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Zimdollar will maintain a 'fragile stability' this year report

by Staff reporter
17 Feb 2021 at 06:11hrs | Views
ZIMBABWE's currency will maintain a "fragile stability" this year, continuing from the volatilities that haunted the domestic unit even after the introduction of the
foreign currency auction system in June, according to a report by Inter Horizon Securities (IH).

In a report titled Zimbabwe 2021 Equity Strategy, IH projected that there will be improved production and output this year, which will help the currency stand its ground.

"We observed a fragile stability in 2H20 (second half of 2020) in the local currency, in the absence of any drastic changes in fiscal and monetary policies, we believe the same fragile stability can be maintained in 2021," said IH.

"We see this being backed by improved production levels. With liquidity at the base of the pyramid being driven by agriculture, we expect consumption levels to be surprisingly resilient. In our view, agriculture, food processing and food retail with a focus on staples will remain defensive. The telco sector will benefit from increased data and voice traffic under lockdown conditions supported by a new tariff structure. The mining sector will be positively impacted by firm commodity prices and improved electricity supply," the report said in an outlook that looks at most economic sectors.

"It is our view that investment activity for most of CY20 was driven by inflation hedging as opposed to critical fundamental valuation. The present stability in the economy will necessitate a return to fundamental valuations as investors return to basics and interrogate opportunities," the report noted.

After facing immense criticism from frustrated Zimbabweans and industries for ending a decade-long multicurrency system to return the Zimbabwe dollar in 2019, central bank chief John Mangudya has been hailed for inspiring the rebound of a currency that had been battered by volatilities.

It is unclear if the Reserve Bank of Zimbabwe (RBZ) boss' fine run will be sustained given the sporadic shocks that have always returned to haunt Zimbabwe when many least expect.

But five months into the auction system that had injected over US$400 million into industries by November last year, chief executive officers had turned off their anger.

"The positives include the stability of the exchange rate on both the formal and informal markets as well as the slowdown in inflation," the Confederation of Zimbabwe Industries said in November.

"There has also been increased access to foreign currency by businesses," said Zimbabwe's biggest industrial body.

Mangudya's bold monetary reforms had precipitated a sudden rage of inflationary spiral, barrelling prices and exchange rate volatilities.

The Zimbabwe dollar struggled to stand its ground, with annual inflation spiralling to over 800% in the second quarter, before cooling down to 348% in December.

The Zimbabwe dollar responded by surrendering value at a frightening scale, plummeting to US$1:$165 on the parallel market in March last year, from US$1:$2,50 when it was introduced in June 2019.

It ended the year much firmer.

However, since the forex auction system came into force, the exchange rate stabilised at US$1:$81, while defusing the parallel market rage, but IH noted that pockets of fragility remained.

Facing the backlash, Mangudya reintroduced the forex auction system, which had been unsuccessfully tried by his predecessor Gideon Gono in 2004.

In a series of third quarter trading updates, listed firms agreed at the end of last year that Mangudya's measures were beginning to bear fruit.

"The trading environment in the last quarter ended 30 September 2020 was largely stable supported by the foreign currency exchange auction system and a contractionary fiscal policy," said the Zimbabwe Stock Exchange (ZSE)-listed Masimba Construction, one of Zimbabwe's biggest construction firms.

It said its rebuilding efforts in Cyclone Idai-ravaged eastern districts had been bolstered by the system.

"Foreign exchange shortages were alleviated to a large extent, by the introduction of the foreign exchange auction system where the official exchange rate between the US dollar and the Zimbabwe dollar has stabilised at about $81 to US$1," said Nampak Zimbabwe, another ZSE-listed counter.

"Despite this, the allocated foreign exchange is insufficient to meet all the imported raw material requirements needed to facilitate efficient production schedules. Inflation, temporarily at a reduced rate of increase, is likely to remain under pressure to move upward," said Nampak, a unity of the South Africa-headquartered packaging materials giant, Nampak SA.

Source - newsday