Tanzania businesses in forthcoming recession!
The warning, caution and confidence issued by Profesa Benno Ndulu, the Governor of the Bank of Tanzania that the Tanzania's economic remain strong and is likely not to be pretentious by the global financial downturn sent waves through my mind that triggered me to suggest steps that Professor Ndulu overlooked in his analysis, that could help the Tanzanian business recover from the financial gloom terrorising the world financial market.
Although the waters are still turbulent, this is now the time for renowned and professional individuals like Professor Ndulu not to undermine Tanzanian by not telling them the reality.
While the normal way of reducing risk in a portfolio during a slump is by diversifying, certain assets tend to do better than others at different parts of the economic cycle. What the world is experiencing is a de-leveraging, where all asset classes are falling in value and will continue to fall in the next two years. No doubt the world is going through a period where shares, property, fixed interest and even commodities will go down.
That said, despite slowing global economic activity and the impending recession that Professor Ndulu seem not to put into his equation, it is not all doom and gloom for business and especially for those with a long-term approach.
I would like to remind Professor Ndulu that what he needs to remember is that market volatility and the indiscriminate selling the world financial sector is witnessing or has witnessed in the past few weeks will create opportunities to pick up bargains.
I would have thought Professor Ndulu would have coded among others, things like the need for business to consider diversifying their portfolio.
While there's no escaping the fact that it's not going to be plain sailing from on-going global financial turmoils, and that all equity portfolios will get rocked by further short-term volatility, he should have assured business with well-insulated portfolios that those with long and proven track records will be able to overcome the slump. He should also have tried to advice the business to look to professional managers who could help them benefit through the cycle.
Stating that Tanzania financial position is fine wasnt enough, he should have reconsidered what happened to Iceland bank were UK government is struggling to recover its money invested by its business. To state that Tanzania banks are well-positioned for the slump and that Tanzania money in the foreign account is safe and is enough to allow business as usual isnt correct, because Tanzania is not an island! Is Professor Ndulu aware on what Kenya stock market is facing following global financial downturn?
Professor Ndulu should have seen the need for corporate debt that seems not to feature in his statement. To me, corporate debt is one of the first investments to recover in a slump, and many bond experts are beginning to call the bottom of the market for this sector. At the moment, yields are likely to be attractive, because interest rates and inflation will or are expected to fall which is a fantastic backdrop for any finance executive.
In any slump, there are traditional areas which are viewed as immune or defensive such as pharmaceuticals stocks and healthcare company; along with utility providers. People need medicine and power, irrespective of economic conditions. I do understand that tobacco and liquor companies that Tanzania has been using as a model of success following privatisation, also tend to flourish under the spectre of a protracted recession.
Nothing regarding our gold reserve was mentioned in his statement! Gold
at times of financial crisis, is looked upon as a safe haven for distressed investors rocked by faIling share prices. In the current extraordinary circumstances, Professor Ndulu should have told Tanzanians where this asset class is going or taking Tanzania?
My view is that gold is a long-term story underpinned with supply and demand drivers that he might deliberately omitted in his statement. Does Professor Ndulu recognize that gold price has been rocky in the current crisis? Last year the gold price was $667 an ounce and it rose to a peak of more than $1000 on March 17th 2008. As price now remains choppy, what is the position of Tanzania that is said to produce a lot of this precious metal among gold producer in the world?
While I am not sure if BOT, that Professor Ndulu is the Governor will bail out private owned banks in Tanzania or nationalise part of them, make me speculate what a business need to do in Tanzanian context ?
I think, business needs to be careful not to be too defensive in the current slump. In a way, looking at a cynical portfolio after values have already fallen is a bit like locking the stable door after the elephant has already bolted.
To the business I think, it's important not to lose sight of your long-term objective, try and have the asset mix which is most likely to give the return you are looking for. If as a business you are too defensive now, you will risk missing the upturn when it happens.
Professor Ndulu should have encouraged the business to seek additional sources of diversification, encourage them the focus on investments with high earning visibility and supportive valuations. Telling us that daily interbank cash market in Tanzania was doing well and BOT is watching exchange rate movement is not enough! We need measures on how to help business to cope with financial downturn.