VZCZCXYZ0005
RR RUEHWEB

DE RUEHSB #0159/01 0561447
ZNR UUUUU ZZH
R 251447Z FEB 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 4095
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEAIIA/CIA WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RHEHAAA/NSC WASHDC

UNCLAS HARARE 000159 
 
AF/S FOR B. WALCH 
AF/EPS FOR ANN BREITER 
AGRICULTURE FOR RONALD LORD 
COMMERCE FOR ROBERT TELCHIN 
TREASURY FOR D. PETERS AND T. RAND 
NSC FOR SENIOR AFRICA DIRECTOR 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV ZI
SUBJECT:  ZIMBABWE'S EQUITY TRADERS WELCOME DOLLARIZATION, 
RE-OPENING OF STOCK EXCHANGE 
 
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SUMMARY 
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¶1. (SBU) Zimbabwe's financial sector welcomed dollarization of the 
economy and the foreign currency income that asset managers, the 
Zimbabwe Stock Exchange (ZSE), and stock brokers can now earn.  But 
they do not expect a sudden return to profitability, as trading only 
re-opened on the ZSE last week after a three month suspension. 
Asset managers are also concerned whether thereturns on new 
hard-currency denominated prescribed assets will be market 
determined.  In addition, liquidity constraints arising from foreign 
currency shortages will likely dampen trading volume.  Privatization 
of state assets using the ZSE could provide liquidity to the market 
in the short-term.  In the meantime, more reforms are needed to 
attract foreign investment and support economic recovery.  END 
SUMMARY. 
 
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Partial Dollarization Welcomed 
------------------------------ 
 
¶2. (SBU) Although asset management firms welcomed partial 
dollarization introduced in the January 2009 Monetary Policy 
Statement (MPS), they also expressed some concerns.  Zvomunoda 
Chizura, the Managing Director of Old Mutual Asset Management 
Company (OMAM) explained to economic specialist on February 10 that 
asset managers earned their income from commissions from managing 
clients' assets that include shares on the Zimbabwe Stock Exchange, 
properties and pension funds.  The suspension of trading on the 
Zimbabwe Stock Exchange (ZSE) on November 20, 2008 had devastated 
asset managers' incomes as most asset management companies held 
large proportions of their clients' assets in the form of shares; 
deeply negative real interest rates made money market investments 
unattractive.  Farai Manjokota, Head of ZB Asset Management Company, 
told economic specialist on February 18 that the Association of 
Asset Managers had written to the RBZ to protest the US$1,000/month 
licensing fee for trading in foreign exchange, stating that it would 
lead to the collapse of many asset managers.  To the relief of the 
players, the RBZ suspended the fee on February 13. 
 
¶3. (SBU) ZSE CEO Emmanuel Munyukwi told us that the ZSE was in 
deficit largely due to the suspension of share trading last year. 
ZSE income comprised annual levies on registered companies and a 
proportion of trading income.  Munyukwi foresaw the situation 
improving with the resumption of trading in U.S. dollars on February 
19, 2009.  Although the first day of trading witnessed a mere 3,000 
shares in one company changing hands at 1 U.S. cent per share, by 
the third day activity had picked up substantially with the number 
of counters traded increasing to 13 and turnover rising to over 
US$37,000. 
 
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Costs in Foreign Currency 
------------------------- 
 
¶4. (SBU) Chizura and Manjokota agreed that asset managers still 
faced challenges despite the benefits from partial dollarization of 
the economy, since most of their costs (including labor) were 
denominated in foreign exchange whereas their income in Zimbabwe 
dollar terms had not grown sufficiently to cover the costs.  Chizura 
told us that pension funds that had been operating in a net negative 
Qtold us that pension funds that had been operating in a net negative 
position, with contributions insufficient to cover payouts due to 
the hyperinflationary environment, welcomed the decision to allow 
them to trade in hard currencies.  The benefits, however, would not 
be immediate.  Chizura said that the sector could not meet 
pensioners' expectations to be paid out in foreign exchange as soon 
as contributions were paid in foreign exchange. 
 
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Prescribed Assets Still a Problem 
--------------------------------- 
 
¶5. (SBU) Chizura welcomed the reduction in the prescribed asset 
 
ratio for insurance companies from 35 percent in Zimbabwe dollar 
terms to 5 percent for short-term and 7 percent for long-term 
policies and to 10 percent for pension funds in foreign currency. 
However, he said the industry lacked confidence that the instruments 
that the government will introduce to enable players to comply with 
these statutory requirements would pay positive real returns. 
Chizura also said that it was not clear from the monetary policy 
statement whether the rates applied to the stock of assets or to the 
increase in stocks of assets.  If it applied to the stock, then 
Chizura believed no player could remain profitable given the low 
returns associated with most prescribed assets. 
 
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Capital Requirement Too High 
----------------------------- 
 
¶6. (SBU) Neither Chizura nor Manjokota saw the need for minimum 
capital as high as the present US$2.5 million minimum requirement. 
Chizura told us that even though Old Mutual Asset Manager was backed 
by a wealthy parent company, in light of the low risk involved it 
was not prepared to tie up as much as US$2.5 million in capital. 
 
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Lack of Liquidity Constrains Trading 
------------------------------------ 
 
¶7. (SBU) Munyukwi told us that the main problem facing the ZSE was 
lack of U.S. dollar liquidity.  Both Munyukwi and Chibaya said that 
the amount of U.S. dollars in circulation in Zimbabwe was very small 
relative to the country's needs.  Munyukwi added that most companies 
were in desperate need of re-capitalization.  He believed money 
would flow in once the economy had stabilized and foreign lines of 
credit were restored.  In the short term, he proposed the 
privatization of state assets as the only way of quickly injecting 
liquidity into the market, particularly if the process is open to 
foreigners through the ZSE.  Manjokota added that the restoration of 
fungibility status on counters that have a dual listing would boost 
investor confidence. 
 
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New Finance Minister Drops Levies And Charges 
--------------------------------------------- 
 
¶8. (SBU)  Munyukwi told economic specialist that new Finance 
Minister Tendai Biti, with effect from February 19 and to the relief 
of the equity market, had dropped onerous levies and charges 
introduced by RBZ Governor Gono in his January 2009 Monetary Policy 
Statement.  Gono had introduced a 1.5 percent financial sector 
stability levy, payable to the RBZ, and directed that 3.5 percent of 
proceeds be paid by the seller of shares to the RBZ. 
 
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COMMENT 
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¶9. (SBU) Asset management firms, the ZSE, and stock brokers all 
agree that dollarization will restore viability to the financial 
sector.  However, in the short-term, liquidity is a constraint.  As 
donor funding is unlikely to fill the gap quickly, Munyukwi's 
suggestion of privatizing state assets using the ZSE merits further 
study.  Finance Minister Biti's removal of some taxes introduced 
less than a month ago by RBZ Governor Gono on share trading will 
help lower transaction costs and boost activity on the ZSE.  Biti's 
Qhelp lower transaction costs and boost activity on the ZSE.  Biti's 
action also bodes well politically, as he re-asserts for the Finance 
Ministry authority usurped by Gono over recent years, but more 
reforms are needed to attract foreign investment and support 
economic recovery.  END COMMENT. 
 
MCGEE