Zimbabwe: The new investment frontier

There are signs of economic recovery in Zimbabwe, thanks to a change in the political landscape, indicating that now might be the best time to invest. But the government of national unity (GNU) is still facing monumental challenges.

The question is how far is it prepared to go to propel economic recovery? 

A key catalyst for a turnaround remains securing external funding, a major challenge for finance minister Tendai Mbiti who has the unenviable task of finding means to clear the US$5 billion debt Zimbabwe owes to foreign creditors, in order to restore a credit rating that can attract loans from the private markets.

While the reaction from some western donors has been lukewarm, the Southern Africa Development Community’s (SADC) promise to help raise the US$8.3 billion the country needs to fund its Short-Term Recovery Programme (STREP) should prove to skeptics that Zimbabwe is ready to do business.

The Development Bank of Southern Africa (DBSA) is also supporting Zimbabwe’s economic recovery plan. Instead of adopting a “wait and see” strategy, the DBSA is taking the bull by the horns with a number of promising transactions under consideration. DBSA is considering projects in the energy, telecommunications, mining and agribusiness sectors. (These are amongst the sectors being promoted by the official Zimbabwe Investment Authority.)

“We are confident of growing this pipeline to include other sectors, and we are also confident that the downward cycle in Zimbabwe has turned for the better,” says DBSA’s chief economist Sam Muradzikwa.

Also eyeing Zimbabwe is Botswana’s VPB Ltd, which is launching a €150 million private equity fund designed to benefit companies operating in targeted sectors in the SADC region, according to chief investment officer Ndaba Mpofu. “Recent changes will hopefully usher in a period of sustained economic growth and stability for that country,” he says.

Companies from South Africa, the European Union, the US, and Australia are already looking at projects in mining, agriculture and the manufacturing of primary products. Canadian Caledonia Mining recently announced it would double gold production from its Zimbabwe mines, while steel maker Arcelor Mittal’s South African unit is reportedly interested in taking over state-owned Zimbabwe Iron & steel Co. Agro-processing firm Tongaat Hulett plans to inject R145 million in its sugar mills in Zimbabwe to restore full productivity.

The signing of the Bilateral Investment Promotion and Protection Agreement between South Africa and Zimbabwe is crucial and will boost confidence amongst South African investors wanting to enter the country. “Zimbabwe’s recovery will largely depend on the will of the government to provide a conducive environment for investment. Signing bilateral trade and investment treaties with investment protection guarantees will indicate its commitment to facilitate operations of the private sector,” says Tinei Muwandi, an audit manager at Ernst & Young.

The GNU hit the ground running and already some policy reforms have been put in place, including the dollarisation of the economy and the re-opening of the Zimbabwe Stock Exchange. Investor interest has sharpened with most betting on the country to deliver decent returns once the unity government is working properly.

For investors who got in early, like mobile operator Econet and agribusiness firm Delta Corp, dollarisation of the economy in April rewarded their foresight, enabling companies to achieve quick gains, with Econet reaching a market cap of $500 million from $200 million.

Challenges in Zimbabwe

Investors now have some security but also recognize that all markets carry a measure of currency risk. Challenges for financing in Zimbabwe include political risk factors with potential investors waiting to see if the GNU will remain in place to implement a sustainable economic recovery.

 “Currently the situation is quite delicate due to the rapid and complete dollarisation and due to the absence of liquidity in the local money market. However, the prospects look fairly good, especially if dollar inflows into the country – via foreign direct investment (FDI), credit lines and balance of payments support – will lead to increased intermediation within the banking sector,” says the DBSA’s Muradzikwa.

The mystery of the vanishing balance sheets wiped out by hyperinflation, which rendered accounting procedures impossible, has made asset values of Zimbabwe companies hard to determine. “You have no historical financial statements that can be referred to when considering project financing,” says Muradzikwa.

Rather than be scared off by the risk, Zimvest – an investment company which provides investors with a wide range of viable investment opportunities – is looking at available investment vehicles at its disposal to mitigate risk. “The decade long period where there was little or no investment has opened up a myriad of opportunities present day. I think everything should be put in context – doing business and investing in Africa as whole is not easy. The foundation has been laid in Zimbabwe and now investors need to take advantage of that,” says Zimvest’s managing director Shaun Lightfoot.

Zimbabwe is set apart from many other African countries by its comparatively good infrastructure – a dream for foreign investors dealing in emerging markets. Considering the current scarcity of investment opportunities in the global economy, changes happening in Zimbabwe should rank it as a favoured option for investment.

Promising investment sectors

Investor interest over the last few years has been in portfolio investment at the Zimbabwe Stock Exchange and in mining. Currently most businesses are in need of recapitalisation. Privatisation of potentially profitable parastatals (including Air Zimbabwe, the National Rail, Cold Storage Company and Tel One) offers significant investment opportunities.

According to investment analysts the mining sector – with abundant reserves of gold, platinum, coal, diamonds, nickel, iron ore, copper and coal-bed methane – is attractive for foreign investors. The sector is currently the largest single contributor to export earnings with the potential to create downstream industries including retailing. The implementation of favourable policies could see mining attracting between $6 billion and $16 billion in exploration and mine development during the 2011-2018 period, the GNU estimates.

Agriculture, tourism, ICT, energy, infrastructure, financial services and retail sectors are also poised to offer lucrative opportunities.

The government is actively pursuing the rehabilitation and expansion of all infrastructure and massive opportunities exist in dam and road construction, provision of urban housing on land provided by the State, and construction of energy and communication networks.
 
“We are banking on these projects to take off because of the huge opportunities that have the potential to improve our balance sheets ruined by the effects of the financial downturn in the industry,” says Tito Mpungose whose South African based firm supplies construction and building materials in the region.  

Many operators are optimistic that tourism will be one of the first sectors to recover as international arrivals increase.  Although in need of recapitalization, its infrastructure is impressive and the country is well placed to benefit from the 2010 World Cup soccer tournament in South Africa. Opportunities exist in the construction of hotels and lodges and in operating tourist facilities.

“The tourism sector will only go from strength to strength. There are generous tax incentives in areas designated as Tourism Development Zones including a 0% tax on the first five years of operation,” says Shaun Lightfoot.

The property market, buoyed by the Diaspora, has shown significant growth over the last four years but prices remains relatively cheap when compared with the rest of Africa. Property prices in the traditional tourist strongholds of Victoria Falls and Kariba have remained depressed and should offer good value for investors in the short to medium term as tourism recovers.

Smart investors will also be looking to buy assets that can be sold for a profit once there is some level of stability. “Due to the generally undervalued assets, asset management firms, merchant banks and insurance companies have very good prospects going forward should the current political and policy stability prevail,” says Sam Muradzikwa.

It is clear that a wealth of opportunities awaits intrepid investors in Zimbabwe. TradeInvestAfrica