Gulf Times
Sunday, July 5, 2020 11
Old Mutual’s share price is focus in Zimbabwe’s currency war
Bloomberg
Johannesburg
T
he share price of one of Africa’s
oldest insurers is taking centre
stage in Zimbabwe’s battle to
bring order to its chaotic foreign-ex-
change system.
In the latest in a series of attempts to
stabilise its currency, the government
wants to eradicate the Old Mutual Im-
plied Rate. The gauge, used by domes-
tic companies to determine the future
cost of goods and services, calculates a
potential forward rate for the Zimba-
bwe dollar by measuring the difference
between Old Mutual Ltd’s share prices
in Johannesburg, London and Harare.
The indicator is among many “con-
trived phantom exchange rates” in use
that “conspire to defeat fiscal policy,”
the government said in a June 26 edict
that halted trading on the Zimbabwe
Clouds may be parting
for dividend investors
on US stock market
Reuters
New York
U
S companies are cutting their
dividends less than investors
anticipated, providing a poten-
tial boost to a stock market rally that
has clashed with concerns over a recent
surge in coronavirus infections.
S&P 500 companies are likely to see
an aggregate 2% decline in 2020 divi-
dend payments, compared with analyst
projections earlier this year of around
10%, according to S&P Dow Jones.
That’s good news for income-seek-
ing investors at a time when a series of
rapid interest rate cuts by the Federal
Reserve has taken US Treasury yields
to near zero, sending market partici-
pants further afield in search of steady
payouts.
“We saw a devastating amount of
dividend cuts, but the second half of
the year does look a bit better,” S&P
Dow Jones analyst Howard Silverblatt
said.
US financial markets are closed on
Friday for the July 4th holiday. On
Monday, data firm IHS Markit reports
its surveys of US business activity,
while Walgreens Boots Alliance Inc re-
ports quarterly results on Thursday and
US initial jobless claims are also due
out that day.
S&P 500 companies slashed or sus-
pended over $40bn in dividends in the
second quarter, the deepest quarterly
drop since 2009, according to S&P Dow
Jones. The cuts tapered off in the latter
part of the quarter as the US economy
began to rebound, fuelled by Fed stim-
ulus and easing lockdowns across the
nation.
“The hope is that we have turned a
corner, but that is going to depend on
the reopening of the economy,” Silver-
blatt said. The fall in Treasury yields
Bloomberg QuickTake Q&A
How German fintech darling Wirecard fell from grace
By Stefan Nicola and Sarah Syed
Berlin/London
Until June, German payments company
Wirecard AG was a hot growth story
that had shaken off allegations of
accounting fraud. Then came the
admission that about $2bn of company
funds had gone missing. The scandal
led to the resignation and arrest of
the company’s former chief executive
officer Markus Braun, with the company
filing for court protection from
creditors. More executives, banking
officials, auditors and even regulators
may become ensnared as the broad
impact of Wirecard’s potential demise
rattles Germany’s financial industry.
1. What does Wirecard do?
Wirecard is a developer of software
and systems for online payments
and fraud protection used across the
internet, processing a customer’s
card details and ensuring the funds
to cover a purchase are transferred
to the merchant. Its technology
helps handle smartphone payment
transactions, issue credit cards and
detect suspicious activity. Through the
Stock Exchange and stopped most mo-
bile-banking transactions. Read more
on how security forces ordered the clo-
sure of the stock market
The OMIR is one of multiple ex-
change rates Zimbabweans use daily to
navigate the nation’s myriad economic
challenges, including annual inflation
of almost 800%.
A perennial shortage of cash means
anyone who has physical banknotes is
able to negotiate exchange rates with
brokers who pay the funds onto mo-
bile-money platforms. The brokers
can then sell the hard cash at an even
higher rate.
That’s resulted in a widening gap
between the official rate of 63.7 per
US dollar, and the amount at which it
trades on the streets of Harare, which
is now at 100.
“People have relied on making mon-
ey from buying and selling Zimbabwe
dollars, and not from any real produc-
Traders work on the floor of the New York Stock Exchange (file). US firms are cutting their dividends less than investors anticipated,
providing a potential boost to a stock market rally that has clashed with concerns over a recent surge in coronavirus infections.
to historic lows has raised the allure of
stock dividends, which are generally
paid four times a year.
The gap between the S&P 500 divi-
dend yield and the 10-year Treas-
ury yield in March hit a high not seen
since at least the 1970s, according to
Datastream data, which does not go
back further. Currently, the S&P 500’s
dividend is nearly 2%, compared with
the benchmark 10-year US Treasury’s
0.67% yield.
Jake Dollarhide, chief executive of
Longbow Asset Management in Tulsa,
Oklahoma, has been buying shares of
dividend-paying companies that have
aggressive acquisition of at least 18
companies, Wirecard outgrew Munich’s
start-upscene to report 2.1bn euros
($2.4bn) in revenue in 2018. That year,
Wirecard replaced Commerzbank
AG in Germany’s 30-company DAX
stock index, alongside titans such
as Volkswagen AG, Siemens AG, and
Deutsche Bank AG.
2. Why has Wirecard been
controversial?
The company got its start two
decades ago as a provider of financial
services to the gambling and adult
entertainment industries, operating in
murky waters. While it’s now focused
on more mainstream clients, Wirecard’s
business model remains complex and
it has had to defend its reputation
repeatedly.
The shares dropped after claims were
made in 2008 about accounting
irregularities and again in 2016 amid
fraud allegations, both of which
Wirecard rebutted. But the critics
never completely went away, with the
Financial Times publishing a series
of articles in 2019 that accused the
company of improper accounting in
Asia and the Middle East.
tion,” said John Robertson, an inde-
pendent economist based in Harare.
“It’s what has created these distor-
tions.” The OMIR also feeds into the
black-market Zimbabwe dollar rate,
which the nation’s bourse uses, along
with the official rate, to determine the
value of stock prices.
Old Mutual, founded in Cape Town
in 1845, is not involved in determin-
ing the rate. Market participants take
the company’s share prices in South
Africa, the UK and Zimbabwe, convert
each of them into the US dollar, which
should typically trade near par.
The finance minister, however, in
March restricted trading in the shares
of Old Mutual and two other compa-
nies by making the stocks no longer
fungible, or regarded as being equal
in value to those traded on other ex-
changes, in a bid to prevent outflows
caused by the dual listings.
Despite the move, investors poured
also been outperforming in the epi-
demic, including Johnson & Johnson,
Campbell Soup, General Mills, and
retailers Costco Wholesale Corp and
Walmart.
Johnson & Johnson, which is among
companies rushing to develop a coro-
navirus vaccine, raised its dividend
in April. In June, Kroger and Target,
which have been seeing more business
with people staying at home, upped
their dividends.
Over 40% of the United States has
now reversed or placed reopenings on
hold, analysts at Goldman Sachs said in
a recent note.
3. So what actually
happened?
On June 18, auditor Ernst & Young
declined to greenlight Wirecard’s
long-delayed 2019 financial report,
sending its shares into a tailspin. The
crisis deepened a couple of days
later when Wirecard admitted that
1.9bn euros it had reported as assets
probably never existed. Braun, who
into Old Mutual, using it as a proxy to
the US dollar because of its offshore
listings, pushing the Zimbabwe-listed
stock up 90% since the beginning of
May. The shares in Johannesburg and
London were little changed, resulting
in the implied rate doubling to 122 as the
gap between the securities widened.
Zimbabwe’s benchmark industrial
index has risen more than seven-fold
this year, reaching a record on June 24,
and giving the overall bourse a market
value of about 229bn Zimbabwean dol-
lars ($3.6bn).
None of the stocks in the 57-member
index have declined this year as Zim-
babweans seek a haven from runaway
price increases and the weaker curren-
cy, which has slumped to 63.7442 per
US dollar after a 25:1 peg put in place
since March was abandoned.
Authorities now want to eliminate
the OMIR before allowing any trad-
ing to resume on the Zimbabwe Stock
Adding to uncertainty about future
dividends, the Fed last week capped
big-bank dividend payments and
barred share repurchases until at least
the fourth quarter after finding lenders
faced significant capital losses when
tested against an economic slump
caused by the coronavirus pandemic.
Wells Fargo shares have fallen about 1%
since late Monday after the bank warned
it would reduce its dividend as a result of
the Fed’s annual bank stress tests. Still,
only three S&P 500 companies decreased
or suspended their dividend payments
in June, while six companies upped their
dividends, according to S&P Dow Jones.
had led the company for more than a
decade, resigned and Wirecard pulled
its financial results for fiscal 2019 and
the first quarter of 2020. Moody’s
Investors Service cut Wirecard’s credit
ratings six levels then withdrew them
altogether. The company began talks
with lenders and hired investment
bank Houlihan Lokey to come up with
a financing strategy to keep operations
going. Wirecard’s banking arm,
BUSINESS
Exchange, people familiar with the
matter said, asking not to be identi-
fied because the talks are private. The
OMIR was the focus of various meet-
ings on Monday between members of
Zimbabwe’s stockbrokers’ association,
the stock exchange, the Securities and
Exchange Commission and the Treas-
ury, the people said.
Measures being considered include
suspending Old Mutual’s shares from
the Harare-based bourse, having the
securities traded only in dollars, or
moving the listing to the Victoria Falls
Stock Exchange, a market that will
only trade in foreign currency once it
opens later this year, the people said.
Nick Mangwana, the government’s
spokesman, referred queries to the fi-
nance ministry. Several calls and text
messages sent to Finance Minister
Mthuli Ncube and central bank Gover-
nor John Mangudya seeking comment
weren’t answered.
Citi’s Brazil CEO works
in near-empty tower
handling loan surge
Bloomberg
Sao Paulo
Citigroup Inc’s Sao Paulo building
sits nearly empty these days but
for the 17th-floor office of Marcelo
Marangon, who still makes the trek
every day to oversee what’s become
a surge in lending sparked by the
Covid-19 pandemic.
“It’s important for people to see
me here,” Marangon, Citigroup’s
chief executive officer for Brazil,
said in a phone interview, referring
to video conferences he conducts.
He said working in the office helps
him “better communicate globally,
manage the crisis, offer comfort
to employees and understand the
needs of our clients.”
About 98% of Citigroup’s 2,000
employees in Brazil are working
from home as the pandemic races
across the country, which is suffering
the world’s second-highest case
count, behind the US. The economic
fallout has been devastating, with
the bank’s economists predicting a
6.5% contraction this year.
In response, many large Brazilian
companies have been trying
to obtain “liquidity cushions,”
Marangon said. Citigroup’s local loan
book jumped 30% in March from
three months earlier, and grew an
additional 5% in April, he said.
Marangon’s goal as Brazil country
officer is to lead the unit and
Citi’s strategy in Brazil, and
“serve as a trusted partner for
large multinational corporations,
public sector entities, high-net-
worth individuals and investment
managers,” he said in 2017.
Citigroup approved a credit line of
as much as 750mn reais ($140mn)
to help rescue the nation’s power
sector, part of a syndicated loan
being organised by BNDES, the
government development bank,
according to Marangon.
The economic contraction and a
government deficit estimated at 11%
of gross domestic product could
end up being even worse, Marangon
said, considering that the figures
are based on predictions that the
Wirecard Bank, is not included in the
insolvency proceedings as it falls under
the jurisdiction of German financial
markets regulator BaFin, which has
appointed a special representative to
oversee it.
4. This was not a complete
surprise then?
Not really. The reports by the Financial
Times in 2019 raised questions about
accounting practices at Wirecard’s units
in Singapore and other Asian countries.
Wirecard denied claims of irregularities
and called the reports baseless. Still,
the stock slid and investors placed so
many bets that it would tumble further
that BaFin stepped in to temporarily
ban short selling of Wirecard shares – a
step it had never taken for an individual
company.
5. Who are the key players?
Braun turned himself in to Munich
police on June 22 as part of a probe into
the company’s accounting practices.
Earlier that day, Wirecard fired Chief
Operating Officer Jan Marsalek, a
key strategist in the company and
a close ally of Braun, without giving
a reason. Interim CEO James Freis,
“There has not been any official
communication from authorities in
Zimbabwe to Old Mutual,” the Johan-
nesburg-based company said in an
e-mail. “We have asked our local sub-
sidiary to reach out to our stakeholders
in Zimbabwe to try and understand the
circumstances around ZSE closureand
other related matters.”
Discussions over the halting of trade
on the stock exchange are ongoing and
the outcome is still uncertain, SEC
chief executive officer Tafadzawa Chi-
namo said by phone. Zimbabwe Stock
Exchange CEO Justin Bgoni said that
the bourse would wait for guidance
from regulators.
In comments at a briefing after a
cabinet meeting on Tuesday, the fi-
nance minister said that stockbrokers
should assure their clients that their
investments in the stock market are
safe and that the bourse will reopen
once investigations are complete.
economy will be fully reopened by
August, “which today seems highly
improbable.”
With credit risk rising in Brazil,
Citigroup shrank its proprietary-
trading book in the country and
boosted its provisions for corporate-
loan losses there, a move that
contributed to a 3% reduction in
first-quarter earnings from the
nation, Marangon said. But profit
margins expanded as the volume of
credit, derivatives and trading for
clients increased and costs remained
under control, he said.
Citigroup didn’t reduce its workforce
in Brazil and has no plans to do so in
the second half of the year. It’s yet
to decide when it will start bringing
employees back to the office.
Marangon said the bank won’t
rely solely on guidance from local
officials, making its decision on
criteria such as “the flattening
of the curve for new infections,
number of deaths, the availability
of hospital beds, among others.” A
crisis committee meets every day to
discuss those matters, he said.
Citigroup CEO Michael Corbat said
in May that, unlike some of his
competitors, he’s not considering
the option of letting workers stay
at home permanently after the
pandemic ends. The New York-based
bank has about 200,000 employees
around the world.
Citigroup sold its retail division in
Brazil to Itau Unibanco Holding SA
in 2017 for an announced value of
710mn reais.
The private-banking business, which
wasn’t included in the deal, was
restructured to eliminate services
such as local bank accounts and
credit cards. Citigroup also realigned
its strategy for the business to focus
on higher-net-worth clients with
at least $10mn invested with the
company.
The bank hired Itau’s wealth-
management director, Eduardo
Estefan Ventura, to lead its Brazil
private-banking business, starting
last month. The previous head, Cesar
Chicayban, was named to oversee
Citi Private Bank for New York City
and Long Island.
a former financial-crime enforcer at
the US Treasury, was hired to clean
house. He told employees to expect a
major restructuring that could include
selling assets to salvage the company,
according to people familiar with the
situation.
6. How much of a blow is this for
Germany’s establishment?
The whole affair has turned into an
embarrassment for Germany and
threatens to ensnare bullish analysts,
lax auditors and inattentive watchdogs.
Concerns about Wirecard have taken
on increased urgency since it joined
the DAX, an index that’s tracked by
everyone from large pension funds
to private investors. BaFin has come
under fire for its ban on short sales in
response to the FT allegations. The
agency’s President Felix Hufeld has
apologised, saying that BaFin was
among institutions responsible for the
“complete disaster” because it didn’t
do a good enough job supervising.
Economy Minister Peter Altmaier
warned that the revelations risked
tainting the country’s reputation as a
reliable place of business and should be
thoroughly investigated.