Dollarisation still paying off for Zim corporates – Imara

Dollarisation is still driving considerable turnover growth across a wide range of Zimbabwe businesses, according to a study of corporate results by Imara Asset Management Zimbabwe, a member of the pan-African Imara financial services group.

In an in-depth report to international investors, John Legat, head of Imara's asset management division, says there is little sign of a slowdown in turnover growth three years into dollarisation of the Zimbabwe economy.

Imara argued for this solution to hyperinflation well ahead of its eventual implementation and in early 2008 sponsored the publication of an influential book on the subject, Zimbabwe: Hyperinflation to Growth by US academic and economist, Prof Steve Hanke.

Since then, economic recovery has gathered traction, with estimated real GDP growth of over 9% in 2011. Well-managed Zimbabwe corporates are notable beneficiaries of dollarisation policy.

Legat notes: "Reports for the first half of 2011 range from 25% turnover growth to nearly 90% – excluding the banks – for the majority of listed companies…

"In almost all cases, growth is volume driven and not price driven, since dollarisation keeps competition high and prices under pressure."

The companies concerned cover numerous industries, from building materials, property, tyres and retail to agriculture.

Strong performance like this supports government forecasts of 10% GDP growth in 2011, says Legat, and indicates growth is "driven by rather more than mining and agriculture".

The informal sector also appears to be doing well as "consumption numbers would suggest it is booming, too".

Some formal businesses are doing better than others and Imara's Harare-based investment researchers voice concern about Zimbabwe's banks.

"We have been concerned about the banking sector for some time," says Legat. "Six-month results looked strong but to us were disappointing from a governance perspective as provisions for bad debts were so low."

In non-banking sectors, the challenge is to contain costs while trying to maximise opportunities created by sustained increases in demand.

Legat points out: "The results season has shown us that net profit growth has rarely matched or exceeded turnover growth and, where it has, it is usually following a corporate restructuring where the costs have been taken in the previous year, allowing margins to rise and profits to grow on a more efficient cost-base.

"Where management have been aggressive … (by) improving efficiencies, selling non-core activities and generally focusing on cost control, profit and cash flow growth has been substantial…

"Companies that have had poor results and negative cash flow (despite rising turnover) have, generally speaking, done little corporate reorganisation and rationalisation but, faced with strong demand growth and the need to invest, have rather burdened their balance sheets with expensive debt in the hopes of growing themselves out of difficulty."

Dollarisation's corporate winners tend to focus on core competence.

"Management who focus on core areas and dispose of or close non-performing businesses have largely done well," says Legat.

"The concern for 2012 is that as turnover growth slows as momentum falls, it is imperative that cost growth also falls or, better still, costs stabilise."