By Perry Munzwembiri
Leading Zimbabwean securities trading company Inter-Horizon Securities in its recently released 2015 equity strategy report, say that the Zimbabwean economy is at a crossroads. “The Zimbabwean economy is coming under increasing stress characterised by depressed aggregate demand, high unemployment, pervasive structural issues linked to poor funding and weak commodity prices in Zimbabwe’s key sectors, mining and agriculture, and a persistent current account deficit. It is now imperative that government implements productive and proactive policy reforms to attract the much-needed FDI and restore the country’s external position as a prerequisite for accessing external financing,” the report says.
The Zimbabwean government has of late been extending its begging bowl to just about anyone who will indulge them, with the Chinese being Harare`s preferred investment partner. Last year, President Mugabe went on a state visit to China, with the hopes of securing significant funding. The Zanu PF led government however, has little to show for that and its other efforts to attract FDI into the country. For instance, in the ten months from January to October last year, Zimbabwe received FDI flows of only $146.6mn compared to $311.3mn during the same period in 2013, an amount far below the medium term policy (Monetary policy) target of $1bn for the year.
Compared to its sub-Saharan Africa peers, Zimbabwe has fared poorly in terms of attracting FDI in the recent past, after impressing in the years immediately after dollarisation, albeit coming off a low base. The country`s eastern neighbour Mozambique, recorded FDI flows of $7 billion in 2013, a record for the country according to data supplied by the United Nations Conference on Trade and Development (UNCTAD). Nigel Chanakira chairman of the Zimbabwe Investment Authority, in an interview with Bloomberg Business last year conceded that Zimbabwe`s FDI remains “embarrassingly low” when compared to its neighbouring countries.
Indigenisation, the elephant in the room
“The main deterrent to FDI at the moment is the lack of clarity around indigenisation policies and the inconsistency around implementation. Until we provide clarity and build a consistent track record in implementation we will continue to see subdued FDI inflows into the country,” the report said. Pursuant to this, Inter-Horizon Securities suggest that policy clarity, transparency and key structural reforms must be made in order to enhance the business climate to attract FDI, boost productivity and competitiveness, and build confidence. Overall, they see policy inertia and the lack of a compromise solution to the country`s indigenisation policy as the largest impediments to Zimbabwe`s growth.
Despite recently amending the indigenisation law to include the role of line ministries in approving compliance plans, Mines and Mining Development minister Walter Chidhakwa recently asserted the Zimbabwean government`s hard-line stance towards indigenisation, by announcing that there would be no change in the application of the 51-49% threshold for indigenisation of mines. “We are still studying the system but what’s clear is that we will take a simple approach. The 51-49% threshold is a requirement enacted by Zimbabwean legislators as such it will stick. It`s not negotiable. We can only be flexible on the period that companies will be able on the period that companies will be able to achieve this,” minister Chidhakwa said last month.
However, the financial services boutique firm offering brokerage and advisory services forecasts that, 2015 will see Zimbabwe`s government become compelled to take a more moderate approach to indigenisation and continue to take proactive measures to normalise relations with creditors and the foreign community. “The economy is forecast to grow 3.2% in 2015 according to the Ministry of Finance, although this forecast is fraught with downside risks emanating from depressed commodity prices, stagnant domestic demand, adverse weather conditions and pervading liquidity shortages. In our view, GDP growth in the year will likely be closer to 2.0%. We expect deflation to persist in 2015 on subdued demand, a softening rand and bearish oil prices; corporates that are highly leveraged will be hardest-hit by the pervading deflationary pressures,” the report further mentioned.
Increased pressure on fiscal and external accounts
Zimbabwe has had to contend with a myriad of problems that have led to persistent current account deficits. Chief among these challenges is a burgeoning government wage bill accounting for over 80% of the government’s total expenditure. Last year, Zimbabwe`s employment costs amounted to $2.51 billion. The World Bank recommends that a country`s wage bill should not exceed 25% of its total expenditure. Clearly, the Zimbabwean government missed that memo and crucial investment projects continue to be crowded out.
“Reversing the budget focus from consumptive to developmental has become a key priority for the government and this can only be done by managing the wage bill. The external position remains unsustainable with a large current account deficit, low international reserves and an overvalued real exchange rate. The current account deficit constitutes about 24% of GDP while our SADC peers have current account deficit under 9% of GDP,” noted Inter-Horizon Securities.
“We re-iterate the urgent need for government to take proactive measures to attract FDI to restore the country’s external position as a prerequisite for accessing external financing. Encouragingly the IMF re-opened its Zimbabwean office in July 2014 and the EU proceeded to formally lift sanctions in November 2014 on the Zimbabwean Government, both of which bode well for the restoration of constructive foreign relations,” highlighted the report.
Bearish stock market
The Zimbabwe Stock Exchange was among one of the worst performing exchange in Africa, plunging by close to 20% in 2014. Market capitalisation declined to $4.3 billion from $5.2 billion in 2013, and $876 million in shareholder value was eroded in what was a disastrous year for the bourse. “The general poor performance was driven by below par GDP growth, a continued lack of FDI, downward earning revisions, as well as poor sentiment exacerbated by political events particularly in the last quarter of 2014. There appeared to be little discernible trend between sectors as regards performance reflecting the generally poor economic environment, although retail counters were hardest hit with seven of the top ten losers on the ZSE being exposed to the Zimbabwean consumer,” added the report.
Its tough times for the Southern African country, and the government appears bereft of any strategies to put the brakes on Zimbabwe`s apparent terminal decline. To the sober minded observer, not only have the wheels fallen off, but the axles and transmission too for Zimbabwe`s coach. And 2015 will most likely be another bumpy ride for Zimbabwe.
IH Zimbabwe Equity Strategy 2015
