Zimbabwe’s economy is struggling to shake off negative investor sentiments
RESEACHERS at the Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) have warned that the country could be headed towards an excruciating economic crisis as severe as the 2007/2008 meltdown which, eventually led government to abandon the local currency that had come under serious attack from hyperinflation.
ZEPARU, an economic think-tank, sees the crisis sparking another wave of investor exodus from the Zimbabwe Stock Exchange (ZSE), and stoking further deflation.
In the absence of well-thought out interventions to arrest the impending implosion, deflation could continue to disrupt markets, heightening the liquidity crisis caused, in part, by Zimbabwe’s lack of competitiveness.
Zimbabwe’s economy is struggling to shake off negative investor sentiment as evidenced by the negative business confidence index data (-37,2 during the fourth quarter of last year) and a reduction in capacity utilisation in the manufacturing sector.
Not helping the situation are prospects of a drought in the 2015/16 farming season, which is bad news for a country whose industries feed on output from agriculture.
ZEPARU intimated that the drought will be “one of the severest since 1992”, with far-reaching implications on over three million people who shall be in need of food handouts.
Mining, a key sector that could have easily insulated the country from shocks given the problems facing the agricultural sector, is currently in severe stress owing to slackening global commodity prices, which are undermining exports.
A slowdown in Chinese consumption has, to a large extent, affected commodity prices.
Although gold prices have been rallying of late they fell by eight percent to US$1 104 per ounce last year while platinum prices retreated by 26,08 percent to US$907 per ounce.
Growth in strategic minerals would remain subdued, and in fact, output would be overtaken by that from informal producers (panners) by 2018 who, unfortunately, operate outside the taxation system.
Worse still, it said “we don’t see investors coming to open businesses. This is a sign of economic decline. The ZSE industrial index is falling, reflecting investor concerns about the future prosperity of the economy,” said ZEPARU in its 30-page 19th edition of its Economic Barometer.
The report points to prospects of sustained deflation as more consumers lose jobs and companies close ZEPARU anticipates a marginal rise in inflation later in 2016 that would further dampen consumer spending.
This should be worrisome to the authorities who have battled for years to overcome consecutive months of deflation.
Zimbabwe has been importing deflation from major trading partner, South Africa, after the depreciation of the rand last year.
Zimbabwe is now stuck in deflation after adopting a multi-currency regime in February 2009, anchored on the use of the greenback.
Before ditching the hapless Zimbabwe dollar, hyperinflation had reached 500 billion percent in 2008.
“The ZEPARU composite leading index (CLI), which reflects the direction in which the economy is going, deteriorated between October and November 2015, indicating deteriorating economic conditions,” reads part of the report.
“The overall conclusion from the latest CLI is that Zimbabwe should brace for more difficult economic conditions ahead. While the government’s room for manoeuvre is limited by the fiscal position and the wider global economic context, the CLI reiterates the need to implement important government policies. In the face of declining commodity prices, it is imperative to expedite the implementation of value addition and beneficiation strategies.”
The CLI tracks trends on the ZSE’s industrial index, broad money supply, imports, Pay-As-You-Earn receipts and precious mineral prices.
The current year could be the most frustrating for Zimbabweans, who are just smarting out of the horrors of 2015 when over 30 000 jobs were lost and hundreds of firms closed.
In 2015, the growth that had been projected by the authorities was affected by a harrowing electricity crisis and a depreciating South African rand against the United States dollar that negatively impacted on exports.
After losing over US$1,3 billion in potential mineral exports last year, ZEPARU sees the mining industry continuing in the doldrums.
Slow growth in emerging markets including China would continue to exert pressure on commodities markets where prices were suppressed by low demand.
“This is likely to have implications on Zimbabwe given that the country’s export basket is largely composed of primary products,” said ZEPARU.
Gibson Chigumira, a director at ZEPARU, underscored the importance of the Chinese economy to mineral-rich Zimbabwe, saying the Asian giant has a huge appetite for primary products that sustain the local economy.
“The composition of our exports is mainly tobacco and minerals so we expect the slowdown in China to affect Zimbabwe,” he said.
Chigumira said the slump in royalties and taxes in the past year would have serious implications on government revenues, even going forward.
Last week, the Zimbabwe Revenue Authority (ZIMRA) said instances where companies and individual were failing to pay taxes and arrears were rising.
In its performance update for 2015, ZIMRA said it missed revenue targets by US$220 million.
“The year 2015 started with a debt of US$1,38 billion which, after incorporating recoveries and new debts, the figures rose to US$1,97 billion as at December 31 2015. The rise in this figure reveals the level of distress within the tax-paying community,” said ZIMRA.
To mitigate the situation, Chigumira urged government to rebalance recurrent expenditure and capital expenditure, although this will not be easy for an administration that is financially constrained.
Apart from the plunge in revenue, there are already signs of more trouble ahead.
African Sun Limited (ASL), one of the leading hotel groups in Zimbabwe, made the shock decision to shut down Beitbridge Express Hotel last week, citing depressed business.
ASL said it had to mothball the Beitbridge Express Hotel to stop the bleeding at the hotel group.
“The hotel reported losses amounting to US$217 944, as at 31 December 2015, the net current liability position of the hotel was US$194 607.
“Over the last three years, the board and management have implemented broad strategies and initiatives in pursuit of mitigating the hotel’s financial losses. The financial losses continued despite various initiatives,” said ASL.
A week before, brickmaker, Radar Holdings Limited had pleaded with shareholders to approve a proposal to exit the ZSE.
“The reason for the proposed delisting is that the group continues to under-perform,” said the brickmaker.
“Compounding the group’s under-performance are costs associated with remaining listed on the ZSE that are exuberant. Secondly, trading in the shares of the company has been limited and the absence of sufficient buyers and sellers of the shares has meant that the shares are relatively illiquid. During the 2015 calendar year Radar traded a mere 79 483 shares valued at US$2 302.”
The local bourse was on a roller coaster last year, capping its worst trading period in five years by shedding shares traded to 2,21 billion in 2015 from 3,18 billion in 2014.
The market lost 50 percent of its value to close at US$228,6 million turnover.
The industrial index opened the year at 162,57, but surrendered 47,72, points, or 29,35 percent, to close at 114,85 after a flight of foreign investors, unnerved by fresh moves by government to force foreign firms to surrendered majority shareholding to locals.
“In 2016, activities on the ZSE are expected to continue on the downward trend coupled with low investor confidence, declining economic fortunes worsened by the El Nino effect, which will result in one of the most severe droughts since 1992,” said ZEPARU.
“For the greater part of 2015, the (industrial) index fell below its five-year average for the period 2010 to 2014.
“The mining index followed a similar pattern. During the year it traded below its five-year average and reached its lowest level since trading resumed in the multi-currency period, of 22,33 in November 2015.”
With businesses failing to access long-term credit on the domestic financial market, the stock market could have offered a window of opportunity for them to raise capital cheaply needed for retooling and expansion.
Unfortunately the bloodbath on the ZSE is preventing the stock market from influencing economic activity through liquidity creation.
Strong equities markets are known to assist countries in building less risky conditions for investments, which make them attractive. In addition, listed companies enjoy permanent access to capital raised through equity issues.
But the ZSE, as Radar pointed out last week, was no longer providing these opportunities.
This has frustrated many counters into delisting.
Turning to domestic credit, ZEPARU said credit expanded by 15 percent between May and November last year, the bulk of it to government, which revealed a “crowding out of the private sector”.
Meanwhile, Chigumira added that Zimbabwe, once a net maize exporter, was battling with the worst food deficit in the Southern African Development Community.
Government has since declared this year’s drought a national disaster.
The trouble is however, that traditional food exporters to Zimbabwe, Zambia and South Africa, are facing a similar crisis.
Pretoria has reportedly budgeted over 20 billion rands for food imports this year.
“Zimbabwe has a national maize deficit of around 645 000 metric tonnes. This is the largest national deficit in the region,” ZEPARU warned.
“The government only allocated US$46 million for strategic grain reserve procurement in 2016, which falls far short of the amount needed to address the deficit. As a result, it is now calling for private sector and development partner support to import enough maize to ensure food adequacy before the next harvest.
“This is against the background of very serious concerns about the 2016 harvest.
“ Late rains and a prolonged dryness have engulfed most of the country.”
This year’s problems have been compounded by the same problems that have faced farmers.
Zimbabwe has low maize yields compared with other countries in the region.
In 2013, the World Bank said maize yield per hectare in Zimbabwe was 0,7 tonnes compared to 2,1 tonnes in Malawi.
In South Africa it was 3,7 tonnes per hectare and in Zambia it was 2,5 tonnes per hectare.
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