Admire Mavolwane
16 March 2007
opinion
THE industrial index had by Wednesday this week gained an impressive 351% on the year-end close of 569 844,08 points. As a result, the market capitalisation of the Zimbabwe Stock Exchange (ZSE) rose from $6,4 trillion to $28,4 trillion.
As with most issues, Zimbabwe dollar values do not mean much on their own without reference to hard currency and/or the inflation rate. Thus at face value this return looks fantastic, but in hard currency terms investors are marginally worse off than they were at the beginning of the year.
Using the Parallel Market Rate (PMR) of $2 700 and the Old Mutual Implied Rate (OMIR) of $2 674,71 per each US dollar, the ZSE was worth US$2,4 billion on December 29 2006.
Applying the same methodology but with the current estimates of $14 000 and $14 389 for the PMR and OMIR respectively, it would appear that all the listed companies, including the suspended ones, are now worth US$2 billion.
So in the same period that the market has gone up by over 300%, in real terms, these assets are worth approximately 84% of what they were in December 2006. This explains the relentless bull-run being experienced on the stock market. Using the same analogue for salaries and wages, one suddenly realises why there are so many forlorn faces around.
However, not all is down in the dumps. Global tourism has remained buoyant with authorities in the sector indicating that arrivals grew by 4,8%. Africa is said to have recorded a growth of 10,6% whilst, closer home, sub-Saharan Africa recorded an increase in arrivals of 12,6%.
Zimbabwe seems to have benefited from this world trend as, in his budget statement, the Minister of Finance alluded to the fact that the vigorous marketing campaigns undertaken by the stakeholders in the sector had borne fruit.
Arrivals for the nine months to September 30 2006 had grown by 45% and this had been firmly buttressed by a 52% increase in southern African arrivals. On that score, the minister was optimistic that tourist arrivals were expected to grow by 23%. He pointed out, however, that because of leaks in the system these figures would not translate into the dollars that they should.
The issue from an investor's perspective is, should the analysts use these statistics as a yardstick with which to measure the performance of Zimsun and RTG? The executives from the two companies advise caution, highlighting that not all arrivals that go through immigration stay in hotels. In fact, national occupancies are at an average of 34%, a decline from the 38% of 2005, which appears not to tally with the increase in arrivals.
Furthermore, we are told, most hotels, particularly those reliant on the foreign tourist, have been incurring losses starting around October last year on visitors who come on a "package". Such a visitor who is booked in by a tour operator has all his costs agreed to between the operator and hotel in US dollars.
For instance, the agreed price for breakfast could be US$15, which translates to $3 750 at the official exchange rate. This is far less than a third of the ingredients needed to make coffee. So the hotels make a loss on the packaged visitor. The opposite applies to the "off the street" tourist who is charged $25 000 for breakfast, a ridiculous US$100 at the same exchange rate. In the latter case, Zimbabwean hotels are not competitive.
With most hotels having 35% of their business being foreign, it means the increase of 23% in foreign visitors will not translate into profits at anywhere near that rate.
It is in this light that the recent full year results to December 31 2006 from RTG should be looked at. Turnover for the group grew by 1 358% to $4,8 billion. Occupancies reflected the national trend and domestic arrivals accounted for 65% of the business. The impact of the 35% foreign component was felt in the margins, which remained static at 7%. Consequently, operating profits grew at the same pace as revenues to $323 million.
The devaluation of the Zimbabwe dollar in August from $101:US$1 gifted the group with exchange gains of $44 million, which counteracted the impact of the interest outflow of $106 410. After accounting for the huge tax provision of $178 million, largely made up of deferred taxation, all that was left for shareholders was $189 million. This translates to a sub-inflation return on the prior year of 663%.
Going forward, the group indicated that it remains optimistic about the future of tourism and as it gears itself for the World Cup in 2010, a number of refurbishment programmes have been put in place. The construction of the Beitbridge Hotel is also expected to be completed by 2008.
The tourism sector is not the only one that has been affected by the exchange rate issue. Tobacco farmers have also been up in arms with the authorities over the valuation of the Zimbabwe dollar. Unlike the hotels which cannot chase away visitors or withdraw eggs or bacon from breakfast menus, the farmers have opted to withhold their crops from the auction floors. The farmers are arguing that $250:US$1, is not a viable price for their labours and will not ensure that they put in another crop next season.
A counter-argument, which we have highlighted before, is that the farmers seem to forget that they accessed cheaper fuel, 50% money, and subsidised electricity, unless of course they are telling us that they did not. Assuming they did, it would be unfair on their part to ask for an economic exchange rate, when they accessed inputs at sub-economic prices. This then defeats the purpose of granting subsidies which their representatives lobby for every season prior to planting.
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