Investor Protection viz Currency Devaluation
Introduction
Devaluation of a country’s currency is a deliberate downward adjustment of the currency’s value. This may be done through enactment of statutes or introduction of monetary policies. Such a move reduces the cost of a country’s exports and may assist in shrinking trade deficits.[1] This article seeks to unearth the rights and remedies that foreign and domestic investors have in circumstances where the currency of the investee country has been devalued. Uncontrollable events, such as discretionary government actions (economic sovereignty) may make investment unsafe. It follows therefore that investors remain keen to guard against currency devaluation.
Circumstances that lead to currency devaluation
If the supply of a country’s currency exceeds the demand for the currency, the currency declines in value. Further, if a country imports more goods than it exports, there will be pressure on the currency to devalue. However, if the trade deficit is offset by capital inflows into the country for investment purposes, the country can continue to run the trade deficit without being forced to devalue.
Effects of currency devaluation on foreign investors
Currency devaluation may scare off foreign and domestic investors in a number of ways. Firstly, it makes investors less willing to hold Government debt because the currency devaluation effectively reduces the real value of their investment. In other cases, rapid devaluation can trigger capital flight. Further, currency devaluation weakens the price of a country’s exports on one hand, while making foreign products relatively more expensive for domestic consumers on the other hand, thus discouraging imports.
Rights of investors in Zimbabwe
Both domestic and foreign investors have a right not to have their investments nationalised expropriated. This right is provided for in terms of section 17 of the Zimbabwe Investment Development Agency Act (Chapter 14:37) (the “ZIDA Act”). Currency devaluation amounts to indirect expropriation. Indirect expropriation occurs if a measure or series of measures of the Government has an effect equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure.[2] Put simply, indirect expropriation may result from measures that the Government takes to regulate economic activities within its territory, even where such regulation is not directly targeted at an investment. Such measures do not, however, affect legal title to the investment. Section 17 of the ZIDA Act guarantees investors against both direct and indirect expropriation.[3]
Further, investors have a statutory right to fair and equitable treatment of their investments. This right is provided for in terms of section 16 of the ZIDA Act. This means that investors are protected against denial of justice in criminal, civil or administrative proceedings. Investors also enjoy a right of protection against any substantive change to the terms and conditions under any licence, permit or endorsement granted by the Government or the Agency to investors and their direct investments.[4]
Remedies for investors
There are two regimes for the remedies available to investors in the event of currency devaluation. Firstly, statutory remedies and secondly, remedies available in investment treaties and contracts.
a) Statutory remedies
i) Judicial remedies
A domestic or foreign investor who suffers huge losses as a result of currency devaluation has a constitutional remedy to enforce its right to property and can approach the Constitutional Court in terms of section 85 of the Constitution.
Investors may invoke arbitration proceedings using the regime that is provided for in terms of section 38 of the ZIDA Act as a dispute resolution mechanism. The Act provides for both domestic and international arbitration. In most instances, international arbitration is preferable as opposed to local arbitration in the host State. For instance, an investment dispute may be referred to the International Centre for Settlement of Investment Disputes (ICSID) which was established in 1966 by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“the ICSID Convention”).
Since June 1994, Zimbabwe has been a party to the ICSID Convention, which was implemented through the Arbitration (International Investment Disputes) Act No. 16 of 1995 (Chapter 7:03). This Act provides that the High Court must register an award rendered pursuant to the ICSID Convention on the application of any person seeking the recognition and enforcement of the award. The effect of such registration is that the registered award has the same status and effect as a final judgment of the High Court.
ii) National Project Status of an investment
The host State may accord a project of a foreign investor with “National Project Status”. National Project Status is often applied to projects which have a large capital cost, with a large portion of this cost being equipment and services not available within the host State. In Zimbabwe, National Project Status conferred on Prospect Resources a 5-year duty-free window to import eligible equipment in terms of clauses 140 and 141 of the Customs and Excise (General) Regulations.[5] A clear case in point is the Harava Solar Venture, which was given the National Projects Status.[6] Granting National Project Status to an investment may act as a hedge or remedy against currency devaluation.
iii) Special Economic Zones
Special Economic Zones (SEZ) are declared as such in terms of section 31 of the ZIDA Act. They represent designated geographical areas within an economy where business activity is subject to different rules from those prevailing in the rest of the economy. By investing in SEZs, an investor may be exempted from operations of a currency devaluation either by statute or monetary policy.
b) Investment treaties and contractual remedies
i) Treaties
As a safety-net for overseas investment of the domestic companies, domestic Governments enter into bilateral agreements with foreign Governments. These bilateral agreements are called Bilateral Investment Treaties (BITs) or Bilateral Investment Promotion and Protection Agreements (BIPAs).
Zimbabwe signed bilateral investment treaties (BITs) with some 36 countries, some of which have entered into force. These are China (1 March 1998), Denmark (2 February 1999), Germany (14 April 2000), the Netherlands (1 May 1999), Serbia (22 July 1997), Switzerland (9 February 2001) Russian Federation (10 September 2014), South Africa (15 January 2010), Kuwait (22 November 2008) and Iran, Islamic (26 January 2015).[7]
An example of the protection accorded by a BIPA is the one between Zimbabwe and Germany.[8] Article 4 thereof provides that:
“Investments by nationals or companies of either Contracting Party shall not be expropriated, nationalised or subjected to any, other measure the effect of which would be tantamount to expropriation or nationalisation in the territory of the other Contracting Party except for a public purpose and against prompt, adequate. and effective compensation”
This right is enforceable through arbitration as provided for in Article 10 of the BIPA.
In the case of Bernhard von Pezold and Others v Zimbabwe ICSID Case No. ARB/10/15, the Tribunal ordered Zimbabwe to return three large estates it had seized in 2005 from the Claimants without compensation, including forestry and agricultural businesses. It was alleged that Zimbabwe had breached its treaty obligations with Switzerland and Germany by failing to provide fair and equitable treatment and full protection and security. The Tribunal found that the seizure, of the estates, constituted a breach of the expropriation, fair and equitable treatment (FET), and several other provisions in Zimbabwean BITs with Switzerland and Germany. Restitution is rarely used as a remedy in international investment arbitration, but the tribunal agreed it was appropriate and feasible in the circumstances.
Along with returning title to the farms, the ICSID tribunal called upon Zimbabwe to pay the claimants, Bernhard von Pezold and his family, US$65 million in compensation to account for lost value.
In a parallel expropriation case (Border Timbers Limited, Timber Products International (Private) Limited, and Hangani Developments Co (Private) Limited v Zimbabwe ICSID Case No. ARB/10/25), the same tribunal ruled in favour of Border Timbers, a company majority-owned by the von Pezold family. [9]
ii) Stabilisation clauses
These are clauses that assist investors to mitigate or manage the risks associated with their projects. Under these clauses, investors are not automatically exempted from the application of new laws. Rather, these clauses provide that the investors may be granted an exemption. For instance, an investor may be exempted from the operation of laws like section 44C of the Reserve Bank Act [Chapter 22:15] as inserted by the Presidential Powers (Temporary Measures) (Amendment of Reserve Bank of Zimbabwe Act and Issue of Real Time Gross Settlement Electronic Dollars (RTGS Dollars)) Regulations, Statutory 33 of 2019 and the Finance Act No. 2 of 2019. Thus, in the event of currency devaluation, recourse may be found in the stabilisation clause.
iii) Forward contracts
Investors may conclude forward contracts prior to the establishment of their investments. A forward contract is an agreement between two parties to buy or sell a currency at a pre-set exchange rate and a predetermined future date. This form of contract is used as a hedging mechanism by the investor since it enables an investor to lock in a specific currency’s exchange rate. Although forward contracts provide a rate lock, thus protecting investors from adverse moves in an exchange rate, that protection comes at a cost since the contracts do not allow investors to benefit from a favourable exchange rate move.
iv) Option Contracts
These contracts provide the investor with the right, but not obligation, to buy or sell currency at a specific rate (called a strike price) on or before a specific date (called the expiration date). Unlike forward contracts, options do not force the investor to engage in the transaction at the contract’s expiration date. However, there is a cost for that flexibility in the form of an upfront fee called a premium.
Conclusion
In exercising its economic sovereignty, a country may devalue its currency through legislation or monetary policies. This poses a risk to investors and affects Foreign Direct Investment (FDI). To curb and mitigate such currency risks, there are statutory and contractual remedies (including international investment treaties) that are available for investors.
