The market has longing disputed the parity of the USD and the bond. RTGS balances believed to be USD were cast to being strictly bond by the announcement by the RBZ that separate accounts should be operated for USD and bond. This brought chaos to the parallel market which was later quelled. However a disparity still exists. This has resulted in major accounting problems for the market.
The accounting problem
Currency of account
What currency are we accounting in exactly? From 2009 onwards Zimbabwe accounted in USD and now that amounts in accounts are no longer USD what does this mean for values of items recorded? Accounting rules provide this by allowing values of fixed assets to be revalued to reflect current valuations.
We’ve seen wonderful reports of growth and increased earnings for companies all over as it is year end. However inflation data has come in twice with signs of increase in the rate. Applying inflation-adjustments to these figures paints a more sobering picture of the performance of our industries. The S&P DJI has resolved to stop tracking Zimbabwean stocks as the inflationary environment reports greater results than are actually obtaining. Recall that for the purposes of reporting Bond/RTGS are recorded as USD at 1:1. However in the market place Bond/RTGS figures are actually around USD1:3.5 Bond. So this suddenly gives the picture that they are performing really well, when the case may not be so.
Values on the ZSE have also been affected by inflationary environment. The graph below shows the ZSE perform over the months August to October 2018. In October we see the value of shares rallying upwards in what seems like a bull run. However remember October as the month that saw parallel market rates for the USD spike sharply. But for the person looking from outside Zimbabwe or the person looking strictly at financial data, values have gone up. Now where companies, especially foreign ones hold shares in Zimbabwean companies the valuation becomes questionable. That is why the S&P has moved to delist Zimbabwean companies.
Prices have increased rapidly in the 4th quarter of 2018. From 20.85% in October, the year on year inflation rate jumped to 31.01% in November. With increased prices all around companies are reporting increased earnings. However the increases are due to the value of the money being lower and not necessarily improved performance or quantities. This again makes Zimbabwean companies look more attractive than they really are. High inflationary periods can be characterized by shrinking businesses earning more. Nominally at least.
Debt and Liabilities
Paper debt securities, such as debentures have a determined face value. That value is a nominal value stated in currency. Ordinary debt instruments therefore are negatively affected by inflation. As inflation gallops the nominal value is eroded. A $1500 debenture bought when USD where still the currency would today be worth $285 all else being equal. A liability owed also becomes less valuable as the amount required to settle its payments becomes less valuable. A long term debt that required a payment of USD$500 a month in 2013 would now require $143 a month to settle. The creditor suffers a real value loss.
The high inflation environment has both balance sheet and income statement effects for companies. The second principle of accounting information according to the International Financial Reporting Standards (IFRS) is that information be reliable. Two qualities that make information reliable are it being complete and true & fair. And as long as reporting is done in nominal figures the reliability of the information is questionable at best. We’ve seen the S&P DJI drop Zimbabwean domiciled entities for precisely this reason. For an effective analysis inflation adjustment is required but such methods are not easily accessible to the majority of information users. This leaves our investments less attractive to the Foreign investors we have spent so much money courting.