Mugabe Poll Win May Spark Zimbabwe Devaluation (Update1)
2005-03-30 10:03 (New York)
(Adds probable timing of devaluation in fifth paragraph.)
By Antony Sguazzin
March 30 (Bloomberg) -- Zimbabwean President Robert Mugabe
drove 85 percent of the country's commercial farmers off their
property and sparked three straight years of famine. His party's
expected victory in tomorrow's elections will probably prompt him
to help the only major income earner left: mining.
A planned $750 million expansion by Impala Platinum Holdings
Ltd., the world's No. 2 platinum producer, may be in jeopardy
unless Mugabe devalues the Zimbabwe dollar after the elections.
Prices are rising almost 130 percent a year and Impala, which holds
the rights to most of Zimbabwe's platinum deposits, needs a
devaluation to cut costs. At one mine they rose 63 percent in South
African rand in six months.
``The need for a devaluation is a no-brainer,'' says Ian
Saunders, president of Zimbabwe's Chamber of Mines in Turk Mine,
south of Harare, the capital. ``There are nickel and gold projects
waiting for an exchange-rate devaluation.''
Zimbabwe, which in 2000 exported more top-grade flue-cured
tobacco than any other country except Brazil, now grows 75 percent
less than it did that year. Production of corn, once an export
crop, has slumped so much that the government now imports grain and
the United Nations feeds about a 10th of the 11.8 million
population. Mugabe, 81, needs U.S. dollars from gold, chrome,
nickel and platinum sales.
``The exchange rate is important because the exporters who
make the foreign currency needed to pay foreign debt aren't able to
cover their local costs,'' says John Robertson, an economist at
Robertson Economics in Harare. He expects the central bank to
announce the devaluation in about a month in its first-quarter
monetary policy statement.
Platinum Prices
The Zimbabwean dollar trades for about 14,000 to $1 on the
black market. Companies must use the central bank's official
auction, where the rate is 6,082 to $1. As consumer prices surge,
their costs go up as well because the exchange rate does not adjust
as it would in a country where currency values are determined by
the market.
``They need to devalue,'' says Fidelis Madavo, a platinum
analyst at Citigroup's Smith Barney unit in Johannesburg. ``Input
costs are out of sync.''
Aquarius Platinum Ltd., Anglo American Plc, Anglo American
Platinum Corp. and Rio Tinto Group mine or are planning to mine in
Zimbabwe, which has the world's second-biggest deposits of both
platinum and chrome. Platinum averaged $846.50 an ounce in 2004,
compared with $691.82 an ounce in 2003. The 22 percent gain was
spurred by the metal's rising use in jewelry and pollution-control
devices for cars.
Margins Squeezed
``It's important for all exporters,'' says David Brown,
Johannesburg-based Impala's finance director. ``With inflation in
triple figures, the gross margins have been squeezed quite
significantly.''
While a devaluation may cause prices of imported goods to
rise, the higher black-market currency rate is already having the
same effect, Robertson says.
Central Bank Governor Gideon Gono, a former chief executive
officer of the Commercial Bank of Zimbabwe, was appointed by Mugabe
in December 2003. A month later, he started central bank foreign-
currency auctions in a bid to curb black-market trading, and agreed
with gold miners on preferential currency rates to boost
production.
Zimbabwe last reduced its general exchange rate for the
Zimbabwe dollar in August 2000, by 24 percent. In 2003 it adjusted
the rate the central bank paid to exporters. It hasn't made any
major changes to its exchange rates since the auctions were put in
place in January last year.
Inflation Slows
Gono, 45, has slowed the annual inflation rate to about 127
percent in February 2005 from a record 623 percent in January 2004.
Now the economy -- which contracted by 40 percent from 1999 to
2003, according to the International Monetary Fund -- may expand 3
percent to 5 percent this year, Gono said last month.
``The opportunities in Zimbabwe are very, very attractive from
a resource-sector point of view,'' says Mike Davies, an analyst at
Control Risks Group in London. ``It's going to take a while for
investor confidence to return.''
The economy started its free fall in 2000, when Mugabe began
seizing commercial farms to hand over to blacks. They had been
largely deprived of land during a century of white minority rule.
Since the land grab began, the Commercial Farmers Union says,
all but 700 of its 4,500 members have left their farms. More than
340 have moved to Zambia, Mozambique, Malawi and Tanzania, creating
jobs and boosting exports from some of the world's poorest nations.
Voting Rights Suspended
The IMF suspended Zimbabwe's voting rights in the Fund in June
2003 after the nation failed to meet its debt obligations. While
Zimbabwe has taken steps to stem an economic decline, the IMF said
in a Feb. 16 statement, the measures are ``insufficient to
decisively turn around the economic situation.''
Since a review last July, Zimbabwe has repaid $16.5 million of
its debt, the IMF said. It is almost $300 million in arrears to the
Washington-based lender.
Mugabe's government wants to ``pay every penny'' of its $5
billion foreign debt, Central Bank Governor Gono said on Feb. 10.
``We are not looking for any debt write-offs.''
A devaluation would increase the cost of debt payments in
Zimbabwean-dollar terms. At the same time, though, it would help
export earners such as mining companies bring in the hard currency
the government needs for imports and debt payments.
``The biggest imbalance in the Zimbabwean economy is the
overvalued currency,'' says Isaac Matshego, an economist at
Standard Bank Group Ltd., Africa's largest bank, in Johannesburg.
Even so, he says, ``They are not servicing their debt, so the
impact of a devaluation is that their arrears will accumulate at a
faster rate in Zimbabwe dollars.''
Metal Exports
At independence in 1980, a Zimbabwean dollar would buy $2;
it's now worth about a 60th of a cent at central bank-run auctions
and less than half of that on the black market. The central bank
said it sold less than a 10th of the $143 million that companies
bid for at its biweekly auction on March 22.
``With the currency depreciating at around 30 percent per
annum, but with an inflation rate around 130 percent, the exchange
rate doesn't fully compensate exporters for inflation,'' says
Robert Bunyi, an economist at Standard Bank Group in Johannesburg.
He expects a 20 percent devaluation by July.
Platinum and metals such as nickel and chrome have risen in
importance since crop exports collapsed with the land grab.
Gono said last month that foreign-currency inflows from
exports and money repatriated by an estimated 3 million Zimbabweans
living abroad in 2004 amounted to $1.7 billion.
Tobacco Earnings
Of that, Zimbabwe's ferrochrome production was worth $310
million, gold earned about $290 million, nickel $151 million and
platinum $123 million, according to data compiled by Bloomberg
using current prices.
Tobacco companies such as Universal Corp. and British American
Tobacco Plc also are seeking to restore supplies of some of the
world's best-quality tobacco leaves. Earnings from tobacco sales
dropped to about $138 million last year from $400 million five
years ago.
Universal's purchases of Zimbabwean tobacco fell to 14 million
kilograms (30.9 million pounds) last year from 100 million
kilograms in 2000.
Without a devaluation, tobacco farmers won't be able to profit
at annual auctions that begin on April 5, says Rodney Ambrose,
chief executive of the Harare-based Zimbabwe Tobacco Association.
The trade group has asked the government to boost a subsidy of
2,000 Zimbabwean dollars per kilogram of tobacco to 5,000
Zimbabwean dollars.
``If the floors opened today, the industry wouldn't be
viable,'' Ambrose says. ``There's not much time to work.''
Mugabe Unchallenged
Mugabe, who says he plans to retire in 2008, has ruled
Zimbabwe for a quarter-century. Now his ruling Zimbabwe African
National Union-Patriotic Front party may win a two-thirds majority
in the parliamentary elections, giving him the power to change the
constitution to ensure he can see out his term free of political
challenge.
New York-based Human Rights Watch and Amnesty International
and the Movement for Democratic Change opposition party say the
poll won't be fair because of intimidation and an outdated register
of voters.
A poll marred by rigging and intimidation may hurt U.K. Prime
Minister Tony Blair's plea to the Group of Eight industrial nations
to double aid to Africa to $50 billion a year, analysts say.
``If Zimbabwe's election isn't fair and most of Africa still
gives it the nod, that will make it more difficult for Tony Blair
to promote his Africa agenda at the G-8 summit because the
perception will be that Africa isn't serious about dealing with its
problems,'' says Richard Dowden, director of the Royal Africa
Society in London.
Condemnation
Mugabe's re-election in March 2002 drew condemnation from the
European Union and the Commonwealth, an association of the U.K. and
its former colonies.
They cited vote rigging and intimidation. The U.S. and the EU
responded by imposing travel restrictions on Mugabe and senior
government leaders, while the Commonwealth suspended Zimbabwe from
membership. Donors such as the U.S. and the U.K. cut all aid except
for emergency food assistance.
Zimbabwe, where AIDS claims a life every 15 minutes, now gets
$4 for each person infected with the HIV virus, while neighboring
Zambia gets $74, according to the United Nations Children's Fund in
New York.
``You don't get a sense of passion for the elections this
time,'' says Eldred Masungure, a politics lecturer at the
University of Zimbabwe in Harare. ``The concern is day-to-day
survival rather than the politics of the ballot.''
`Overwhelming' Victory
Mugabe invited South Africa, the Southern African Development
Community and Russia to observe the elections. He has excluded the
Commonwealth and the EU, whose teams condemned the previous two
polls.
``I don't think that a free and fair election is possible in
Zimbabwe given the technical deficiencies such as the absence of an
independent electoral commission, a proper voters' roll and the
political environment,'' says Chris Maroleng, a researcher at the
Institute of Security Studies in Pretoria, South Africa. ``The
question is, how overwhelming will the ZANU-PF victory be.''
--With reporting by Godfrey Mutizwa, Nasreen Seria and Brian
Latham. Editors: Maier, Swardson, Henry, Jahncke, Maier |
