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Cablegate: Spotting Investment Opportunities in Zimbabwe's Ruins

VZCZCXRO5668
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0361/01 1141258
ZNR UUUUU ZZH
R 231258Z APR 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 2819
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 1936
RUEHAR/AMEMBASSY ACCRA 1941
RUEHDS/AMEMBASSY ADDIS ABABA 2063
RUEHRL/AMEMBASSY BERLIN 0626
RUEHBY/AMEMBASSY CANBERRA 1340
RUEHDK/AMEMBASSY DAKAR 1697
RUEHKM/AMEMBASSY KAMPALA 2119
RUEHNR/AMEMBASSY NAIROBI 4550
RUEHGV/USMISSION GENEVA 1198
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RHEHAAA/NSC WASHDC
RHMFISS/EUCOM POLAD VAIHINGEN GE
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS SECTION 01 OF 03 HARARE 000361

SIPDIS

AF/S FOR S.HILL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN
TREASURY FOR J.RALYEA AND T.RAND
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
COMMERCE FOR BECKY ERKUL

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV ECON PGOV ASEC ZI
SUBJECT: SPOTTING INVESTMENT OPPORTUNITIES IN ZIMBABWE'S RUINS


--------
SUMMARY
--------

1. (U) In the midst of Zimbabwe's distressed economy, some
investors see opportunity that the risk averse abandoned long ago.
Banking on economic recovery and attracted to Zimbabwe's cheap price
tags, investors are looking at sectors with international links or
those that will benefit from an increase in consumer spending.
Zimbabwe is also ripe for a massive sale of state-owned assets once
the government--or government policy--changes. Investors' bullish
sentiment is based on an economic turnaround coming within three
years or less, failing which many of the enterprises that investors
are so hopeful about now probably will be out of business. END
SUMMARY.

--------------------------------------------
Why Invest? The Pot of Gold at Rainbow's End
--------------------------------------------

2. (SBU) Embassy officers met key investors in the hospitality,
financial services, and mining sectors, as well as asset managers
and economists in Harare to determine who is investing in Zimbabwe
now and why. We learned that investors interested in profiting from
Zimbabwe's potential are financing Zimbabwean companies through
direct acquisition and equity purchases, hoping to position
themselves to take advantage of an eventual economic recovery.
Their interest, which suggests optimism about economic recovery that
belies assessments about Zimbabwe's current economic predicament,
will be crucial to jump starting recovery. Respected economist John
Robertson estimates the economy needs USD 3.5 billion to operate
even at its current shrunken state, but there is only USD 98 million
worth of local currency in the economy. Foreign investment will
help make up the difference, playing a significant role in
Zimbabwe's economic recovery.

3. (SBU) Investors are drawn to the market by Zimbabwe's undervalued
assets, according to Tongai Muzenda, the CEO of Zim Alloys, a chrome
mining company. The Zimbabwe Stock Exchange (ZSE) is worth a third
of what it was in 1997 at the Old Mutual implied rate of exchange (a
proxy for the prevailing black market rate). Prominent stock broker
Murray Lynton-Edwards cited ZSE-listed Delta Corporation, Zimbabwe's
beverages giant, whose market capitalization is USD 300
million--less than half the value of its breweries, and Imara Asset
Management's Managing Director Sean Gammon assessed Innscor, SeedCo
and Dawn Properties as world class companies available at "Zimbabwe
prices." The Financial Mail, a South African weekly, also lists the
hotel chain ZimSun, the Kingdom Meikles group and cell phone company
Econet as good bets for investors on the ZSE. Lynton-Edwards opined
that international investors viewed Zimbabwe as a venue for the next
Soviet-style sale of state assets, which could be bought cheaply and
turned around.

-----------------------------------
A Risky, but Small Piece of the Pie
-----------------------------------

4. (SBU) Zimbabwe is a risky place to invest, with abrupt shifts in
policy from price controls to indigenization of assets that could
destroy a company's value overnight. Most investors looking at
Zimbabwe, however, are large enough and brave enough to accept
Zimbabwe's sovereign risk. Imara Asset Managers was in London
drumming up business for its Zimbabwe fund launched in February 2007
when opposition leader Morgan Tsvangirai was arrested and beaten in
March 2007, but investors' fervor for Zimbabwe did not cool. The
fund started with USD 5 million in February 2007 and now has USD 23
million invested. Gammon explained that for a hedge fund with USD
600 million in total assets, a USD 5 million investment in the

HARARE 00000361 002 OF 003


Zimbabwe Stock Exchange is less than one percent of the total
portfolio, so the risk is manageable.

5. (SBU) To hedge risk, many companies have couched their
Zimbabwean assets as part of a pan-African strategy designed to
capture Africa's positive growth trend. ZimSun is rebranding itself
as African Sun to reflect its impending investments throughout the
continent. The conglomerate Lonrho has five water bottling
companies throughout the continent and is looking into purchasing a
similar company in Zimbabwe, and has interests in the Kenyan-based
airline, Fly 540, which it would like to bring into the Zimbabwe
market. Many of these companies are chasing the oil and gas
revenues that are leading growth in places like Angola and Gabon.
Zimbabwe has good gas reserves and is a mining powerhouse, much of
which is underutilized in the current environment.

-------------------------------------------
Strategy #1: Capturing International Demand
-------------------------------------------

6. (SBU) Investors noted that the international community would be
part of any recovery in Zimbabwe, bringing a tide of money into the
financial, tourism and telecoms sectors. When Zimbabwe reengages
with the international community again, investing in businesses that
foreign consultants, advisors and tourists will use, such as hotels
and international telecommunications links, will be profitable,
according to Geoff Goss, CEO of the conglomerate LonZim. With
this in mind, LonZim is spending USD 5 to USD 10 million to acquire
companies and plans to spend another USD 5 to USD 10 million to
develop them before selling them. If the businesses can be sold
five years into an economic recovery, LonZim foresees making 5 to 10
times its initial investment. LonZim purchased two companies that
would benefit from a recovery in financial services--Paynet, a
payroll services provider and Celsys, a checkbook printer-- and has
a payphone company that was very profitable until price controls
reduced the price of a phone call to below the cost of the
international tariff. LonZim also recently purchased Rollex, a
fresh produce supplier to South African Woolworths and to UK-based
Marks and Spencer for USD 5 million.

7. (SBU) Tourism has been recovering for the past three years and
will lead any upturn in the broader economy. The manager of the
Holiday Inn, a ZimSun property in Mutare, said that occupancy rates
had risen for the past three years from 53 percent in 2006 to 61
percent year to date. Shingirai Munyeza, CEO of the ZimSun hotel
chain and chairman of the Zimbabwe Tourism Authority predicted when
the economy turns around there will be a shortage of hotel rooms, as
happened in Nigeria and Angola when their economies took off with
the oil price boom. The Kingdom Meikles group is seeking to raise
USD 300 million via an IPO of a company called Mentor plc on the
London Stock Exchange and plans to spend USD 50 to USD 60 million
refurbishing the five-star Meikles Hotel in Harare and investing in
a safari lodge, according to Dave Mills, the director of retail at
Kingdom Meikles. The potential quick rebound in tourism has both
Goss and Munyeza separately investing in the airline industry with
the hope of making Zimbabwe a regional air hub to compete with
Johannesburg's O.R. Tambo International Airport.

-----------------------------------------
Strategy #2: Capture Pent-Up Local Demand
-----------------------------------------

8. (SBU) Gammon argues that depending on foreign money and exports
during an economic rebound is not the best investment strategy
because the value of exports will decline in local currency terms
while costs rise as the currency is revalued. Gammon is betting on
another source of wealth: a consumer rebound. When Zimbabwe's
economy begins to recover, money will trickle down into the local

HARARE 00000361 003 OF 003


economy, boosting the market for consumer goods from food to
clothing. Imara's investments are diversified, but include
companies such as British American Tobacco and Delta Corporation,
which will benefit from the increase in local wages that will occur
when the value of the Zimbabwe dollar is stabilized as part of an
economic recovery plan. Imara is buying listed assets based on a
quick recovery scenario and assesses if Zimbabwe were to institute
comprehensive economic reform, the economy could see USD 230 million
of investment pour in within 3 months--before the sovereign risk
premium falls.

--------------------------------------------
Investors Banking on Recovery, But How Soon?
--------------------------------------------

9. (SBU) It goes without saying that investors are counting on
economic recovery to realize their returns. If Zimbabwe fails to
stabilize its economy and begin to grow again, many of the companies
that have benefited from investors' capital will fail. Goss said if
the economy's downward spiral continued for another three years, all
the companies LonZim had invested in would be closed. Gammon argued
that Imara is so bullish on Zimbabwean recovery that no matter who
won the 29 March harmonized elections, economic reform would have to
happen, in large part because civil servants are so badly affected
by hyperinflation.

-------
COMMENT
-------

10. (SBU) It is undeniable that government policy, especially price
controls and the fixed exchange rate, has been devastating to
business. However, investors can see the potential in a country
that is still wealthier, with better infrastructure and skills, than
many of its neighbors. While the positive outlook on Zimbabwe's
economy is heartening, timing is key--and uncertain. With the
harmonized elections passed and no result announced, the chance of
economic reform in the short term seems remote, which may dash
investors' hopes and make recovery even more difficult when things
do come right. END COMMENT.

DHANANI

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