Zimbabwe Asset Management Corporation (ZAMC)- A virtual Sovereign Wealth Fund proposed by us

Introduction

Zimbabwe Asset Management Corporation (ZAMC) is a Sovereign Wealth Fund which manages Zimbabwe`s growing foreign reserve assets. Sovereign Wealth Funds are a large pool of assets or investment vehicles owned and managed by the State to achieve long-term economic development policy frameworks. Thus, Sovereign Wealth Funds (SWFs) are state-owned investment funds which are usually derived from the country`s foreign reserves, revenue from exports and fiscal surpluses as well as other official foreign currency operations. In this report we advise Zimbabwe Asset Management Corporation a sovereign wealth fund investor whose investment strategy has been focusing on local markets. The company was created by the act of Parliament in 2010 to manage and invest $ 2 billion foreign reserves on behalf of the government of Zimbabwe. Zimbabwe Asset Management Corporation (ZAMC) is financed through from the country`s vast natural resources and loyalties from foreign owned companies operating in Zimbabwe. Also Zimbabwe has recently enjoyed high level growth largely to increase in foreign capital inflows and trade expansion prompted by the country’s growing export market base in Europe, Asia and the Middle East.

So the government is using some of its fiscal proceeds to capitalize the state-owned Sovereign Wealth Fund, we then perform economic time series to analysis the company`s current investment strategy. We believe that, having a sovereign wealth fund to manage the growth foreign capital reserves is noble, but we feel that the positive role a Fund could be undermined if majority of its portfolio is invested locally. This is largely because sovereign wealth fund now appear to represent a new paradigm in wealth management only if it invest large chunk of its foreign asset holding in overseas markets. Sovereign wealth funds can provide a sound macroeconomic stabilization process if it manage to re-allocate excess capital to foreign markets. In the event of excess capital inflows/outflows a sovereign wealth fund can insulate a looming crisis through strategic asset allocation investment strategies aimed at redirecting foreign reserves outside domestic markets. Hence, investment purpose of Zimbabwe’s Sovereign Wealth Fund is to support the government`s long term economic and social development objectives. Zimbabwe Asset Management Corporation (ZAMC) has four distinct funds and each with specific investment objectives.  These funds are aimed at reducing the country`s sovereign debt, provide macroeconomic stabilization, infrastructural investments and social enterprises finance. That is the overall objectives of Zimbabwe`s Sovereign Wealth Fund is to insulate and stabilize government and export revenues against external economic shocks. (ii) Providing finance for development, (iii) Reserve investment strategies aimed at increasing the return on currency reserves.

Investment strategy

Zimbabwe asset Management Corporation utilizes wide range of investment windows to ensure the government`s long-term social and economic objectives are met. The current investment strategy is aimed at supporting domestic market and to fund the government`s long term economic and social development objectives. Zimbabwe Asset Management Corporation (ZAMC) managing Zimbabwe`s growing reserve portfolio has been investing in low risk-return assets more particularly in local markets. Thus, (ZAMC) `s current investment goal is not for higher return on asset under management. The firm `s investment objectives are to enable macroeconomic stabilization, boasting infrastructural investments, reducing the country`s public debt and supporting social enterprises.  Zimbabwe Asset Management Corporation`s investment strategy focuses on domestic market, investing in real estate and alternative investment markets. The company also invests part of its portfolio on social development initiatives to encourage growth related economic activities, as such 46% of Zimbabwe`s Sovereign Wealth Funds is invested in industrial and manufacturing sector through the infrastructure investment Fund to boast economic growth following decades of economic and political uncertainty in the country. In addition to that, 20% of is allocated to social enterprise investment Fund, 15% of the total capital is aimed at macroeconomic stability and 19percent is not allocated to a particular investment window but remain central to the future investment strategies of the overall Fund. 

 Zimbabwe Asset Management Corporation total asset $ 2 billion foreign reserves

Asset allocation  techniques
Infrastructural Fund	46 %
Social enterprise Funds	20%
Stabilization Funds	15%
Unallocated Funds	19%

 

Zimbabwe infrastructural investment Fund

The infrastructural investment window is responsible for industrial development and has invested in the energy sector, hospitality industry and real estate markets. So Zimbabwe Asset Management Corporation is the largest investor in Zimbabwe`s domestic markets it has recently acquired stake in Zimbabwe`s energy company commonly known as ZESA for the purpose rehabilitating the country`s energy supplier. The infrastructural fund as an investment strategy for Zimbabwe Asset Management Corporation is also involved in the railway construction network through a partnership with local companies. In addition that, more recently Zimbabwe Asset Management Corporation has taken over the Zimbabwe Water Authority a state owned company responsible for the water purification supply. Through the infrastructural Fund, the company has gone into a joint venture with a Chinese investor (China Water PLC) to manage and supply water throughout the country.  Since 2010, Zimbabwe Asset Management Corporation has been aggressively investing in roads, rail network, and hydro and thermal power energy production.

Social enterprise Funds

Social enterprise Fund is part of Zimbabwe Asset Management Corporation`s investment strategy responsible for citizen empowerment programs. The company support small to medium enterprises through providing financial assistance and marketing consultancy. The Social enterprise Fund investment window is not aimed at making profit for the government but to empower the general population so it can be self-reliance. In the long-run, the investment strategy aim to help government to reduce expenditure on social security once majority of the population succeed.  

Macroeconomic stabilization Fund

Macroeconomic stabilization Fund is intended to insulate the economy against adverse effects of business cycle changes. As Zimbabwe Asset Management Corporation gets its investment capital from commodity exports, then stabilization Fund act as a macroeconomic risk manager safeguarding foreign reserves. So Zimbabwe Asset Management Corporation`s macroeconomic stabilization investment window/Fund finance budget and balance of payment deficits brought about by changes in commodity prices. Moreover, macroeconomic stabilization Fund is also responsible for ensuring that excess reserves are managed in such a way that capital inflows would not lead to financial crisis. Thus, the stabilization Fund is paramount investment strategy for Zimbabwe Asset Management Corporation given as it enables a stead flow of revenue which finances its operation. This is largely due to the fact that, excessive capital inflow or outflows can potentially resulting in financial crisis similar to that of the Latin America debt crisis. 

Time Series    

We conducted two time series data on FDI inflows and a forecasting time series to project Zimbabwe`s economic performance. The two time series performed were intended to give us a clear macroeconomic environment in which our client is operating. The time series methodology we applied was fundamentally important because it can help us assess Zimbabwe Asset Management Corporation`s current investment strategy. According to the time series we carried out, Zimbabwean economy appear to have enjoyed a sharp increase in capital inflow between 2010 and 2012. At the same time, a forecasting time series we performed on GDP growth rates and Current Account Balance appear to show a different economic prospect as both GDP growth rates and Current Account Balance show signs of a stead decline from 2010 to 2016.  Zimbabwe`s Sovereign Wealth Fund aim to promote sustainable economic growth and macroeconomic stability.

 Analysis

We think the projected decline in both Current Account Balance and GDP growth rates by 2016 rest is purely caused by our client’s investment strategy.  Empirical studies by Cardarelli.R, Elekdag.S and Kose, M.A (2010), indicate that a large inflow of foreign capital can cause domestic currency to appreciate, as such making domestically produced goods expensive. For a Sovereign wealth fund to be effective, it must invest in foreign markets majority of its portfolio otherwise investing in local economy is not helpful in the event of excess capital flows. This is because capital inflows can be a source of economic instability as they may put pressure on exchange rates, so the current investment strategy of Zimbabwe Asset Management Corporation appear to be vulnerable on the basis it only invest domestically. However, it appears though that Zimbabwe experienced high volume of capital inflows in the form of Foreign Direct Investment, and these capital inflow caused Zimbabwe`s local currency to appreciate  leading to decline in demand for export goods. For this reason we think, the current investment strategy applied by Zimbabwe Asset Management Corporation is very risk and could hamper its overall investment objectives. So we remanded that 60% of the total Funds be invested in the Reserve Fund which an sovereign investment window aim at higher return on the country`s foreign reserves. This is similar to China`s Reserve Fund which now the main foreign direct investment of China Investment Corporation (CIC). We believe if Zimbabwe Asset Management Corporation follows our advice on investing part of its portfolio in high risk-high return markets such as the Hedge Funds Industry where return is likely to be impressive. This will enable the company function and to operate within its mandate of help the country evade a looming balance of payment crisis by 2016.

Conclusion

The report follows traditional economic analysis to enable us to examine if our client`s current investment strategy is working to safeguard economic fortunes of a country. However, after performing two time series on foreign capital inflows as represented by FDI inflows into the country. We then carried out a forecasting time series on GDP growth rates and Balance of Payments  from 2010 to 2016  to assess the likely impact of Zimbabwe Asset Management Corporation`s investment strategy. It was expected that, both GDP growth rates and Balance of Payments were to fall as Sovereign wealth Funds to tend to be effective when they invest in foreign Markets compared to the home economy.  

Reference

Cardarelli.R,  Elekdag.S and Kose ,M.A (2010), Capital inflows: Macroeconomic implications and policy responses: Economic System  34 (4),pge 333-356.Elsevier .

Furcer.D,Guichardc.S and Rusticelli.E, (2012),The effect of episodes of large capital inflows on domestic credit: North American Journal of Economics and Finance 23 (2012) 325–344. Elsevier.

Calvo,G.A, Leiderman.L and Reinhart,C.M,(1990),Inflows of capital to Developing Countries: Journal of Economic Perspectives 10(2),pge 123-139, American Economic Association Publishers.

Raymond. H, (2010), Sovereign Wealth Funds as Domestic Investors of Last Resort during Crisis: International Economics 123(2010),pge 121-160, Germany.

Kotter .J and Lel.U, (2010), Friends or foes? Target selection decisions of sovereign wealth funds and their consequences: Journal of Financial Economics 101(2011),pge 360-381, Elsevier Ltd.