Currency crisis, mining policy uncertainty crippling economy

While investor sentiment toward Zimbabwe is expected to improve, the country faces yet another economic crisis in the form a currency crisis that could deter investors who have had their interest in the country piqued recently, law firm Webber Wentzel tells Mining Weekly.

“The indigenisation law, which is a challenge that investors are facing, is a minor issue in light of the foreign currency issue that the country is facing.“This is really the inhibitor of foreign investment currently. The currency issues shed light onto the problems that Zimbabwe is facing in its economy,” Webber Wentzel partner Bruce Dickinson says.

He points out that, while investors are encouraged to come into Zimbabwe with the offer of preferential fiscal packages, the use of real-time gross transfer (RTGS) dollars places a damper on investments: “It is one thing to offer preferential fiscal packages, but it is not worth much if investors are unable to get their money out in hard currency.”

This massive value leak between converting currency into RTGS and mining companies earning dividends in dollars creates a discrepancy that is enough to deter investment.

Law Amendments

The amendment of the Indigenisation and Economic Empowerment Act in Zimbabwe is likely to translate into a positive outcome for its economy as a whole, yet unanswered policy questions remain.

“The amendment of the indigenisation law, or the intention to scrap it, is positive for the country as a whole.“However, there is significant uncertainty surrounding the scrapping of the law in relation to platinum and diamonds.“Investors might still be wary because of the regulatory uncertainty and, until the economy and politics stabilise, there will still be hesitancy regarding investment for some time,” says Dickinson.

The law was implemented in 2008 and, at the time, it deterred significant investment.“A number of deals and projects were placed on hold, as it did not make economic and financial sense for investors to contribute 100% of project capital, but give away just over half of their investments, which ultimately resulted in foreign investment drying up,” Dickinson notes.

“The motivation for the implementation of this law was to redress the imbalances of the past when 70% of the Zimbabwean population was excluded from involvement in the industry; however, there was an underlying political driver, with elections taking place at thetime and the need by the ruling party to secure votes and stave off the growing opposition, notwithstanding the detrimental impact on foreign investment.”

Dickinson explains that certainelements of the law were implemented through, for example, the establishment of community trusts, which were successfully executed.Equity was also made available to indigenous Zimbabweans, primarily on a notional vendor finance basis.

However, if the indigenisation law were to be amended, it remains to be seen how it would affect locals who hold shares in mining companies and those already living under strenuous economic circumstances.

Dickinson believes that the scrapping of this law will not have a significant impact on indigenous Zimbabweans who hold shares. “It will give them an opportunity to liquidate their investments and perhaps invest in other areas that seem more sensible to them.“Indigenisation laws are inherently limiting as it is inevitable that transactions structured as such mean that Zimbabwean shareholders are only able to sell their shares to other local Zimbabweans, immediately inhibiting the market and value thereof.“However, it is doubtful that any mining companies would force them to sell their shares, although it does present an opportunity to recoup value.”

Overall, this translates well for the mining industry, as immediate concerns of investments are removed, and investors no longer need to set in place indigenisation agreements that might impact on their investment decisions.There has been greater investment interest over the past 12 to 18 months, with less risk averse investors remaining positive about the prospects that Zimbabwe has to offer, Dickinson concludes.