Financial Gazette (Harare)
13 November 2009
editorial
Harare — ZIMBABWE is once again dominating international headlines for the wrong reasons -- an investment-wreaking decision had been taken to push through a contentious plan to expropriate 51 percent of all foreign-owned companies.
This emerged against the backdrop of dismal inflows of investment capital into the country due to a wait-and-see attitude among risk-averse international investors, who may have already become increasingly jittery after a now-suspended partial disengagement from government by Prime Minister Morgan Tsvangirai's party over the so-called outstanding issues.
The impasse over outstanding issues has itself triggered some sort of political uncertainty in the country, something analysts have warned will worsen Zimbabwe's sovereign risk, critical in resolving the country's economic challenges.
Foreign direct investment and related foreign currency inflows to Zimbabwe are necessary for the revival of the frail economy, which had taken a recovery path but is still undoubtedly limping.
Not surprisingly, therefore, disclosures of the unreceptive programme has been met with awe and consternation by Zimbabweans who fear the latest move could further damage the economy and devastate key economic sectors like mining, which had shown huge potential to salvage the country from the abyss.
A similar onslaught in the farming sector hurt the entire economy after the collapse of agriculture, the backbone of the economy. Zimbabwe, which had been a regional breadbasket, quickly sunk into a basket case and has failed to recover the damage of the so-called agrarian reforms, said by President Robert Mugabe's government to be aimed at redressing colonial-era land distribution imbalances.
The tragedy of it all is that a perception was created that such reforms instead benefitted ruling party elites and their cronies, and that those who should have benefitted from the agrarian reforms never received an inch of land.
According to reports, a draft document, supposedly meant to amend the Indigenisation and Economic Empowerment Act passed by Parliament in 2007, has proposed that indigenous Zimbabweans should own 51 percent of all foreign-owned companies, including mines and banks, with asset values crossing US$500 000.
This is likely to send the wrong signals to international investors who had shown a huge appetite for Zimbabwe since the economy transformed into a hard currency one resulting in marked stability in the business environment.
It is important for our politicians to note that capital is timid, and will not go were it is hounded.
The latest reports are likely to suggest a drift towards expropriation, something that will significantly unsettle foreign investors, including those that have already taken residence in the country.
The reports are even more unsettling for the capital-intensive mining sector, where nearly US$1 billion in fresh investment has been held up because of uncertainty over the empowerment programme.
The news of the planned take-overs come when government had recently canvassed the Chamber of Mines for input into the proposed amendment of the Mines and Minerals Act, which will give effect to the indigenisation law in the mining sector.
Zimbabwe's mining industry is estimated to be worth around US$20 billion. Localisation of 51 percent of total assets would mean the Zimbabwean government would have to pay out just over US$10 billion to achieve the 51 percent empowerment threshold.
Inevitably, neither government nor historically disadvantaged persons can raise the amount. Even the local banks, most of which are still struggling with working capital since the introduction of a hard currency regime, have no capacity to finance even minuscule deals in the sector.
The targeting of foreign-owned banks would also make the situation dire, both from an economic and political perspective.
The foreign-owned banks have easily taken concern of local business' cross-border financing requirements, and riding on international banking brands have made business easier in a country where the locally-owned institutions have failed to give them support because of lack of offshore recognition.
A growing number of high net worth individuals, whose banking needs are global, have found the international banks more efficient and useful.
The present difficulties in the economy mean that Zimbabwean banks require foreign support in securing international lines of credit, including Letters of Credit and guarantees.
Once all banks are made indigenous, the current support relations arising from foreign control of the four Zimbabwean banks -- Stanbic, Standard Chartered Bank (Stanchart), Barclays Bank and MBCA Bank -- would be severed.
Stanchart and Barclays are British-owned, while MBCA is jointly owned by South Africa's Nedbank and Old Mutual. Stanbic Bank Zimbabwe is wholly-owned by South Africa's Standard Bank Group.
The take-over of the foreign owned banks would predictably result in the country incurring additional costs in finding external first class banks to guarantee and support creditworthiness of local institutions, which are themselves struggling from a battered sovereign risk and low capacity utilisation.
The foreign-owned banks have previously warned that should they lose control of their local assets, they would withdraw their brand names and intellectual properties belonging to the international groups, forcing the new banks to develop their own brand identity, which would not be immediately recognisable to the outside world.
If the international groups agreed to have the new entities continue using their brand names and other intellectual properties, including group software licensing agreements, trademarks and advertising, they could charge punitive royalty fees for such use.
Indeed the current situation in Zimbabwe does not create a pleasant environment for the productive disposal of any equity in a foreign-owned company to local partners or government. There will be inevitable challenges in mobilising sufficient funds to facilitate the purchase of shareholding in the foreign-owned companies. Acquisition of equity in foreign owned companies, without sufficient funding, would amount to expropriation.
Moreover, the land reforms clearly showed that the beneficiaries of such an exercise are the politicians and their cronies.
Zimbabweans can therefore not be expected to support such programmes.
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