Zimbabwe: A Diamond in the Rough

Zimbabwe has many impressive flora and faun. For instance it is home to the Victoria Falls, one of the seven natural wonders of the world. Despite this, the economy is far from pretty, only potentially so. This is why it can be named a “Diamond in the Rough”.

The Current Economy

With a Gross Domestic Product (GDP) of just $1.8B (Stephanie Strom, 2010) and a population of 11 million, Zimbabwe is the poorest nation of the 183 countries and territories for which the UN collects data. To understand the depth of this depression, the second poorest nation, The Congo, has per capita income 60% higher than Zimbabwe’s. (Celia W. Dugger, 2010) (Neil Mac Farquahar, 2010).

A May 2010 survey of 4000 rural households found that each of them (typically a family of 6) spent on average just $8 to satisfy all their needs from the preceding month. With unemployment at nearly 90% (CNN Wire Staff, 2011) and nearly 1.7 million persons needing food aid (Celia W. Dugger, 2010), Zimbabwe is in the midst of a monumental economic crisis.

The economic upheaval seems to have begun in earnest when the totalitarian government of Zimbabwe led by President Robert Mugabe redistributed land owned by the predominately white bourgeoisie to the peasants and the working class. The situation degenerated further in 2008 when the government began printing money without restraint causing Zimbabwe’s currency to lose most of its value. While there is broad disagreement on the exact rate of inflation, CNN estimated the rate of inflation at 231,000,000% (CNN Wire Staff, 2011).

With savings wiped out from the ravages of uncontrolled monetary policy, much of Zimbabwe has moved to a barter system and subsistence level farming. (Celia W. Dugger, 2010) According to a NY Times article, in 2009, more than 1/3 of all surveyed households used bartering. (Celia W. Dugger, 2010)

Recent Trends

But life in Zimbabwe has not always been so difficult. In 1970, Zimbabwe was one of Africa’s most promising nations, known as a regional breadbasket and with one of the highest literacy rates in the region. School enrollment was once 95% and life expectancy 54.9 years. But a series of economic missteps by the Mugabe government have led to economic collapse and allegations of human rights abuses have isolated it from the West.

Under the Mugabe dictatorship, life expectancy has fallen to 47 years and school enrollment has fallen. Today, less than one third of school age girls attend school. Agriculture has also languished under Mugabe rule declining precipitously. For example, the agricultural output in 2003 was just 15% of the output seen in 1997. (Sokwanele , 2003) (Neil Mac Farquahar, 2010) Overall economic output has also declined in almost unbelievable fashion.

At one point, Zimbabwe’s overall gross domestic product was $13B but dropped to $5.0B in 2007 (Econstats, 2010) while today it produces just $1.8B. (Stephanie Strom, 2010) According to a UN report, Zimbabwe is worse off now on combined measures of health, education, and income than it was 40 years ago. (Celia W. Dugger, 2010) 

THE ROOTS OF DECLINE

The rapid decline seems to have begun after the Mugabe government Land Redistribution act was implemented, but the Mugabe government argues that targeted economic sanctions are the cause. In 2002, the US and members of the European Union imposed sanctions, such as visa restrictions and asset freezes, on Mugabe and some senior party members (CNN Wire Staff, 2010) for human rights violations and oppressive government tactics. Currently, the European Union has sanctions against 163 persons and 31 businesses within Zimbabwe. (Sibanda, 2011) While the Mugabe government blames Western economic sanctions for the catastrophic decline in economic output, most economists say government mismanagement is the culprit (Neil Mac Farquahar, 2010) (Gowans, 2010). Recently, the 2011 Indigenization and Economic Empowerment Act sponsored by the Mugabe government requires foreign companies to submit plans for transferring 51% ownership of all businesses and investments worth more than $500,000 to indigenous (mostly black) Zimbabweans (CNN Wire Staff, 2011) further discouraging foreign capital. Meanwhile the Mugabe government maintains these actions are retaliation against Western sanctions and a natural extension of the 1979 Land Agreement with Great Britain.

Winds of Change

Despite the depressed and oppressive economic conditions, there are signs of progress and hope. Richard Branson, billionaire founder of the Virgin Group, has set up Enterprise Zimbabwe in cooperation with the Nduna Foundation and Humanity United, an organization backed by Pam Omidyar, wife of the founder of eBay. (Stephanie Strom, 2010)

Enterprise Zimbabwe has purchased children’s school books and provided nurses’ wages helping hospitals reopen. As key elements of infrastructure stabilize, Enterprise Zimbabwe plans to invest in local business. In another positive sign, British business executives with representatives from the London Stock Exchange (LSE) traveled to Zimbabwe for meetings on foreign investment and discussions on how to support the Zimbabwe Stock Exchange. (Dube, 2011) The objective of these meetings is to assess the business prospects and help raise much needed foreign investment.

And then there is a wild card, the spirit of democracy is now racing across the Middle East beginning first in Tunisia then moving on to Egypt, and then to Bahrain, Yemen, Jordan, Iraq and Iran. Even Libya’s Gaddafi with his tanks, planes and hired gunmen is struggling to contain the grass roots rebellion within his country. A change in leadership within Zimbabwe would most certainly herald in a new economic era that would benefit investors.

Given the patterns of repression, Mr. Mugabe must calculate if he should get out ahead of the uprisings giving more power to the people or hope the spirit of national liberation can be contained. The stakes are high with little room for miscalculation. For example, Egypt’s “April 6th Youth Movement” caused Egypt’s Hosni Mubarak to resign in 18 days. Will the Mugabe government ignore the swell of democratic fervor in the Mid-East or will he try to raise popular support for his government by proactively addressing the complaints of the people.

Diamond in the Rough

As is often the case, the best investment opportunities are those where a company (or a nation) with great economic and financial fundamentals is depressed by a temporary reversible condition. Zimbabwe is one of those potential investment jewels. Beneath the surface of the depressed economic landscape, there are solid fundamentals promising excellent economic potential. Let’s look at the evidence.

1. The current economy has a demonstrated capability to produce much more than it does today. In fact, its demonstrated capability is 10x its current output and its potential output likely much higher given the changes in technology. Only through mismanagement and favoritism have the riches of this country been squandered away, and therefore is a completely reversible state if proper government incentives were in enacted.
2. Zimbabwe has abundant natural resources which can provide the kick-start needed for a prolonged economic expansion. Natural resources include timber, minerals, including, nickel, platinum, iron ore, gold and lithium, and precious stones, primarily diamonds. Just as its neighbor South Africa has benefitted from easily accessed outcroppings of these brilliant gems, Zimbabwe also is replete with an abundance of diamonds. A recently discovered diamond field in eastern Zimbabwe may be the world’s richest; and, while perhaps 90% of these diamonds are industrial grade, this field alone is capable of producing several billion dollars in revenues per year. (Celia Dugger, 2010)
3. Zimbabwe also has fertile land which has in the past allowed Zimbabwe to produce enough food for its entire population plus produce cash crops. In the past, commercial farms have exported tobacco, cattle, fruits, vegetables, sorghum, cotton and maize. An abundance of raw materials and cheap labor have supported a clothing industry.
4. Zimbabwe’s natural beauty already attracts tourists from around the world with it varied wild life and abundant forest, streams and mountains for recreation. With investment in marketing and infrastructure development, the inherent attractiveness of this region can be enhanced increasing tourist trade.

Certainly, there is much potential, but where should investors look for opportunity. I can only begin to hint at the many possibilities. The largest opportunities are the most obvious and involve revitalizing the mining, timber, tourism, textiles and agricultural industries, the Zimbabwe “Big 5”. But many ancillary and supporting industries will be needed to support the Big 5 creating a multitude of smaller opportunities.

As an illustrative example, look at forest management and timber harvesting. Timber harvesting will require men, machines, infrastructure and supporting industries. Supporting industries will feed and house workers, repair machines, provide fuel and service to vehicles, process logs into lumber and provide transport of the lumber/ trees to foreign ports. Local furniture manufacture will also flourish.

And, of course, economic growth will increase government revenues which can then be used to build vital infrastructure, creating jobs and another string of opportunities. New Roads, bridges, highways, schools, and power generation will be required. Spare parts for power generation and repair / expansion of power lines will be needed along with monitoring and repair of existing roads, bridges, electrical systems. (Eineman, 2011) All of these government projects will require materials, knowledge, and equipment – more opportunities for entrepreneurs.

Invest Now to Maximize Return

In summary, the potential opportunities for profitable investment in Zimbabwe are many and varied. Of course, regime change will be critical to a rapid and powerful economic recovery in Zimbabwe, but waiting to invest could be a mistake. Prudent investing now establishes a local presence building the systems and basic logistics to support a more rapid expansion when the political-economic environment shifts. While there are some risks, the cost to invest now is low and the potential long term return on the investment is huge. Also, those who are first to invest will profit most and have an easier ability to leverage those gains into even larger scale investments. For the savvy investor, now is the time to begin exploring investments in Zimbabwe.