Zimbabwe On Death Watch

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The demise – or departure – of a key leader in power doesn’t happen often.

But when it does, it can create huge uncertainty – and opportunity. (And it’s just the sort of market that I look at in International Capitalist… go here to see our special extended Black Friday offer for our global high-upside investment publication.)

That’s what we’re seeing with the south African country of Zimbabwe right now. Last week, after decades filled with civil and economic strife, strikes and ethnic battles under President Robert Mugabe… Zimbabwe’s military seized control of the country. And now, the 93-year-old leader has officially resigned.

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I visited Harare, the capital of Zimbabwe, a few years ago. It was a genuinely nice city. I met some incredibly smart and switched on people. I opened a local brokerage account. I had some of the best beef I’d ever enjoyed. I was mistaken for a foreign government agent. And I’d go back in a second.

And though it probably isn’t on your radar, Zimbabwe matters. What happens there – as the government teeters on the edge of the next thing, whatever that is, after decades of dictatorship – will have a huge impact on other countries in Africa. What’s more, Zimbabwe has extraordinary natural resource wealth in platinum, palladium, diamonds and chromium. Based on these resources, Zimbabwe could be one of the richest countries in the world, per person.

Zimbabwe also has Africa’s highest literacy rate. Peo­ple in South Africa talk about how they prefer to hire Zimbabweans because they’re generally hard-work­ing, no-excuses people.

So despite Zimbabwe’s current problems, the country has several big things going for it. And soon, it could present an opportunity for savvy investors…

The Death Watch investment strategy

Regular readers are familiar with my “Death Watch” investment strategy.

In some countries – especially those where a single individual holds a lot of power – death (or in this case, the ousting of a leader) can be a big driver of asset prices.

In many developed democracies, for example, the unexpected death (or departure) of a leader would be big news… but it wouldn’t change the fundamental direction or structure of government.

In these countries, institutions – like the presidency, the judiciary, and the parliament – are strong and stable. They operate, generation after generation, based on a clear set of rules that are universally respected, regardless of political party or economic circumstances. If a key leader dies, there’s little question about who takes over and what happens next. The rules of the game don’t change, regardless of who’s in power.

However, in many countries, individuals – rather than institutions – hold power. Highly personalised governments operate at the whim and will of one person. In these countries, the abrupt departure of this individual can throw a country’s entire government structure into chaos.

That’s what we have with Zimbabwe. And it’s making investors uneasy: Last week, the stock market dropped nearly 20 percent over three trading days.

How did we get here?

Most of Zimbabwe’s prob­lems can be traced back to racial discrimination and poor leadership.

Beginning in the late 1800s, the country – which was then called Rhodesia – was controlled by the British, who confiscated land from blacks and put in place legal barriers to black ownership of land. This created a permanent black underclass. Blacks were denied the right to vote and were barred from many whites-only institutions and organizations.

But in 1965, the white minority in the country unilat­erally declared independence from Great Britain. This later helped spark a guerilla war against white rule by the country’s black majority.

And in 1980, when the country was formally granted independence from British rule, Robert Mugabe, a black revolutionary, became prime minister of the new Republic of Zimbabwe.

In the following years, Mugabe had the Zimbabwe military kill about 20,000 opposition supporters.

The opposition began to gather strength in the late 1990s with the help of the white minority. While whites accounted for less than 1 percent of the country’s population, they still owned 70 percent of Zimbabwe’s farm­land. So in an effort to shore up support and solve the pesky race issue once and for all, Mugabe green-light­ed the outright confiscation of white-owned land, without compensation. Thousands of whites were killed or ran for their lives.

You might be able to guess what happened when large, relatively efficient commercial farms were forci­bly taken away from the people who owned and oper­ated them and given to the people who had previously worked on them… Agricultural production plummeted by more than 50 percent.

Zimbabwe’s foreign earnings collapsed, and the country couldn’t import food to make up for its lost agricultural output. Now that anyone with a gun could legally confiscate land, banks wouldn’t take land as collateral for loans. And loans that had been made to white farmers went sour. The banking sector froze.

The average Zimbabwean went from earning US$76 per month in 1980 to US$45 per month in 2000. And investors fled. Foreign investment dropped from nearly US$500 million in 1998 to under US$4 million in 2003.

Then things got really bad.

“The economy was starved for money… and these farmers needed equipment to work their farms, but they didn’t have money to invest,” the head of one of Zimbabwe’s banks explained to me when I visited the country. “So the govern­ment said, ‘Well, we need money… we’ll get money.’”

So in 2006, Mugabe cranked up the printing presses. And during the following three years, Zimbabwe ex­perienced some of the highest inflation since wartime Germany. For a while, prices were doubling every 24 hours. People paid for things with bags of bills – and then had to bring twice as much the next day.

At a certain point in late 2008, the inflation rate reached 79.6 trillion percent. Finally, in 2009, Steve Hanke, a scholar at the Cato Institute who studies hyperinflation, says, “People simply refused to use the Zimbabwean dollar, and the hyperinflation came to an abrupt halt.” Eventually, Zimbabwe stopped using its currency in favour of the U.S. dollar (and several other currencies).

When hyperinflation hits, creating currency with ever-higher denominations is a challenge in itself.

The impact of land expropriation and hyperinflation was devastating, sparking what Foreign Policy called “recent history’s most shocking economic slump.”

Agricultural production fell even further, and famine swept through a country that had been known as the breadbasket of the region. From 1998 to 2008, Zimbabwe’s GDP growth shrank at an average rate of 6 percent every year. During the same time frame, its GDP per capita (the value of the country’s annual production divided by number of citizens) fell 34 percent.

Today, around three-quarters of Zimbabwe’s population lives below the poverty line. Zimbabwe ranks 154 out of 176 in Transparency International’s Corrup­tion Perceptions Index. And it only ranks 126 out of 138 countries for the competitiveness of its economy, according to the World Economic Forum.

Yet, Mugabe remained in power through all of this… at least until last week.

So what happened?

Mugabe is one of the world’s oldest and longest-ruling leaders – and his age and failing health haven’t gone unnoticed.

Tensions have been rising in Zimbabwe for a while… but they came to a head over Mugabe’s eventual successor.

Many thought the country’s vice president, Emmerson Mnangagwa would end up succeeding Mugabe – at least until Mugabe sacked him. That led to Mnangagwa fleeing the country in fear of his life. Many accused Mugabe of trying to turn his wife into his successor.

That’s when the military intervened… putting Mugabe and his wife under house arrest, taking over the country’s television station… and stationing military vehicles around the city. (The military insists it is not a coup. But if it looks, sounds and feels like a coup… well, it’s probably a coup.)

On November 21, Mugabe finally resigned after his party (Zanu-PF) threatened to try to impeach him.

No one knows exactly how things will play out from here… but for the time being, Zimbabwe remains in a state of uncertainty. (That’s part of the reason why bitcoin prices in Zimbabwe have soared to more than US$13,000 on the country’s primary bitcoin exchange… compared to around US$8,000 in other global markets as Zimbabweans seek a safe haven for their money during the political and economic turmoil.)

So what happens next?

“I feel like this country is a handful of credible policies away from changing for the better in a big way,” the head of a foreign aid operation in Zim­babwe told me a few years ago. And thanks to Zimbabwe’s enormous natural resource wealth, the foundation is already there… as is a lot of the infrastructure.

“Unlike most of the rest of Africa, we already have decent roads,” one local businessman told me. So once the switch is flipped, the change will happen fast. The question is, how… and when.

There’s no question that Mugabe leaving office is the big catalyst everyone is waiting for.

I have no idea what will happen now that Mugabe is no longer in power. But I do know this: Whoever follows him can’t do any worse. So once things settle down, the country’s situa­tion can only improve. And I think Zimbabwe’s stock market will be a lot higher a year from now.

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