Economies, equity notes: The Zim syndrome
•Oil
price shocks.
The assumption is that M3 (Money Supply) will grow at a monthly average of 23,07% up to December 2023.
In this scenario, inflation peaks to 702,8% in April 2023 and settles at 529,3% in December 2023. The best-case scenario is the most ideal projected scenario. However, it requires serious efforts on the part of monetary authorities and is also linked to acceleration of economic reforms.
The advancement of key reforms may result in re-allocating spending to more productive uses; reducing spending inefficiencies and distortions; and ensuring monetary policy supports price and exchange rate stability.
The assumption is that M3 (Money Supply) will grow at a monthly average of 5,38% up to December 2023.
In this scenario, inflation trends down gradually and settles at 51,6% in December 2023. The parallel market exchange rate forecast for December 2023 is ZW$1,290/ USD.
Based on our assessments of geopolitical risks as well as country-specific issues, there is a stronger probability for the Worst-Case Scenario to play out (assigned probability of 55%).
While we note some positive developments in the form of improved foreign exchange receipts and the mopping up of excess liquidity through gold coins, global inflation risks remain elevated.
The upcoming elections are also a big factor given that they could trigger excessive government expenditures. Therefore, we expect inflation to reach 529,3% and the exchange rate to deteriorate to ZW$2,873/USD by December 2023.
Introduction of gold coins
The Reserve Bank of Zimbabwe recently introduced gold coins into the market as a store of value. The gold coins (Mosi-OaTunya) weigh one troy ounce with purity of 22 carats. Other features of the coin include liquid and prescribed asset status.
The gold coins are available for sale to the public in both local currency (ZWL) and United States dollars (USD) (and other foreign currencies) at a price based on the prevailing international price of gold and the cost of production.
The Reserve Bank of Zimbabwe (RBZ) recently announced that 1,500 gold coins were sold by its agents during the first week of their release onto the market, signalling a strong demand for the yellow metal.
A total of 85% of the sales were in local currency while the balance of 15% was bought in foreign currency. The RBZ released a total of 2,000 Mosi-oa-Tunya gold coins on the July 25 2022 and indicated that it will be releasing another batch of 2 000 soon. The gold coins were sold at an initial price of US$1,823.80 per coin.
Zimbabwe is not the first country to introduce gold coins. According to the Gold Bars Worldwide, countries with gold coins include South Africa with its Krugerrand gold coins, Australia has Australian Kangaroo, the United States has the American Eagle, Canada has the Maple Leaf and Austria has the Vienna Philharmonic.
Krugerrands, for example were first minted by the Republic of South Africa in 1967 to help promote South African gold to the international markets and to make it possible for individuals to own gold. Krugerrands are among the most frequently traded gold coins in the world market
There has indeed been a significant global shift to gold amongst Central Banks. According to the World Gold Council, central banks around the world are increasing the gold they hold in foreign exchange reserves, as they have built up their gold reserves by more than 4 500 tonnes over the past decade.
The value of the US dollar against gold has also dropped sharply over the last decade as large-scale monetary relaxation has kept boosting the supply of US dollars.
According to S&P Global, gold prices have been supported by multidecade-high inflation rates in many developed countries. In addition, US real yields have remained in negative territory because of low nominal interest rates which supports the case for gold investment. The gold price outlook for the short term is expected to fluctuate around USD1,900/oz due to the current geopolitical and macroeconomic uncertainties. As interest rates rise, prices are expected to average around USD1,825/ oz by late 2022 before ending a five-year forecast horizon closer to USD1,700/oz.
Impact on investment markets
The Mosi-Oa-Tunya Gold Coin should be seen as an alternative investment to USD, the stock market and properties market. Generally, a gold coin is amongst the most preferred choices of investment. It is a low-risk investment option that offers better security. Gold is also a tangible asset and has always commanded a good market value for centuries. Some of the benefits of investing in gold coins are as follows;
•vestors
Gold is a safe-haven asset. Global in
typically look at gold as a haven during times of political and economic uncertainty. History is full of collapsing empires, political coups, and the collapse of currencies. During such times, investors who held gold were able to successfully protect their wealth.
Gold is a good hedge against inflation. Gold is an alternative to currencies, particularly where the native currency loses its value. Gold is a real physical asset that tends to hold its value in the market.
No maintenance is required. Unlike other tangible assets, investors in gold coins do not need to worry about its maintenance to get the best returns.
Gold is a diversifying investment. Gold can add a diversifying component to investment portfolios. Gold prices are not directly correlated to stocks, bonds and real estate.
Gold is easily transferable. Once bought, gold coins can be easily passed on to generations. This is what has been traditionally happening within families. Inflationary pressures and the instability of the local currency unit clearly cement the investment case in the Mosi-OaTunya Gold Coin. In addition, there has been a lot of interest in the coins (particularly from a ZWL position) given that it has prescribed asset status.
According to the Ministry of Finance and Economic Development, the persistent low level of compliance with the prescribed assets threshold by the insurance and pension industry remains a cause of concern.
Going forward, the industry will need to invest in bankable projects that can be accorded prescribed asset status or subscribe to Government paper to comply with the law.
The gold coin has therefore triggered a massive sell-off on the Zimbabwe Stock Exchange (ZSE) as institutional investors are switching to an alternative asset-class. As a result, the stock market has largely de-rated on weak demand because of tight liquidity in the market.