largest printer of security documents, cheques and air time cards. Although the company is now valued at half the purchase price, LonZim is interested in its “strong future growth potential.”

The Zimbabwe Financial Gazette said it was “particularly audacious” for a company with such a controversial colonial history to return to the country at this time. (Former UK prime minister Edward Heath once called Lonrho’s former chairman, Tiny Rowland, “the unacceptable face of capitalism” for the way he bought political influence with several post-colonial African governments despite his company’s South Africa and Rhodesian roots.) Lenigas says he wants to return the firm to its former status as Zimbabwe’s biggest employer.

Lonrho has had no shortage of interest from risk-hungry investors. Lenigas says even his broker was surprised at the responses and although he could raise more funds he would struggle to deploy them.

Another fund investing in Zimbabwe is Imara, an investment banking and asset management group represented in the UK and South Africa. In October the firm used its newly launched Botswana-based Zimbabwe Fund to invest $13.5 million in about 17 of the 82 companies listed on the Zimbabwe Stock Exchange. Imara’s chief executive, Mark Tunmer, says Imara decided to launch the Zimbabwe Fund after its high net worth investors showed an appetite for Zimbabwe in the company’s Imara Africa Fund, launched back in July 2005. That fund, aimed at African investors seeking to diversify out of South Africa and Egypt, seeks to have 10 per cent of its investments in Zimbabwe.

South African funds eyeing Zimbabwe include Sanlam Investment Management, the investment arm of Sanlam, South Africa’s biggest life assurance company, Rand Merchant Bank and BoE Private Clients of South Africa.

To a large extent, these funds hoping to capitalise on the country’s brighter, post-Mugabe prospects, are merely copying the strategy adopted by local Zimbabwean investors. In a market where exchange controls restrict domestic insurance and pension fund companies from investing outside the country, the market is kept liquid through hedging against inflation by buying property and shares.

One of the country’s longest-standing investors is Old Mutual Asset Managers, Africa’s biggest money manager. Chief executive Thabo Dloti warns: “If you have a short-term perspective, you should be extremely worried. We have a long-term view and we have restructured our portfolios to reflect that.” Old Mutual has been in Zimbabwe for 110 years. It began switching into stocks and property in 2000, when Mugabe’s seizure of white-owned farms gained momentum. Dloti declined to comment on what Zimbabwe assets the firm now owns.

But investors must understand the risks. Investing in Zimbabwe increases the flow of foreign currency the regime can lay its hands on, thereby prolonging the survival of Mugabe’s dictatorship. Zimbabwe’s laws force investment funds to buy various forms of government bonds. There is truth in the claim that the Zimbabwean subsidiaries of Old Mutual, Barclays and Standard Chartered have created what the London-based newsletter Africa Confidential calls a “$400 million financial lifeline to Robert Mugabe’s government over the past two years.”

In late October the South African-based Zimbabwe Solidarity Trust urged South African businesses to speak out against the regime’s human rights abuses. Acknowledging the constraints under which businessmen in Zimbabwe operated, the trust’s Brian Raftopolous argued that they could and should do more to avoid complicity. Privately business leaders in South Africa bristle at this because across the world political leaders from countries other than Britain, Australia, the US and Botswana have done little to end the crisis in Zimbabwe.

More worrying for investors in global firms operating in Zimbabwe is the fact that security of tenure cannot be taken for granted in the country. In October the Zimbabwean parliament passed the Indigenisation and Economic Empowerment Act, which requires all “foreign-owned business” to be 51 per cent owned by black Zimbabweans.

Already the government has cancelled the operating licence of Telcel Zimbabwe – the mobile phone operator that is majority-owned by Egyptian Orascom Telecom – because Zimbabweans “only” owned 40 per cent of the business.

The law’s supporters point to China, where the government’s approach of taking controlling stakes in foreign firms is said to have kept wealth within the country. But the crux of Mugabe’s law is that Zimbabweans wanting to buy the 51 per cent stake in an international business will still have to borrow the money, something they may find difficult to do at current levels of inflation.

By halving any potential returns, the Indigenisation Act has called into question the rationale of opportunistic investment in Zimbabwe. Even if Mugabe’s regime does respect changes of ownership, funds must consider that there may well be post-Mugabe claims against the beneficiaries of these enforced sales as the only ones with money to invest now are likely to have close links with or will at least have benefited from Mugabe’s regime.

In November observers were encouraged by reports of a breakthrough in talks between Mugabe’s government and opposition leaders at Lake Kariba. Both sides have finally began making concessions: the opposition MDC, because Mugabe’s security forces have nearly destroyed it as an organisation; Mugabe’s allies, because they know they will outlive their 83-year-old leader who once again has selected himself as his party’s sole candidate for the March 2008 presidential election.

Optimists see an outline of a post-Mugabe Zimbabwe emerging from the Kariba talks, but such hopes are not new. Over the past four years the South African government has repeatedly promised imminent deals and breakthroughs in the crisis in order to prop up its “quiet diplomacy” approach to the Zimbabwe crisis, which critics charge has kept the pressure off Mugabe.

The MDC knows it can count most of the business community, bar Mugabe’s cronies, among its supporters because every business leader wants a return to a normal, non-hyperinflation economy. But the pressure to speak out is mounting on business.

Vic van Vuuren, chief operations officer of Business Unity South Africa, sees a rationale for big business already in Zimbabwe to stay. He says: “They may take losses, but I think everyone has got the hope that there is going to be some light at the end of the tunnel, and that the corner is going to turn soon. And someone is going to then benefit from the long-term investment.”

Ordinary Zimbabweans living in exile in the UK have called for sanctions, especially from South Africa, to bring down the regime, pointing out that things can hardly get worse for ordinary people.

The real challenge for businesses in the country is corruption, says Mike Flax, executive director of Johannesburg-listed Madison Property Fund Managers, and one of those promoting investment in property in Africa. He says: “It is quite important to avoid the cycle of corruption at all costs. Once you are in, you are sucked into a vortex you can’t get out of.”

Vulture investors should beware that Mugabe has outlived many predictions of his demise before, warns Flax. If he survives long enough, foreign funds may find the moral costs of their investments rising as financial returns continue to lag.

If Zimbabwe were to come out of its political and economic morass in the next few years, there certainly would be huge returns for these investors. But given all the uncertainties, huge losses cannot be at all ruled out.

Many countries in Africa that are beginning to experience economic growth are severely constrained in that growth by insufficient or absent infrastructure. It is a crying shame that what one person quoted in this story describes as Harare’s “fantastic” infrastructure is being utilised at a small fraction of its potential. It is also ironic that with all the talk by the Mugabe government about how the country’s isolation is because the West is opposed to its moves to have indigenous Zimbabweans “own” the economy, after all is over it may still be foreigners who mop up the choicest assets of whatever would remain standing after Mugabe is gone.

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One Response to “Vulture investors banking on Mugabe’s fall”

  1. Anonymous said

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    Excellent post. Keep it up!

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