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Investors Go to Treacherous Places Seeking Returns
Funds Pour Money Into Zimbabwe on the Theory
Mugabe Can't Rule Forever, Nation Will Rebound
By SARAH CHILDRESS
November 17, 2007; Page B1
Johannesburg, South Africa

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.


President Robert Mugabe
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.

China, in particular, is pouring cash into the continent, investing in oil fields, mines and more recently the financial sector. Just last month, Industrial & Commercial Bank of China Ltd. said it would spend $5.5 billion for a 20% stake in South Africa's Standard Bank.

Managers at Imara Holdings Ltd., a Botswana-based investment-banking company, were surprised when investors started asking this year about Zimbabwe, considering the seemingly better opportunities in the region, including diamond-rich Botswana and agribusiness-focused Uganda.

Dave Eliot, chief executive of subsidiary Imara Assets Management in South Africa, said he once classified Zimbabwe as an "emerging market," but has now downgraded it to "frontier" status since the country began falling apart in the past few years.

"It's gone backwards," he says.

Once known as Rhodesia under white minority rule, Zimbabwe became a democracy in 1980 after a prolonged guerrilla war. The veteran guerrilla leader, Mr. Mugabe, was elected president, and the new country became the darling of foreign investors eager to access Zimbabwe's natural resources. Within a decade, Mr. Mugabe had become corrupt and paranoid, fixing elections, crushing dissent and dragging the country into economic decline.

Investors are interested anyway. Imara launched a Zimbabwean-focused investment fund in March, hoping to pull in $10 million by the end of the year. It had $11 million in a few months, mostly from private investors.

John Legat, the fund's manager, estimates most businesses in Zimbabwe are selling at 15% to 20% of their actual value. In October, Imara said the fund was up 35% in September from the previous month.

Investments include: Zimbabwean fast-food company Innscor Africa Ltd., which also owns a crocodile-farming business; mining subsidiary Rio Tinto Zimbabwe Ltd.; and Dawn Properties Ltd., which invests in hotels left over from Zimbabwe's once-flourishing tourism industry centered around the spectacular Victoria Falls.

Pan-African investment house Lonrho PLC divested itself of its Zimbabwe holdings a few years ago, but now is getting back in. The London-based company has set up an investment fund targeting Zimbabwe and neighboring countries. The fund, called LonZim, plans to raise $145 million.


Zimbabwean agriculture was hurt by a disastrous land-overhaul program. Above, a farmer inspects tobacco. Mining companies look for bargain.
Separately, Lonrho last month snapped up Blueberry International Services Ltd., a company incorporated in the British Virgin Islands with interests in two Zimbabwean companies -- telecom firm Celsys Ltd., which specializes in payphones, and Gardoserve Ltd., a chemical maker -- for $5.45 million.

One irony of Zimbabwe's slump is that it is home to some of the richest gold and platinum reserves in the world. As a result, natural-resource investors -- who are used to operating amid political instability -- are looking closely at Zimbabwe, too.

South Africa-based Impala Platinum Holdings Ltd., which owns two Zimbabwean mining subsidiaries, has announced plans to expand its operations in the country, and Anglo Platinum Ltd. is planning to build a 120,000-ton-a-month mine, one of its larger projects.

Risks Still Abound

Despite the excitement, Zimbabwe is still one of the world's riskiest bets. Lawmakers recently took steps to tighten foreign-ownership rules, requiring 51% local ownership of foreign companies there.

It is unclear how -- or even whether -- the bill will be enforced. Still, it worries some observers who see parallels with Mr. Mugabe's previous land-overhaul program. Starting in 2000, he let squatters violently overrun the nation's commercial farms (owned mostly by white Zimbabweans), throwing food production into disarray.

No Faith in Currency

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, Louis J Sheehan the Old Mutual Implied Rate stood at 2,596,784 Zimbabwean dollars to the U.S. dollar.

Not everyone can stomach that much risk. Navaid Burney, managing director of Washington-based private-equity firm Emerging Capital Partners, which invests exclusively in Africa, says his fund hasn't made a move in Zimbabwe yet.

"It doesn't have the feel of Lagos," he says, referring to the crumbling, crime-plagued Nigerian commercial hub -- which is a bustling boomtown by comparison.

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