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Positioning in times of high uncertainty

Unfolding events since the beginning of 2019 have helped give a clearer view in terms of expectations on the policy side of the economy. The reactionary fuel price increase, announcements by the Finance minister Mthuli Ncube that the Zimdollar will be back within 12 months and delays in Monetary Policy Statement (MPS), have helped narrow down expected outcomes contrary to the view that these factors have instead increased uncertainty.

By Respect Gwenzi

Unfolding events since the beginning of 2019 have helped give a clearer view in terms of expectations on the policy side of the economy. The reactionary fuel price increase, announcements by the Finance minister Mthuli Ncube that the Zimdollar will be back within 12 months and delays in Monetary Policy Statement (MPS), have helped narrow down expected outcomes contrary to the view that these factors have instead increased uncertainty. This article will explore what we believe to be possible indications and expectations on the policy front going forward and further proffer guidance to business in terms of risk mitigation, given the possibilities.

In pure sequence of events and ahead of Davos 2019, economic pressure was mounting, characterised by severe fuel shortages and although fuel supply has been erratic for three years, the January 2019 levels were a notch higher. Ncube was the first to highlight at a pre-Davos townhall meeting that government had no capacity to contain the fuel crisis. At that meeting he said the government had secured $20 million worth of fuel, which we deduced to be in the region of 40 million litres and given the then fuel consumption rate ,amounted to only a four days’ supply.

Now, would a four-day supply help to alleviate two weeks long dry spells and even cover future needs. It was inevitable that something had to yield and although the price hike was unpopular, it could buy time on government’s side because as shown there were no funds to secure the supplies.

The government’s response through a 150% fuel price hike was again misread by most of the populace and it is paramount to elaborate. Increasing the price of fuel in local money terms could rebalance the market to some extent in the short run, but the mid to long-term effect is significant inflation. In his justification for the price increase the President said he sought to close the gap caused by illegal black market dealers. Essentially, there were two things, one being the black market exchange rate for dollars and the black market for fuel. The black market price for fuel was around US$1,12 per litre, which could be acquired for bond $3,80 on the same black market. So the gap was a pump price bond $1,38 and a bond $3,80 black market price.

What the responsible authorities failed to read is that the black market forex rate was a moving variable, which was not within their control and an upward movement, which was likely anyway, would result in yet another gap widening and give further room for rent seeking on the black market. This means government was playing to the gallery and yet in doing so, creating inflationary pressure. If it is agreed that economic fundamentals are still weak, then a black market rate increase is always a possibility.

On the other hand, fuel is secured in United States dollars. If a price increase is effected in local money it does not help increase its supply, but only helps constrain its local demand. The government would still have raided exporters for forex at 1:1, whose local costs would be moving up in line with the rest of the local market despite a rebate teaser. So the forex shortage remains with us.

So those believing that this policy measure was correctly timed and that it had a positive impact of closing the fuel subsidy gap are wrong. They are wrong in that they assume the parallel foreign exchange rate is a constant variable.

Authorities, however, know this fallacy and only took the route so as to achieve a temporary rebalancing cognisant of the not so far effects of inflation. The conclusion with regards this move is that it shows government is no longer looking at returning to the US dollar regime as a primary currency.

It also shows that the government has no immediate solution to solving the forex crisis. Lastly, it demonstrates that the government is less worried about inflation than it is about a shortterm disguised stability. This bird-in-hand approach depicting a defective telescopic view is replete in Zimbabwe’s economic history and has been one of the major sources of its economic crisis.

While gradually every economy should move towards an independent currency to allow for flexible monetary management, a promised return of the Zimdollar in the very short-term (12 months) is without basis. It further solidifies the view that the government has no solid plan to the crisis and has become highly nostalgic and reactionary, giving room to high downside costs. In his argument, Ncube has said every country should have its own currency and that the US dollar is too strong for Zimbabwe.

Although he said certain fundamentals have to be met, there was no clear guidance as to what fundamentals he meant. A weak current account position, huge budget deficit and high inflation are brickbats in effective Zim redollarisation of the economy.

Without forex reserves or gold reserves to support the currency as hedge given possible volatility, the currency will be highly exposed. Shoring up such reserves in the short term is clearly not possible, given the trade gap and a projected economic recession in 2019.

Moreover, the weakening of the currency does not necessarily imply increased competitiveness of local produce. To be competitive, one needs to produce and given the challenges we face in terms of retooling and forex challenges to allow for importation of raw materials, production is readily pointing southwards. Introducing a local currency at the present moment will not make local produce competitive, but even more expensive, given effects of inflation. So why announce such a policy measure now?

The government simply wants to control money supply, and one would argue, but they readily have indirect control through open market operations (TBs).

Yes, that is right, but there is a cost attached to the issuance of sovereign instruments, which is not incurred paper printing. The cost, known as interest, can drive money supply up at a higher rate and cause serious inflation within a very short space of time through the compound effect.

A new currency could allow for government to inject money without incurring an interest cost. Within the trappings of power, this option is very tempting, especially in desperate times. But within the context of this report, this move highlights yet again the desperation, the short-termism and reactionary approach by government.

It can only further demonstrate that government is giving in, sacrificing principles for expediency and that road we have travelled before. It yields inflation if prudence is in lack and all that we have seen over the last five years, is a clear sign of lack of prudence and more of expedience as seen by the growth in money supply to finance government’s excesses.

Delays in announcement of monetary policy have heightened speculation and given the gestures shown by government over the last five weeks, the population could be forgiven for speculating an immediate return to the Zimdollar.

The question still remains, if there is no shift in currency policy, why then delay the MPS announcement? The truth is, overtures over currency regime debunking have been tabled and contemplated over the last few weeks and, indeed, as expected there are two sides to the matter; one for the status quo or managed exchange rate, where exchange rate is partially floated and partially managed and another which is ready to bite the bullet and go for the Zimdollar.

While we will not dig into the merits of the various proffered policy positions, these variances and resultant delays are a demonstration of lack of a coherent plan to tackle the cash and forex crisis on the part of government. It feeds into the formative observations that government is reactionary and lacks a solid plan to tackle the present crisis.

In planning at business level, against the observations made, corporates should ensure there is sufficient downside hedge against further and more severe inflation, sustained and wider forex gap and the resultant parallel exchange rate worsening.

It is tactical to delay credit settlements where necessary and shore up inventory levels. Less resources should be kept as cash and to counter for value erosion, necessary placements of cash into investments should be expedited. Where import competition is concerned companies will have to re-evaluate their models using the purchasing power parity and make informed decisions concerning own production. If status quo is maintained, which the Reserve Bank of Zimbabwe has already hinted on, there will gradual, but effective value erosion.

If the local currency is restored immediately without controls (both partial and managed exchange), money supply will incur a shock that can destabilise financial market further and collapse the currency.