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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