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[Updated] Deflation, Low growth and subdued capital flows: Zimbabwe`s toxic cocktail for 2016


Zimbabwe`s current structural constraints, will likely curtail economic growth, and private sector investment in 2016. The country`s growth outlook for this year remains negative, barring a miraculous intervention in policy shifts to spur economic activity. Without the prioritization of economic growth ahead of the political agenda, this pessimistic view of Zimbabwe`s economy could even get worse and spill over into 2017. The Ministry of Finance and the World Bank have both come up with overly optimistic growth forecasts for this year at 2.7% and 2.8% respectively. But as we have come to expect, these forecasts will be trimmed down as the year progresses. Here are some of the salient factors to look out for in the coming year.

Inflation Outlook

Zimbabwe`s inflation outlook is likely going to remain negative for much of the year – deflationary conditions. The South African Rand`s weakening, political uncertainty in the country, a growing fiscal deficit and sluggish economic growth heading into 2016 are all set to contribute to the inflation rate`s continued retreat. Zimbabwe has had negative inflation since October 2014 as slowing aggregate demand in the economy against the background of a strengthening dollar against the South African rand has led to Zimbabwe heading towards fully-fledged deflation. South Africa is Zimbabwe`s main trading partner. With at least two rate hikes by the US Fed anticipated this year, the US dollar – the currency of choice in international trade – will keep getting firmer in 2016. These as well as other international developments that Zimbabwe has no control over such as further weakening commodity prices, particularly brent crude, will see the inflation rate remaining in negative territory this year.

Suppressed local demand will persist in the coming year on the back of limited, household, corporate and government incomes. High unemployment and company closures have had strong adverse knock-on effects for the economy, and this too means the inflation outlook will be negative. A little respite might present itself in the form of higher maize and wheat prices, as the drought predicted this year will likely cause food prices to edge up – Zimbabwe is now pretty much a net importer of its food. Coupled with tariff hikes for utilities like Zesa, potentially, there is some upside risk to inflation this year, albeit minimal.

The Zimbabwe Stock Exchange

By and large, the stock exchange reflects sentiment on the overall economy, and the market`s performance will just be a reflection of the state of the economy in 2016. Large bellwether companies listed on the stock exchange have been struggling and the ZSE will continue its terminal plunge. Latest financials of corporates like Econet and Delta lend weight to this forecast as their topline has increasingly been coming under pressure. Delta recently issued a trading update showing a 5 percent decline in its Q3 to December revenues. They don`t come as big as Delta on the Zimbabwe Stock Exchange, and when Delta sneezes, you best believe everyone else in the market will catch a cold.

However, if investors are merely focused on the short term, they will forever be in panic mode as investing in a market like Zimbabwe is certainly not for the fainthearted. The current economic and political turbulence will pass, although there is no set time for this. But for the futuristic investor, there is value in this market, long term. So it is a waiting game that involves a great deal of patience, which will no doubt be rewarded. However, for those investors with shorter investment horizons, private equity might very well be a foray worth embarking on this year.

Foreign Capital Flows

Capital by its very nature is very fluid and follows the path of least resistance. That is a truth that is apparently not self-evident to policy makers in government. By October last year, the Zimbabwe Investment Authority had approved only $3 billion worth of investments up from the miserly $715 worth of approved projects in 2014. This however still pales in comparison with the jaw-dropping foreign capital flows that Zimbabwe`s regional peers like Zambia and Mozambique have been enjoying over the years.
2016 will likely see more of the same, as capital flows will remain depressed. Never mind the fact that Zimbabwe is a very capital hungry nation especially considering its economic history, the government still does not look like it has prioritized attracting FDI. The Indigenization law in its current state is going to remain one of the largest impediments. The reality of this may however have more to do with the brashness of approach by the line minister responsible for this policy than the mechanics of the law itself, sadly. Some reports have actually suggested that other investors have actually all but given up on investing in Zimbabwe on account of this policy, and the way it is being pushed. Though activity might pick-up a little, foreign capital flows will mostly remain constrained this year.
Policy Inconsistencies
Zimbabwe`s political and economic landscape has generally been as inconsistent as the waves. Listening to some of the pronouncements that come from government, one actually wonders how many ministerial cabinets there are in the country. Last year for instance, Finance minister Chinamasa announced that there would not be any bonus payments in 2015, a statement that was rubbished by the head of State as quickly as it had been announced. Then more recently, there was the skirmish between Patrick Chinamasa and his namesake, Patrick Zhuwao over amendments to the indigenisation act. For the investor looking at the investing terrain in Zimbabwe, what greets them is the unfettered political uncertainty. It appears there is no method to government`s madness when it comes to political government`s policy pronouncements. In the coming year, it is highly unlikely that this trend will change. This will obviously not help the “Zimbabwe is open for business” message that the government is laboring to communicate.

Sectoral Outlook

Traditionally, the agriculture and mining sectors have been the major economic sectors, contributing close to 19% and about 22% to GDP respectively. However, these sectors are not set to perform positively given the international pricing trends in the markets for commodities. In 2016, the tourism sector will be integral to the economy, and increased tourist arrivals mostly from Europe and the United States can be anticipated. The US dollar and the Euro have strengthened against the Rand, and tourist arrivals. At current exchange rates, A Briton holidaymaking in South Africa can buy a pint of beer for just £1.06, and can get thoroughly wasted with just £20. Just this festive season alone, South Africa recorded a 6.1% and 7.8% jump in tourist arrivals from Europe and North America respectively. It is not utterly inconceivable that as the Rand further depreciates, and increased foreign tourist arrivals continue regionally, some tourists may make a dash to visit local destinations like the Victoria Falls and the Great Zimbabwe. Even in the absence of that, Zimbabwe`s tourism sector has been making notable strides in cementing itself as a vital cog in the country`s economy. What recent developments in the global economy pointedly tell us is the need to create a more diversified economy. With oil prices fastly approaching the once unimaginable $20/barrel mark, countries like Nigeria and Angola are reeling. But Zimbabwe, like other African countries seems to be putting this agenda at the back burner, to its obvious detriment. This brings us to the ‘contentious’ indigenisation issue.

Indigenisation and Economic Empowerment

First things first, there is absolutely nothing wrong with indigenisation. This is a very noble initiative, but simply put, that the government`s current approach of the indigenization policy is myopic and fraught with inconsistencies that will not see the economy benefit much.  indigenization and empowerment must be approached with a forward looking lens, and be seen as being a means for enabling people, particularly the youth to start  and efficiently run future businesses in various economic sectors, with the sufficient skills-set. This runs counter of to the current unsustainable model of simply transferring ownership. Though minister Zhuwawo claims that this law is not impeding foreign investment, which the country is in dire need, hard facts on the ground simply render his argument false. Though the law in its current form may satisfy the emotional and justifiable need for local participation in the economy, it does little however, in the long term to integrate those previously excluded from the mainstream economy. Government has to focus less on what exists currently, but more on what needs to come into existence in the future in the form of other business and enterprises. This is what will accelerate economic transformation and empowerment. But judging from the pronouncements by the current minister Zhuwawo, this does not seem like it will happen this year. Even after the so-called amendments to the law, the legislation needs more simplification ad clarification, and foreigners have been calling for this to happen before they commit funds.

Debt Clearance and Possible Resumption of Funding from IFIs

Late last year, the Zimbabwe`s external debt clearance plan was approved at the Bretton Woods financial institutions` annual meetings in Lima, Peru. This was a welcome development as Zimbabwe`s debt overhang is unsustainable and stands in the way of future growth. Along with this development, a renewed sense of optimism that this re-engagement with foreign creditors will result in fresh loans to spur economic activity. In 2016, we all wait with bated breath to see if this clearance plan will be implemented successfully. What must be noted however, is that in the absence of structural economic reforms to improve the overall business environment and to promote fiscal and economic discipline, no amount of foreign funding can change the country`s economic prospects. This potential capital must be placed in efficient hands and must be directed towards strategic spending on shoring up infrastructure and utilities. In the absence of these and several other economic reforms that are needed, even if fresh financing comes to our shores in 2016, it will be of not much use.


As like other countries in the sub-Saharan region, Zimbabwe will also face certain systemic challenges like power cuts, the effects of the drought and slumping commodity prices. Investors looking to get exposure in Zimbabwe will have to price these factors as well as attach a risk premium on Zimbabwe`s unique challenges. For 2016, in sum, expect lower inflation and even lower growth, a stagflation of sorts.

















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