Vulture investors banking on Mugabe’s fall

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.

A fascinating but strictly academic Zimbabwe recovery plan

A gentleman by the name of Norman Reynolds has been thinking hard about how Zimbabwe could be pulled back to relative normality. I read his “How to put Zimbabwe back on its financial feet” in the Business Day (SA) of August 21st 2007 with fascination.

But the article also brought a grin to my face, because it completely discounted the many political factors which would make his plan unpalatable to any Zimbabwean government, and the many social and cultural factors that would make it un-implementable if tried. The components of his plan that would also require the South African government’s cooperation are also straight out of political fantasy land.

Excerpts:

Over the next 10 years, the international community will have to pour vast sums of money into Zimbabwe. Immediately, Zimbabwe requires at least R900m just for food. To also cover fuel, electricity, medicines, other essential imports, and to fund rand civil service payments, the figure would be about R8bn — until December. The Zimbabwe “bill” for humanitarian and recovery costs will come to at least R300bn from next year to 2012.

If Zimbabwean refugees were welcomed and used in SA for the next three years to build our faltering economy and services, and if there was a proper currency, transfer and payment system to Zimbabwe, they would provide about a quarter of that R300bn bill direct to their families inside Zimbabwe.

If SA plays a leading role, it can restore the New Partnership for Africa’s Development vision and the promise of the African Union. It can demonstrate a “failed state” programme able to be used elsewhere in Africa, including in SA’s marginalised townships and rural areas, and provinces such as Eastern Cape, which still hold the majority of citizens as economic prisoners.

Below, I outline a humanitarian and recovery plan prepared by a colleague and me for the Zimbabwe United Nations (UN) Country Team in 2003. It uses all foreign aid and transfers strategically to rebuild the modern economy, with the local rand equivalent supporting a community-based economic and social rights programme of the kind recently approved for SA by the government under a new Local Economic Development programme. The programme is called the Sustainable Community Development Programme.

Citizens are invited to mobilise and to register in community trusts formed at village, neighbourhood and street level. They are then given resources enabling them to act as partners of the government and business in development and service delivery…

Strategic use of the considerable foreign exchange (forex) provided by the international community and the Zimbabwe diaspora would be managed through a series of forex “windows”. The first window would aim to back exporters, so that the forex provided is first multiplied. For instance, tobacco used to earn $12 for every $1 it took to grow the crop. Mining, tourism, some industrial production and all of agriculture earn forex. The funds in this “window” would not be auctioned — they would be “sold” at a price agreed on by the donors and the reserve bank.

Any forex surplus to the first window would be passed to a second “window” through which national essentials such as fuel and medicines would be bought. This would act to keep the cost structure of the economy, and inflation, down. Any further forex surplus would go to a third window, which would auction it for use by domestic producers. A fourth window would auction small surpluses for private use .

The use of economic and social rights programming, within a strong “localisation” model to balance “globalisation”, would allow Zimbabwe to come under a form of United Nations/African Union economic and social trusteeship. It would guarantee that all citizens were economically active and secure .

Dr Reynolds is a development economist.

Well, it’s hard to know where to start enumerating all the reasons why his plan would not fly in the real world. But I am not even going to do so in a detail, because I wonder if the whole exercise was not at least partly tongue in cheek!

The idea of Zimbabweans “working off” their refugee status in South Africa and the remittances to be formally repatriated to Zimbabwe: There are elements of this idea that make sense, but it would be such political anathema in the pan-African political environment that it would never get off the ground to even consideration stage. Plans of any sort that do not take into account the political milieu they are proposed for are of little use except perhaps as academic exercises, which Reynold’s very much is.

So is the idea of Big Brother South Africa running a “failed state” programme for the benefit of Africa! Much of Africa may very well need some variation of such a programme and all else being equal (which all else definitely is not!) South Africa may well be equipped to try administering it. But again, the idea that it could be called such and be acceptably run by South Africa is absolutely cuckoo! I’m sure Reynolds must know this, which is why I am a little reluctant to react to his article as a strictly serious piece.

We now know from the countless “development plans” that have been hatched by “experts” over the decades that workability is not necessarily a strong point in the conception of these schemes. I’m guessing Reynolds was bored one weekend and decided to take out that boredom on Zimbabwe by hatching an entertaining recovery scenario like this one.

It’s a pity the setting of his plan is in dream land rather than in reality. Parts of it are quite innovative and just plain make sense, such as partnering groups of citizens in development initiatives together with government and business, and the idea of forex allocation based on productivity and multiplier potential. But even so, many versions of these fine-on-paper ideas have been tried and failed across Africa because they paid insufficient attention to their operating environment.

An interesting read, but strictly from an academic, theoretical point of view…

Why the sanctions issue is a red herring

The Mugabe government puts tremendous energy into blaming what it refers to as “illegal sanctions” by Western countries for the Zimbabwean economy being down on its knees, causing untold hardship to the majority of Zimbabweans. The claim is that international aid, credit and investment have largely dried up on the orders of Western governments, unhappy with change which took prime land away from white farmers.

When the representatives of the accused countries bother to respond to these charges, it is usually to say that what have been imposed are merely limited “targeted sanctions” against members of the ruling elite. They deny applying any sort of general economic embargo, or seeking to cause “regime change” by trying to instigate popular rebellion over the hardships. They also point to how they continue to contribute humanitarian aid to relieve the suffering of the most vulnerable Zimbabweans, despite the diplomatic impasse.

It is quite clear that economically, things have completely spiraled out of the control of the government. There is little prospect of any change for the better happening before next year’s expected elections, and it is not at all far fetched to imagine things might be much worse by then. Short of improving the situation, therefore, the government finds it convenient and necessary to latch on to sanctions as an explanation for its inability to make living conditions bearable.

The hope is that the electorate will find that classic political explanation (“it is the fault of the Great Enemy”) for their economic plight, and the government’s seeming helplessness in the face of it, convincing enough to avoid a feared thrashing at the polls after almost 10 years of steep decline. It is not likely to impress a significant number of the voters who have been fed this line as they watched their lives deteriorate dramatically.

There are several perspectives from which the Mugabe regime’s blaming sanctions for the economic state of Zimbabwe today is weak.

One major problem of arguing “your suffering is the fault of our enemies” is to seem to absolve oneself of responsibility. Yet whether or not there are Western sanctions against Zimbabwe in place, declared or undeclared; legal or illegal, it is still the responsibility of a government to reduce or prevent the deprivation of its people, and to put in place conditions for an improvement in their standard of life. Sanctions would certainly make this difficult, but they would just be one more out of many obstacles to success. The quality of a government can to a large extent be measured by how well and hard it works to work around these sorts of obstacles.

A Zimbabwean voter cannot be expected to accept putting primary responsibility for his economic fortunes on governments in Europe or North America, over that of his own government. He or she would be quite justified to say at election time, “if you find that the sanctions you allege are in place are an insurmountable barrier to doing your job of running the Zimbabwean economy better than this, then I am exercising my right to give another group of people a try.” This, of course, is exactly what Mugabe & Co. fear many voters will choose to do.

But instead of working harder to have them lifted, or to more effectively get around them, the government merely moans louder about the unfairness and “illegality” of those alleged sanctions. This merely entrenches the appearance of complete helplessness and inability to deal with the issue, which is what the average Zimbabwean cares about at the end of the day, regardless of why and how it came about. Screaming “illegal” sanctions ever louder, as things get worse, suggests the authorities have no coping strategies, and have given up. This is not the kind of image a ruling party that has presided over almost a decade of very dramatic decline can afford to go into an election with.

You cannot boast endlessly about your “sovereignty,” and at the same time whine about how your economy’s fate is not within your hands, but in that of your enemies. It must be one or the other. If we are as “sovereign” as Mugabe never tires of reminding us we are, then our economic performance should not depend on what any other countries do or don’t do. If, by crying “sanctions” every other minute, Mugabe and his regime are admitting that we are a small country whose economic fate cannot be divorced from the international diplomatic standing of it’s government, then we are not quite as “sovereign” as we imagine. In the latter case, diplomatic action beyond helpless whining is called for, and yet silly bravado is all we see and hear.

Suppose Mugabe “won” his sanctions argument. Suppose Western governments said, “You were right Mr. Mugabe, we did impose sanctions, and your fine speeches have made us see the error of our ways. We now hereby formally lift those sanctions.”

Do Mugabe & Co. really believe this is all it would take to make money, goods and investment suddenly flow into Zimbabwe, with no other actions on their part? Can they really be so divorced from reality that fail to understand that there are many other factors which make the typical hard-headed investor look elsewhere than the Zimbabwe of today for opportunities?

A question that is not asked often enough: if our economic calamities are because of sanctions imposed over land reform, why didn’t the government foresee and prepare for them? We are often reminded what tough revolutionaries our rulers are. In preparation for the wholesale takeover of farmland, did none of these revolutionaries think for a moment that it would cause a ruckus, and therefore have short, medium and long term plans to prepare for it? Why has the government seemed so surprised by the reaction its actions have received in Western capitals?

The point here is not that they should only have done what the Western countries approved of. It is, instead, that on having decided to go ahead with measures they knew would be disapproved of by economically powerful countries, they should have had a plan in place to deal with the effects of how that disapproval was expressed. Or was the hoped for “plan”to talk one’s way out of the disapproval with fiery, populist speeches at the U.N.? What naivete for self proclaimed revolutionaries!

Then there is the issue of sanctions busting. Nothing would have earned the Mugabe regime the respect of even its detractors more, than having shown particular agility at the “sovereign” ability to get around the claimed sanctions; to keep things working fairly normally despite them. Or to at least show prospects of even slight recovery after an initial dip, which could then have been explained as merely a transitional hiccup as “the revolution” took hold. This was especially important to show in the agriculture sector, whose overnight wholesale changes were the genesis for all that has followed since. If the government had been able to say, “yes, we know things are hard, but look at all the successes we are beginning to score in the agricultural sector, whose taking over caused the imposition of sanctions in the first place,” people’s reactions to it would have been very different from what they are today.

Comparing the American sanctions on Cuba with those said to be in place against Zimbabwe is pathetic, and ill-advised for the Mugabe government. Cuba has achieved notable successes in areas like agriculture and health despite decades of outrightly declared, strictly enforced U.S. sanctions. They have done this through quite innovative approaches we have not seen our government show in any arena. Cuba’s rulers at least give the appearance of being real revolutionaries, living modestly and wanting to be seen to be sharing any hardships with the people. In Zimbabwe the rulership takes great pride in showing off just how removed from the general populace they are, as if to goad them. So in Cuba one sees some genuine “solidarity” between the governed and the rulers; whereas in Zimbabwe the rulers delight in emphasizing their lordship over the people, “solidarity” being nothing more than a cheap slogan.

It is a pity our opposition parties are so distracted by so many peripheral things. A more focused opposition could have made mincemeat out of the Mugabe government for its attempt to absolve itself of responsibility for the pathetic state of our country with the weak official excuse of “sanctions.”

Chido Makunike