As Mugabe's economy crumbles, Zimbabwe's stocks soar

It's no secret that Zimbabwe's economy is crumbling, despite what the country's ambassador might tell you. Zimbabwe's GDP has declined for the seventh straight year and is now half of what it was in 2000. London's Daily Telegraph reports this morning that inflation in Zimbabwe, the world's worst, hit 7,635 percent in July. These are official numbers from the country's Central Statistical Office, so actual figures are undoubtedly much higher. But that's nothing. The IMF is now predicting that the rate could reach 100,000 percent by year's end. Meanwhile, Christopher Dell, the outgoing U.S. ambassador to Zimbabwe, puts the figure somewhere around 1.5 million percent by the end of 2007, "if not before." Hence the empty grocery store shelves that followed President Robert Mugabe's price-slashing last month, which made buying meat in a city like Mutare something akin to buying smack in Singapore.

Interestingly, the economic meltdown has sent Zimbabwe's stocks skyward. In fact, Zimbabwe has the world's best-performing market. The Zimbabwe Industrials Index is up 595 percent since the beginning of 2007 and is up 12,000 percent in the last 12 months (check out the chart at right).

So Mugabe must have secretly created an economic miracle, right? Hardly, though keep an eye out for him to spin it that way. No, the truth is that in the face of economic crisis, average Zimbabweans have nowhere to turn but the market. Australia-based stock-watcher John Paul Koning explains it like this:

Keep Zimbabwean dollars in your pocket, and they’ve already lost a chunk of their value by the next day. Putting money in the bank, where rates are pithy, is not much better. Investing in government bonds is the equivalent of financial suicide. Converting wealth into foreign currency is difficult; hard currency is scarce, and strict rules limit exchangeability."

So the only alternative to these less-than-attractive options is to invest in the market. The flood of cash has Zimbabwe's market growing three times faster than consumer prices. Can the "boom" last? It's doubtful. Eventually, economic catastrophe on the scale of what is happening in Zimbabwe catches up with the rest of the economy, too.

(Hat tip: Robert Covile)