Monday, 20 May 2019
Today is World Metrology Day and the definition of the kilogram is changing because it's apparently been 'losing weight'. The Planck constant will replace the IPK as the new kilogram plus a whole lot of complex maths, physics,quantum mechanics and quite a bit more blather. Not to worry though, a kilogram of feathers will still equal a kilogram of rocks today; as it was yesterday.
Now to the Brew. In today's Brew we feature:
• An Economic Fantasy
• Fool's Gold
• How an Economy works
• Brew's Star Ratings
MARKETS
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RAINBOW TOURISM GROUP | 7.20c |
+19.60% |
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PPC | 170.00c |
+12.40% |
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UNIFREIGHT AFRICA | 10.11c |
-8.09% |
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GOLD | 1,277.78 |
-0.56% |
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BRENT CRUDE | US$72.21 |
-0.56% |
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• RTG's shares have been on quite the rally over the past weeks with the tourism giant adding in excess of RTGS$ 11 million to its market capitalisation in the past week alone.
• Pretoria Portland Cement had a 12% increase in share value whilst major competitor Larfage saw no action at all.
• Unifreight were the top decliners on Friday in what is generally a difficult period for the transport services industry.
•Crude Oil and Gold Prices are based on world market figures.
CURRENCY
AN EFFICIENT INTERBANK MARKET: LET'S DARE TO DREAM
It is safe to say that thus far the Interbank Foreign Currency market has been pretty close to useless. The exchange rate has not stabilised, industry by and large cannot access forex and the Parallel forex market still exists. Just this past week the exchange rate lept from a fairly stable RTGS$5/US$ to RTGS$7/US$. Speculation is pointing at a mystery injection of 'fake' $5 bond notes for the leap in rate; a situation which would not occur had there been a functional Interbank Market.
A US$500 million facility has been announced to augment the system so we've decided to picture in a dream what an efficient Interbank market would mean. We've confined this efficiency to the land of dreams because past experience has taught conservative optimism.
What Problems Would Be Solved?
• Inflation: much of the inflation the country has faced since the advent of currency shortages has been exchange rate fuelled. Prices of goods and services have increased in tandem with the US$/RTGS$ exchange rate. If the Interbank system were to become workable, the exchange rate would be fairly stable, consequently prompting inflation to subside.
•Fuel & Electricity: the country is currently enduring crippling fuel and electricity shortages. One of the big reasons for this situation is lack of foreign currency. Fuel retailers are often unable to pay for fuel imports and the country's sole electricity supplier has no forex to import electricity. A functioning Interbank market would mean ample forex supply which would contribute significantly to the solving of the fuel and power difficulties we are currently facing. It probably wouldn't matter who is in the Minister of Energy hot seat.
•Industry Production: some manufacturing industries require foreign raw materials for production. The forex shortages have forced scaling down of production and complete closure for others. Furthermore, there are industries like mining and tobacco and cotton farming where output should be paid for in forex. In the absence of the greenback, mining companies and farmers have been forced to make do with the RTGS$. The payouts are often not enough of an incentive to continue production into the future. An effecient forex market would solve the whole debacle.
•Consumer Imports: the bulk of goods and services consumed in the country are imported. They have been costing an arm and a leg and sometimes even more. However, if forex was readily available at a friendly premium, they would cost much less and be more readily available.
The Takeaway
Our dream could go on forever and right all the forex shortage wrongs but let's stop here. If the US$500 million is indeed available and is used properly, you can anticipate a limited period of all those problems 'kind of' solved. However, more outside injection would be needed in the future to sustain our foreign currency needs. Solving the real economic problems will not come through the Interbank foreign currency market.
AGRICULTURE
WHITE GOLD OR FOOL'S GOLD
In this time of rampant inflation and volatile exchange rate, farmers risk having their potential income eroded. The government has been kind enough to review the cotton producer price upwards; but has it really gone up in 'real'(US$) terms?
We try and explore that below...
| 2018 (US$)* | 2019 (RTGS$) | 2019 (US$)** | 2019 (US$)*** | |
| Cotton Producer Price per tonne | 520 | 1950 | 564.76 | 278.57 |
2018 (US$)*- Exchange rates were a Reserve Bank stipulated 1:1 notwithstanding the existence of a currency Black Market.
2019 (US$)**- Amounts calculated from Interbank Market exchange rate on 17/05/19.
2019 (US$)***-Amounts calculated using current Parallel Market rates.
What The Numbers Say
Whilst the RTGS$ producer price has almost tripled from 2018, the US$ price according to the Interbank rate has increased by only US$44 per tonne. A look at the new price in Parallel market terms would show a 46% decrease in the cotton producer price from 2018.
What Does It Mean For The Farmer?
Considering that forex on the Interbank market is hardly accessible; farmers can only turn to the Black market for their foreign currency needs. These needs include inputs for the next farming season or money to pay back loans. The problem is their payouts are paltry and thus cannot meet their requirements. The once 'white gold' feels a bit like fool's gold (it's not worth much anymore). Surely, there cannot be much motivation to grow cotton in the next season.
The Rest of The Economy?
Cotton is one of the country's foreign currency earners and at a time where the country needs as much forex as possible, a subdued cotton harvest next season will be a problem. Agricultural sector suppliers will also suffer from lower sales of inputs which only adds to the already prevalent recessionary trajectory.
Fingers crossed there is a price review.
ECONOMY IN PERSPECTIVE
HOW IT WORKS OR FAILS TO WORK
Ever wondered how the economy works or in our case fails to work? There are seven core facets to look out for. In no particular order, here they are:
GDP- the gross domestic product is the measure of local production in a given time period. It is best derived through a summation of consumer spending, government spending and net exports. When GDP growth is positive all is well. When it is negative, the country is in recession as is the current situation with Zimbabwe.
Supply & Demand- supply and demand drive the macroeconomy in the form of supply of labour and raw materials whilst demand represents consumption. A decrease in 'supply' leads to a decrease in production while a decrease in 'demand' leads to a fall in consumption. Zimbabwe is currently suffering for a sustained plunge in demand which contributes to the ensuing recession.
Inflation & Deflation- we've had so much inflation, everybody now knows what that is like. Deflation is the opposite; prices will be decreasing. Contrary to popular belief, inflation is actually better for an economy than deflation but only before it becomes hyperinflation. Deflation often leads to lower production as producers have to make do with decreasing revenues. Unemployment is an inevitable result which leads to falling consumption and a decreasing GDP. We have a different sort of problem because of hyperinflation.
Fiscal Policy- this is the national budget which includes government revenues and spending. In healthy economies, government spending when directed properly can spur growth. On the other hand, reduced government spending and higher taxes much like the austerity measures currently in place can depress the economy.
Monetary Policy- monetary policy is basically the control of money supply by the Central Bank. In other words, it is a tool to control inflation. This function is often easily implemented but in an economy so reliant on foreign currency; the RBZ can not have extensively effective monetary policy.
Trade Policy- trade policy affects the cost of imports and exports by regulating trade agreements with other countries. Tariffs and subsidies are often used to make imports more expensive and exports cheaper. The general idea is to make policies that ensure exports outweigh imports; a state Zimbabwe is still far from.
Financial Markets- in most economies these are the highest value investments. They include stocks, bonds and treasury bills. Stock investing in Zimbabwe is not as high value as other countries as the companies are comparatively small. The Central Bank is also not always reliable with honouring treasury bills. These and other reasons lead to a low volume financial market. A low-key financial market often signals and creates struggling economy.
It appears on all seven fronts, Zimbabwe has a bit of an issue. Thankfully, the Vision 2030 Economic Blueprint addresses all of them. The trick is succesfully enduring another 11 years.
BUSINESS
PAY THE WHISTLEBLOWER
As you read this, there is some theft or misdemeanor happening in your company. Somewhere in the country there is someone siphoning state funds or signing off a tenderpreneurship deal. There are people seeing these things happen but as sure as night follows day; they will say nothing because there is nothing in it for them.
We expect people to be responsible and morally upright when it comes to reporting fraud or corruption; but when has the human race ever acted beyond their own interests?
Maybe it is time a bit of a reward was given to whoever steps up to report the rot in businesses and government. In the United States, 25% of the value of funds involved in a corrupt deal are given to the whistleblower as a reward for stepping up.
A similar system right here in Africa where corruption is much more rampant would ensure swift investigations and recovery of funds. A lot less shady deals would go through unnoticed and the total cost of corruption would be lowered significantly.
Try the whistleblower incentive scheme at company level, the results might shock you.
WHAT ELSE IS BREWING?
• Zimbabwe central bank says it secures $500 million to ease dollar shortages
• Secret Govt deals with outsiders render parliament useless, says Zanu-PF MP
• Zimbabwe's economy 'pronounced dead', set to contract 20 percent in 2019.
• South African mining tycoon Mzi Khumalo demands $132 Million from Zimbabwe Reserve Bank.
• AB InBev’s Zimbabwe head sees long winter ahead as demand slumps.
• Secret payments to Nikuv exposed. Nikuv has been accused of manipulating Zimbabwean elections in the past.
• State media says US diplomat’s guns used in Zimbabwe post-election violence.
