Inflation risk, also called purchasing power risk, is the chance that the cash flows from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation.
by Donald Chidoori
Inflation causes money to lose value, and any investment that involves cash flows over time is exposed to this inflation risk. For Zimbabwe the ramifications of this can be serious, says BMI research.
A combination of continued shortages and the likely growth in the supply of bond notes and use of electronic payments will see inflation remain high for the large portion of the
population that cannot access dollars.
As prices increase the poor will not be able to afford basic commodities which might trigger riots, looting, or other political stability headwinds.
“With the memory of crippling hyperinflation still fresh in the minds of many Zimbabweans, the possible return of runaway prices will add another headwind to political stability over the coming months in the approach to the 2018 election,” BMI Research, said in its latest african economic outlook for December 2017.
Other than triggering political instability inflation risk has reached a point whereby it is already a headwind to economic activity. Inflation is high at 60% and the country has already been experiencing shortages at fueling stations and in supermarkets.
Shortages of goods typically leads to an increase in prices.
In addition to this businesses are earning lower returns than what they originally expected, due to discrepancies in pricing. Businesses have lowered their prices for cash purchases as bond notes and electronic money cannot be liquidated into a means of buying imports.
Failure of business to liquidate bond notes and electronic money has forced businesses to buy cash on the black market, the consequences have been severe; for example in the past few weeks the prices of medicinal drugs have risen by 70%, supermarkets and fueling stations have been experiencing shortages.
“Since Zimbabwe adopted the US dollar as its official currency in 2009, large current account deficits and limited inflow of foreign investment have seen the supply of cash fall to the point where it has become a headwind to economic activity. In this environment, businesses have struggled to access the dollars needed to import goods from abroad, leading to shortages at fueling stations and in supermarkets,” BMI Research said.
RBZ exposing companies to Inflation Risk
Inflation risk is not the risk that there will be inflation, it is the risk that inflation will be higher than expected.
BMI says the growing disparity between official inflation statistics and reality on the ground, will confuse monetary policy over the coming quarters and does not auger well for businesses.
Inflation figures released by the Reserve Bank of Zimbabwe (RBZ), does not equip businesses operating in Zimbabwe with accurate inflation data to manage inflation risk it rather exposes them to inflation risk, as official statistics do not give a clear picture of risks of rising costs for businesses operating in Zimbabwe.
The RBZ reports that inflation figures are stable, however in recent weeks the inflation rates have reached as high as 60.0% y-o-y s for goods and services paid for with bond notes or via electronic transfer.
“While the data released by Zimbabwe’s central bank points to stable prices, this belies the reality of an increase in the cost of goods and services when paid for in bond notes or via electronic transfer… inflation has reached as high as 60.0% y-o-y in recent weeks for goods and services paid for with bond notes – a quasi-currency issued by the government to ease illiquidity in the economy – or via electronic transfer,” BMI Research said.
Price Disparity Shows No Sign Of Slowing
“With the prospect of a sufficient recovery in Zimbabwe’s balance of payments looking unlikely, we believe the country’s shortage of hard cash will continue to weigh on economic activity and confuse monetary policy over the coming quarters.” the report said.
BMI Research added that continued discrepancies in prices will see inflation remaining high for the large portion of the population that cannot access US dollars.