“The race to invest in Zimbabwe also underscores just how far global investors are willing to stretch in search of decent returns”

An update on the laughable-if-it-weren’t-such-a-tragedy basket-case of our times, Zimbabwe. From the Wall Street Journal:

Zimbabwe is an economic nightmare. The annual inflation rate is 8,000% and rising. People don’t have food to eat.

Yet investors have started pouring millions of dollars into the country. Foreign direct investment has rebounded, reaching $103 million in 2005, up from just $4 million in 2003, according to the most recent figures available from the United Nations Conference on Trade and Development.

What explains the flood of money? Some investors are betting there’s nowhere to go but up. A slump like Zimbabwe’s can’t last, and when it’s over — perhaps with the graceful, or otherwise, exit of President Robert Mugabe, who has presided over a decades-long downward spiral — the country will rebound.

The race to invest in Zimbabwe also underscores just how far global investors are willing to stretch in search of decent returns. The turmoil in global credit markets has rippled across emerging economies, boosting yields for some of the riskiest bets around.

At the same time, in recent years, relatively sluggish returns in many developed markets have sent investors farther afield.

Africa overall is emerging as a hot destination for money. Amid a global commodities boom, investment bankers from around the world are flocking to African commercial hubs such as Lagos, Nigeria, and Johannesburg.

Part of the challenge of investing in Zimbabwe is figuring out how much anything is actually worth, given the plummeting Zimbabwean dollar.

The Reserve Bank of Zimbabwe fixes the exchange rate at 30,000 Zimbabwean dollars to the U.S. dollar. The problem: Zimbabweans don’t put much faith in that figure — if they did, they’d quickly lose all their money.

There is another, presumably more accurate, method of estimating what a Zim dollar is worth. Dubbed the “Old Mutual Implied Rate,” it offers a glimpse of the obstacles to doing business in Zimbabwe.

It is based on the share price of Old Mutual, a British investment company whose stock trades on three different markets — London, Johannesburg and Zimbabwe’s capital of Harare. Because all Old Mutual shares are of equal value, it is possible to extrapolate the market value of the Zim dollar by comparing the price of Old Mutual shares on the different markets.

On Friday, the Old Mutual Implied Rate stood at 2,596,784 Zimbabwean dollars to the U.S. dollar.

Blimey. Didn’t most of the credit problems begin with firms tossing risk aside in the chase for unsustainable yields? I did say that Zimbabwe could certainly recover: many countries have done so. Speculation on this sort of scale isn’t going to help that happen (although it can’t be much worse than having the IMF do their dirty work for them).


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