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Econometer Global Capital

Econometer Global Capital

Wednesday, 13 November 2019 09:34

Too early to talk about growth, Mr. Minister

As it becomes increasingly clear that Zimbabwe’s economy is heading south and prospects of meeting growth targets set out in the Transitional Stabilization Programme appear dim, Finance minister Mthuli Ncube brew a shocker ahead of the 2020 National Budget that the fiscal policy document will focus on productivity, growth and job creation.

Wait a minute. How he would do that would be the most logical question that begs an answer. Let us take you aback. Barely a month after being appointed head of treasury, Ncube promised to wave the magic wand and turn around the economy. That was a strong statement which not only spoke about his predecessor but was also loaded with self-praise.

Now, barely a year after President Emmerson Mnangagwa appointed his first cabinet after the 2018 elections, Zimbabwe appears to be on auto-pilot. Key economic indicators such as inflation, unemployment and exports are not projecting a rosy picture. Gold output has been plummeting due to poor policies that fuel side marketing and tourist arrivals have also declined.

Zim Gold Output in Quarters

Data derived from Chamber of Mines

Zimbabwe has become a case study for economics students as well as international financial institutions. Essentially, it has become an experiment for Ncube who de-dollarized 10 years after dollarisation despite the absence of key fundamentals to support the introduction of a domestic currency. Studies by monetary experts such as Steven Hanke have shown this.

The Finance minister is probably seeing Zimbabwe’s growth through rose-coated lenses. He has rebased the economy in the past, blacked out the publication of inflation figures and has trumpeted his exploits in reducing the budget deficit. In fact he sees deficit closing the year at 4 percent of the budget size. Time will tell.

Early this year, Ncube bragged that Zimbabwe had registered a budget surplus and international creditors were pleased with this achievement. In reality though, what is a budget surplus when hospitals have no basic drugs such as painkillers and when the value of the domestic currency loses up to 80 percent within the first 60 days of its reintroduction.

Zimbabwe is suffering from a confidence deficiency and government is not doing much to address this. A week before the announcement of the budget, President Mnangagwa increased the number of government ministers when he appointed deputy ministers of Finance and Foreign Affairs. A new ministry was also formed.

For a government that asked its citizenry to tighten belts and endure austerity measures, this flies in the face of authorities who preached fiscal consolidation.

Secondly the false start to the new bank notes and coins is also dampening confidence in the financial services sector. Banks only started dispensing the units on Tuesday despite an earlier announcement that this would be done a day earlier. To make matters worse, the $2 bond coins were printed in 2018, raising questions on why government took this long to introduce them into the market.

Expectations

That the domestic economy is facing serious headwinds stemming from a devastating drought, rising inflation and erratic fuel and power supplies, is now an open secret.

For an economy with no budgetary support and a high rate of tax incompliance, the Budget should answer how the Finance minister will strike a balance between the needs of hungry servicemen and those of capital projects. In our view the Health and Education ministries should be well funded for Zimbabwe to achieve current and future development goals.

Zimbabwe wants to dream again and policies that support entrepreneurship should be in place among other measures.

Ncube’s ambitious plan to create jobs in an environment where there is rising inflation and low business activity due to factors such as lack of capitalization, could be a fait accompli.

zim inflation Oct 2019

In our view, we contend that the Finance minister should shift focus from agriculture to mining particularly gold, coal and chrome. Legacy issues around agriculture make it difficult for the sector to attract significant funding to mechanize in line with modern trends.

Normalising relations with IFIs and establishing partnerships with states that play a greater role in advancing Zimbabwe’s economic interests should also be top on the agenda. As it stands, it’s still a long way to go before Zimbabwe can start talking of job creation. Let’s go back to the basics first. It’s the politics that need to be addressed first before the economy can tick.

Data derived from: Chamber of Mines Zimbabwe

 

Friday, 08 November 2019 12:12

Will agriculture anchor Zim growth?

Finance minister Mthuli Ncube will next Thursday announce the 2020 Budget Statement at a time the domestic economy is facing serious headwinds stemming from a devastating drought, rising inflation and erratic fuel and power supplies.

Ncube said the budget theme will be on productivity, growth and job creation. His central assumption is that, Zimbabwe which experienced one of its worst droughts in living memory as well as a Cyclone that led to loss of lives in the eastern parts of the country will have normal to above normal rainfall in the summer cropping season. Official figures show that the economy is this year expected to contract by up to 6.5 percent

The Finance minister said the growth will be anchored on agriculture following the abandonment of the Command Agriculture model for the private sector led Smart Agriculture scheme. As we have pointed out in the past, Command Agriculture has become an albatross on treasury and to make matters worse, the programme was clouded by opaqueness, a situation that was criticized both locally and abroad considering that it was funded through public finances.

Under the Smart Agriculture programme, government will not have 100 percent exposure as in the past but will only serve as guarantor for farmers who according to Ncube will receive coupons in which they will use to redeem inputs from supplies.

While this is a step in the right direction, our concern is on the level of non-performing loans that will result from this programme. We envisage a situation where NPLs will hover around 20 percent and this not desirable. Already government has created Zimbabwe Asset Management Corporation (ZAMCO), a special purpose vehicle to clean NPLs on bank’s balance sheets.

ZAMCO succeeded in cleaning toxic loans from banks but recent monetary reforms have affected the entity efforts in recovering funds from debtors and as such its books may not be appealing.

For a Zanu PF that has embarked on populist exercises such as writing off debt for local authorities and the power utility, it would be interesting to find out if Ncube will have the spine to stick to his guns when he faces political pressure.

Smart agriculture will finance mainly the staple maize in which Zimbabwe has no comparative advantage when compared to her peers like South Africa and Zambia which produce higher yields per hectare. So from this, one can say Mthuli’s growth trajectory is premised on import oriented industrialization as opposed to export oriented industrialization. In light of this we expect more rebates in this budget.

In our view, we contend that the Finance minister should shift focus from agriculture to mining particularly gold, coal and chrome. Legacy issues around agriculture make it difficult for the sector to attract significant funding to mechanize in line with modern trends.

More so production of the maize crop is now mainly for domestic consumption instead of exports. For a government that has been frantically making efforts to contain public expending with the view to restore macroeconomic stability, building foreign currency should be a priority in defending the domestic currency which was effectively re-introduced in June this year. A budget that will not stimulate exports will be nothing but a populist project to calm flaring political temperatures. The question is ‘how long can this last?’

Friday, 08 November 2019 06:49

Breaking:Old Mutual Zim appoints new CEO

Zimbabwe Stock Exchange heavyweight Old Mutual Zimbabwe has appointed Sam Matsekete as the group CEO-designate as the group embarks on its restructuring exercise against the backdrop of a floundering economy.

The group announced on Thursday that Matsekete, who is currently First Capital Bank (formerly Barclays Bank Zimbabwe) managing director will succeed Jonas Mushosho with effect from January 2020.

Mushosho, who replaced Luke Ngwerume in September, 2012, had been with Old Mutual for 28 years.

Old Mutual’s Rest of Africa managing director Clement Chinaka said he is confident Sam would bring the requisite leadership experience and career credentials to lead the business during this challenging time.

Sam is a chartered accountant and associate of the Institute of Bankers, Zimbabwe.

zim inflation Oct 2019

 

The Monetary Policy Committee, which was appointed a few months back, held its first press briefing where plans to attain macroeconomic stability were announced. Reserve Bank of Zimbabwe governor John Mangudya who chairs this meeting announced that the central bank would within the next fortnight inject new domestic bank notes and coins to ease the cash system.

His boss, Finance minister Mthuli Ncube later in the day said authorities would pump in notes into an economy where notes are currently being sold for a premium as high as 60%. The setting of the MPC is one of the few steps in ensuring the independence and integrity of the apex bank.

In the past and to some extent now, there has been a thin line between the executive and the central bank and this has dampened confidence in a key institution whose role is to ensure stability of the financial services sector. During the hyperinflationary era for instance, the central bank went on overdrive printing new notes before the market rejected the increasingly worthless units.

Interesting revelations where also made by the committee which should serve to improve operations of the central bank amid growing resentment.

The MPC noted that the increase in reserve money by 80% during the first 8 months of 2019, when compared to the December 2018 position, caused instability in the exchange rate and resulted in the increase of domestic prices of goods and services.

The independent committee said measures to ensure money supply growth is contained within levels that will ensure exchange rate stability should be adopted. This would be an acid test given wage demands by the civil servants demanding salaries to be indexed against the United States dollar. Gold producers, who have been selling the commodity to side markers are also demanding a fair price for the metal. Should treasury give in to some of these demands we see money supply growth rising rapidly, a development which is inflationary.

Official figures indicate that there was a decrease in reserve money by 10 percentage points in September 2019 from the August position and authorities have agreed to continue on this trend to ensure that reserve money growth is contained to 50% for the full year 2019. Again with no budgetary support to fund critical government projects such as agriculture facilities for the vulnerable, the central bank could again be forced to turn on the printing press in no time.

The committee also noted that the unequal distribution of money supply, which is heavily skewed toward few corporates is the main challenge within the economy as opposed to the general level of money supply. This is on the basis that the majority are struggling to afford basic commodities and banks are also constrained by their liquidity levels, while the productive sectors are short of liquidity.

As we have pointed out in our previous analyses, Zimbabwe road to recovery will not be an easy one unless government fully supports productive sectors. Distribution of money supply to few companies has created arbitrage opportunities that have resulted in instability. So going forward, it is our view that the autonomy of the central bank under the guidance of the MPC may help in containing money supply.

zim trade balance Q2 2019 2

The Reserve Bank of Zimbabwe this week announced that exports for the quarter ending June dipped 8.3 percent to US$860 million while imports headed north. According to latest figures released by the central bank, the country’s trade balance widened from a deficit of US$165.9 million registered in Q1 to a deficit of US$450.7 million in the second quarter.

According to the central bank, the country’s import bill was mainly composed of diesel, unleaded petrol, crude soya bean oil, medicines, Jet A1, electricity, road tractors among others. Notably diesel and petrol imports constituted nearly 30.4 percent against a backdrop of crippling power cuts that have forced both domestic and industrial consumers to rely on alternative sources of energy.

 For a net importer like Zimbabwe, this is not a good picture.  Government has already admitted that the economy will contract by up to 6.5 percent but we are of the view that it could shrink by 8.3 percent. The economy is now in hyperinflation and signs of macroeconomic stability appear remote. In fact government is now resorting to command economy pronouncements to regulate the markets and this has yielded desired results.

Retailers are now using forward pricing strategy where they look at replacement costs instead of current costs to maintain their stock levels and continue to trade, for now.

Gold production has been spiralling downwards as artisanal miners ditch state-owned Fidelity Refineries and Printers for side marketers offering hard currency. The central bank reduced forex retention for gold producers to 55 percent, a measure that gave birth to a flourishing parallel market.

The country’s gold deliveries dropped by 19 percent to 2.80 tonnes during the month of September from 3.47 tonnes during the same period last year, dashing any hope of meeting the annual target of 40 tonnes. As at September gold deliveries to Fidelity stood at 20.6 tonnes and the onset of the rainy season will slow down mining activity particularly for small scale producers who use rudimentary and risky methods to extract the precious metal.

Apart from the unfavourable pricing model, crippling power cuts, inefficient mining and processing technologies, smuggling and fuel shortages have affected bullion output.

The yellow metal last year overtook tobacco as the country’s single largest foreign exchange earner contributing 38 percent of forex earnings and more than 60 percent of the mining sector’s receipts.

The manufacturing sector on the other hand is operating below 50 percent capacity, implying that Zimbabwe is now relying on imports to meet domestic consumption.

Tuesday, 29 October 2019 07:54

Botswana-Zim relations

Mokgweetsi Masisi was declared president of Botswana last Friday, retaining his position and the ruling Botswana Democratic Party’s stronghold despite a strong opposition challenge.

The country’s ruling surpassed the 29-seat threshold needed in the national assembly to secure the presidency.

Masisi who crossed swords with an opposition party supported by his predecessor has a solid record and is popular with business and farmers.

The BDP has ruled Botswana since independence from Britain in 1966 and the country has enjoyed stability and prosperity based on its diamond resources.

Wednesday’s election posed its first genuine challenge in its five decades in power after former president and political heavyweight Ian Khama fell out with Masisi, his hand-picked successor, and backed the opposition Umbrella for Democratic Change (UDC).

However, UDC leader Duma Boko failed to put an end to BDP rule. By Friday morning, BDP had secured 38 of the national assembly’s 57 seats.

The UDC, secured 15 seats while the Botswana Patriotic Front won three and the Alliance for Progressive only one, according to the state broadcaster. In the 2014 election, the BDP had 37 seats.

The Southern African Development Community observers led by Zimbabwe’s Foreign Affairs minister Sibusiso Moyo declared the election free and fair on Friday.

BDP’s victory came in as sweet music to President Emmerson Mnangagwa’s administration which has lately been enjoying a cordial relationship with Gaborone. Masisi’s predecessor, Khama had a hostile foreign policy on Harare during his tenure and tension rose between the two countries borders whenever livestock from Zimbabwe strayed to the neighbouring country.

Botswana was also seen as sympathetic to Zimbabwe’s main opposition party that suffered years of repression under former president Robert Mugabe.

The story of Botswana’s economic growth can be used as a prototype on how good governance can manage the resources of a country. Endowed with vast diamonds resources the Botswana government entered into a joint venture with South Africa’s De Beers to form Debswane—an entity that has transformed the lives of many.

Starting from a very low base, Botswana has had amongst the most impressive growth figures in the world and has pursued policies that reflect aspects of the developmental state model.

This party has pursued capitalist policies, even during its early days in power when most of its African peers followed the socialist model.

Both the growth and developmental record of independent Botswana has been impressive and Botswana (along with Malaysia) has, according to the UNDP, made the “most” progress in human development since 1960.

From being one of the poorest countries in the world at independence, Botswana has enjoyed rapid economic growth and is now classified by the World Bank as an Upper Middle Income country, with a per capita GDP of more than $6000.

Zimbabwe can only take a leaf from such a story.

diamonds production world

As Zimbabwe slides into hyperinflation, there has been mistrust between government and business. Forget the much-hyped Tripartite Negotiating Forum which was revived early this year—prices in Zimbabwe are now rising weekly with some daily.

The manufacturing sector which is operating sub-optimally due to antiquated equipment, high production costs and erratic power supplies is in limbo and cannot match regional peers.

 During a mock survey carried by out by Econometer Global Capital we observed that most businesses are now on survival mode and have adopted the cost recovery pricing model in this inflationary environment. For instance a 900W generator for home use which would cost USD100 was last priced at ZW$2500 at a time the parallel market exchange rate was hovering around 1:19. That has been the case in supermarkets where prices indexed in Zimbabwe dollars are now twice expensive as those in neighbouring South Africa.

This points to an unstable and rising cost structure, frequent repricing of goods and a subsequent decline in the quality of earnings for business.

President Emmerson Mnangagwa recently met local retailers over price hikes but the blame-game prevailed. Manufacturers blamed retailers and vice versa.

 All this points to structural deficiencies in the economy.  Local industry cannot export due to some of the factors alluded above and hence their pricing model has been designed to ensure that they do not trade out of business. Yesteryear memories of consumers becoming bargain hunters, a development that resulted in retailers failing to restock remain fresh. However unlike in the past Zimbabwe’s inflation is not being driven by excessive money supply (notes in circulation) but an unstable currency, government’s fiscal indiscipline and a general lack of confidence.

While doing so, inflation has been heading northwards, tracking foreign exchange movements and price of fuel.

Resultantly buying power has diminished. With low exports, high production costs, this will be a vicious cycle for the economy.

Officially, month on month inflation has slowed down but our analysis shows otherwise. A kilogram of commercial grade beef which would cost USD5 is costing ZWL$120 for the same unit.

In the past the price of a dozen of eggs would track US dollar movements but now low buying power has made this benchmark inaccurate. So in the final analysis, we can conclude that while business is on survival mode, it has also taken two extra steps to ensure that it continues to restock and maintain the going concern status. Authorities and business will not have a convergence point unless the macroeconomic environment is stabilised. Doing so requires Zimbabwe to go beyond the Open for Business mantra and overhaul the business climate for both domestic and foreign investors.

Wednesday, 23 October 2019 06:40

What next after Anti-Sanctions march?

President Emmerson Mnangagwa’s administration this week declared Friday, October 25, a public holiday as the southern African nation makes a case for removal of sanctions imposed by the United States in particular.

The United States through Zidera, imposed sanctions on Zimbabwe as well as preconditions from the removal of these restrictive measures. Zimbabwe has over the last two decades adopted alternative means to counterbalance the impact of the sanctions. Lines of credit have dried up and the country cannot access concessionary funding.

Now Zimbabwe faces daunting but not insurmountable economic challenges that have to be addressed by the government in cooperation with other local and foreign stakeholders. Unfortunately the growing berth between Mnangagwa’s government and other non-state actors such as the country’s main opposition party and civic organisations will make this journey a bumpy one.

Zimbabwe’s case has been under the spotlight for many years many international actors such as Britain want to bring closure to more than 17 years of political crisis in Zimbabwe.

Following the ouster of long-time leader Robert Mugabe, Mnangagwa had the goodwill to map out a clear foreign policy on Zimbabwe. But his message has been ambiguous. On one hand he is supporting a Palestine state and most recently he announced his plans to reengage Israel. Zimbabwe’s traditional allies like China and Russia will not be amused by Mnangagwa’s ambiguity. Apart from the Israeli-Palestine conflict, Zimbabwe’s international relations with Japan (which is not an ally of China) also raise questions on which path the southern African nation wants to pursue in an international system of multi-polarity.

Interestingly, the EU, which also wanted to reengage with Zimbabwe once offered to restore cordial diplomatic relations with Harare after the 2013 elections. The invitation by the EU to President Robert Mugabe to attend the fourth EU–Africa summit in Brussels signalled both a response to African pressure and the desire to normalize relations.

 Mugabe, who felt that the west had reneged on its promise to assist Zimbabwe implement the emotive land reform programme however, decided to boycott the summit. Despite Mugabe’s snub the EU also agreed to suspend most sanctions on Zimbabwe except in the defence sphere and on President Mugabe and his wife Grace.

With memories of hyperinflation still fresh as the economy turns topsy-turvy debate continues in and between Europe and the United States over how quickly bilateral relations should be fully normalized. Harare has hired consultancy firms to normalise relations with the US in particularly but the world’s largest economy wants more-no reforms, no restoration of good diplomatic relations.

For a country that has lost millions to corruption and bad governance, the Zimbabwean government can no longer blame the West for the country’s continued economic underperformance. Scholars that discredit the sanctions narrative as the bane for the country’s development argue that the economy stabilized under the Government of National Unity (GNU) that was in office from 2009 to 2013.

As it becomes highly probable that economic collapse is not inevitable, Zimbabwe has few options to come out of the woods—all hinged on political will. Authorities in Harare should adopt policies to build international business confidence, support technocratic and entrepreneurial expertise at home as well as reaching out to a sizable and skilled diaspora population, encourage good governance and reduce inequality.

Political and economic reforms are the way to go, instead of grandstanding. Zimbabwe is a periphery nation that cannot take on a superpower like the United States. Give diplomacy a chance.

zim gdp growth

Zim GDP growth

Economic growth has often raised living standards around the world. Countries like China, whom in 1980 where almost the size of Zimbabwe’s economy have grown to become economic powerhouses over the years.

However, modern economies have lost sight of the fact that the standard metric of economic growth, gross domestic product (GDP), merely measures the size of a nation's economy and doesn't reflect a nation's welfare. Persuading policy-makers and politicians of GDP’s limitations is no easy feat.

This week Finance Minister Mthuli Ncube released a dashboard view on the country’s Transitional Stabilisation Programme (TSP) and in this document he painted a bright future on the country’s economic prospects. The Finance minister said with the inception of the TSP, fiscal policy now targets a budget deficit in line SADC threshold of below 5% of GDP.

As a result, Government has been rigorously implementing fiscal consolidation measures directed at containing expenditures while strengthening revenue collections (e.g. introduction of 2% Intermediated Mobile Transfer Tax). On that front, Treasury appeared to have ticked the boxes.

The floating of the domestic currency which was at par with the United States dollar was another big step that government took in February. It is only in June that government lost the plot when it hurriedly abandoned the multicurrency system ostensibly to stimulate exports. In reality the move was meant to calm a restless civil service that was demanding payment of salaries in US dollars. Those demands still stand.

Before the reforms in February the monetary system lacked flexible utilisation of a full set of monetary instruments to influence economic activity. In addition, the adoption of a hard and strong currency such as the US dollar compromised competitiveness of local companies.

Minister Ncube also said he deserved a pat on the back for managing the current account. Official figures show that the current account, for the first time since the adoption of the multi-currency regime in 2009, registered a surplus of US$196 million in the first quarter of 2019. This was due to the impact of import management measures under implementation, which prioritise capital and production inputs as opposed to non-essential finished goods.

Ncube in his update on the TSP said focusing on stabilizing the macro-economy and laying a foundation for sustainable and shared private sector-led growth. In reality that has not been the case, industry is on tenterhooks, tobacco farmers are unhappy and so are gold producers due to an unstable currency.

The Finance minister said the last five years were marked with growing fiscal deficits due to fiscal indiscipline emanating from failure to adhere to approved Budgets, with significant expenditures being incurred arbitrarily outside Budgeted Votes, and failure to follow laid down systems, at times involving quasi-fiscal expenditures. The issuance of Treasury Bills to fund programmes such as Command Agriculture which has been shrouded under a veil of secrecy has been a talking point in recent months.

Sadly that message of fiscal consolidation and laying the foundation for growth does not resonate with the majority of Zimbabweans who now languishing in poverty due to rising inflation and companies scaling down operations. Hospitals are not only understocked but dysfunctional too due to an industrial action by health professionals. Urban cities and towns have no running water and primary and tertiary institutions are in a dire state.

 

Wednesday, 09 October 2019 12:23

Looking beyond austerity measures

GDP Growth Sectors

Finance minister Mthuli Ncube has released the 2020 Pre-budget Strategy Paper which will shift from the current thrust on austerity to productivity.

 He said building on the accomplishments of the ongoing reform agenda, the thrust of the 2020 National Budget is to transition from austerity policy position to supporting growth and productivity, without compromising medium to long term fiscal sustainability. For many Zimbabweans, the term austerity has become a synonym for belt-tightening measures and hardships.

According the Finance minister, the economy is, therefore, projected to underperform by as much as -3% to -6% in 2019. The sectors projected to slow down include electricity and water, agriculture and mining, with all other sectors being also affected through close linkages.

We welcome remarks by the head of treasury to focus on productivity but we found it amiss that the strategy paper does not spell out which sectors government had identified as champions for economic growth.

The manufacturing sector is doldrums and requires more investment to replace antiquated equipment. In fact some companies continue to use technology that were used in the 1970s which consumes a lot of energy and is not as efficient as modern technology. Hence this leaves mining, particularly gold as the subsector which should anchor growth.

Capacity utilisation of the manufacturing sector was estimated at 48.2% in 2018 and is projected to have declined below 40% during the year 2019 owing to challenges of foreign currency and energy shortages, among others.

The capital intensive mining sector requires more than US$5bn to recapitalise, according to industry experts but the abundance of gold and the relatively low production costs makes bullion production, the focal point.

Capacity Utilization CZI

In focusing on productivity, government should also focus on export oriented industrialisation. Ncube’s strategy paper attributes the slowdown in economic activity to low foreign currency reserves, electricity and fuel shortages which have crippled industry operations. Ncube said with improved productivity hinged on economic and political reforms, the economy is expected to grow by 4.3 percent next year.

Turning to inflation, inflationary pressures, during the first half of 2019, kept the month on month inflation relatively higher than the TSP targets. The pressure has been emanating from previous year’s high money supply growth, driven by huge fiscal deficits.

It is our view that money supply growth will continue despite assurance by Treasury that it will be contained. In this strategy paper, Ncube admits that government remains the biggest financier of agriculture, a development that has contributed to budget deficits.

 Over the past few weeks the Reserve Bank of Zimbabwe has been issuing a lot of debt instruments in the form of Treasury Bills. The issuance of TBs coincides with the onset of the summer cropping season. Treasury is also facing wage demands from the public service whose monthly incomes have been wiped out by rising inflation