How to price the Zimbabwe risk


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All investments involve an element of risk. The risk component is ostensibly behind the volatility in Zimbabwe’s currency markets.

Among the panel discussions at the Financial Markets Indaba — a forum to promote understanding investments opportunities in the southern African country — which was recently held in London was the topic “Zimbabwe – how are we pricing risk”?

It was interesting to notice the varying views towards that risk.

What would you say is the most important risk in Zimbabwe?

Is it policy consistency; currency; corruption; red tape; labour skill; or is it price?

How we define and measure risk determines our investment decision making.

But herd mentality, fear and greed are all too powerful forces that often determine how we think about risk.

The examples below help to probe this assertion.

Risk definition and pricing does drive investment decision making-whether right or wrong.

For example, at 380 points, ZSE has more than doubled year to date.

That presents a 50% price risk if you, like me, believe that the market was fully priced beginning of the year.

Money pouring into equities is leaving RTGS currency making the case that investors are attaching a devaluation risk of >50% on RTGS.

Implicitly, we can argue that at the suggested current discounts of 35-45% to the dollar, investors buying into the ZSE believe RTGS will experience a further 50% devaluation.

Another place where risk pricing is strange is in equities.

Beginning of the year SeedCo share price was 98 cents and today it hovers at around 250 cents – a 150% rise.

Continued next page

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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