Earlier this week, Zimbabwe, which has been using the U.S. dollar for the past decade, announced that it is back to using its own currency again instead of the US dollar. The primary reason was that the country was running out of U.S. dollars and the dollars stored in local bank accounts are worth only a fraction of their stated value. Which explains why the US dollar was fetching a premium of 300% to 400% on the black market. Abandoning the dollar as the currency peg is really unfortunate for a country that just 10 years ago adopted the US dollar to stave off inflation. Prior to adopting the US dollar, in November 2008, monthly inflation was 80 billion percent and a $100 trillion note barely paid for a bus ticket. Zimbabwe’s President Robert Mugabe was printing money so quickly that the paper supplier stopped delivering.
And now, inflation is back again. Zimbabwe announced that inflation had once again spiked to 57% in January 2019. Beyond the fact that this is a real embarrassment for Zimbabwe’s President Emmerson Mnangagwa, who ousted Mr. Mugabe in a coup in November 2017, inflation has sent its citizens into panic mode with country expected to run out of bread flour within eight days.
Future Wealth’s View
We have seen this movie before in Venezuela and in Zimbabwe as well. The ending is not pretty. Here is how the movie plays out -The country goes into a downward spiral with growing political discontent fueled by skyrocketing hyperinflation, power cuts and shortages of food and medicine. Millions begin to leave the country. A new leader is elected. The incumbent contests that the election is rigged. The new leader bars other candidates from running and begins his own dynasty of failed policies. Ultimately, US supports one of the candidates and begins throw dollars at the problem for a few years before the next US President abandons the support and tosses the country back into disaster.
Why is all this important for investors? Emerging markets and even developed markets investors have to contend with fact that large nations like Zimbabwe and Venezuela, while dealing with their own problems, also create problems for the nations around them. Germany, that took in millions of asylum refugees from Syria, Iraq and Afghanistan, caused Angela Merkel, one of the great leaders of our time, to step aside. And the refugees keep coming with no end in sight.
And therein lies the hidden risk of investing – Political risk. While most focus on company specific risk, product risk, currency risk etc., political risk can never be underestimated. Just try, for a moment, to come to terms with the fact that not $1, not $1 million, not $1 billion but $1 trillion = loaf of bread.