By Addmore Chakurira
A COCKTAIL of measures to fight inflation, deemed the economy’s number one enemy, continue to spur the downward fall in the rate, which has shed 48 percentage points from the July figure
The Central Statistical Office (CSO) released the August inflation figures early this week with the year-on-year official inflation maintaining its strong downward trend, reaching 314,4% in August from 362,4% in July.
The deceleration in the inflation rate can be attributed to a tight monetary policy, depressed demand and that prices are coming off a higher base.
Of the 314,4%, core inflation accounted for 193,8% and food inflation 120,6%.
Notable increases were in communication – 5 171,2%, education fees – 990%, medical fees – 632%, school uniforms – 426,1%, and bread and cereals – 397,3%.
The figures showed a month-on-month increase of 5,3%, down 5,3 percentage points from the July rate of 9,5%, with core inflation accounting for 4,1% and food 1,2%.
Looking at individual items, the highest price increases month-on-month were on medicines – up 15,1%, medical fees – up 15,7%, school uniforms – 12,1%, household equipment – 10,5% and meat – 10%.
Surprisingly, fruit and vegetables month-on-month deflated by 3%, which is the only item to have shown such a trend.
Real incomes continue to be eroded by the high inflation rate, further squeezing disposable incomes resulting in sluggish demand. The increase in the tax bands, which becomes effective this month will offer a bit of relief to consumers who are reeling under increasing economic hardships in a hyperinflation environment.
On that note, the spike in essential goods and services such as communication, medical related and school fees will curtail any improvement in demand due to the shift in tax bands and wage hikes.
On the money market, rates have remained depressed and are in the 50% to 90% region resulting in persistent negative real interest rates. The market has been persistently short during the week, although liquidity seems not to have that much bearing on the interest rates direction.
The one-year Tobacco Bills which were floated last week were finally allotted in the second tender at an average rate of 101,7% with the spread ranging from 100% to 150% after all the first tender bids where rejected.
It seems the market sees high reinvestment risk leading to the first tender bids reaching 150%. With the year-on-year inflation figure coming down, investment interests rates are anticipated to remain at prevailing levels though the lending rates are expected to slow down further from the current levels of around 190% per annum in line with the Reserve Bank of Zimbabwe (RBZ’s) indications that rates should be in the 10 to 20 percentage points above the inflation rate.
That said, the 200% inflation rate target by December by the central bank appears attainable if the momentum since the start of the year is maintained both on the monetary and fiscal side with an anticipation that rates will eventually converge next year.
However, in the short term, savings continue to be discouraged as the yield curve remains downward sloping.
Panic and fear
There seems to be an epidemic of fear and pessimism on the equities market. Are we in a grip of panic – a mania of despair? The issue is how long it will last and how far prices will fall.
It is generally said that fear and greed drive the market and we might currently be witnessing an era of fear, which has resulted in profit taking in the bigger caps. It is going to be tough for the investment markets for the next seven months as investors await for direction from the forthcoming budget, monetary policy statement and general elections and of course the rains coming up in this period.
Investors have become skeptical of financial counters as the deadline for capital adequacy and board restructuring nears, exacerbated by the perceived profiteering in the sector, which the authorities would want curtailed.
The industrial index has softened slightly due to the potential demise facing some banks and the potential fall-out in the banking sector.
The index slipped below the 915 000 level but looks set to fluctuate around that level. Sentiment appears to be shaky, however, on a historic p/e of 3.4x and a forward p/e of less than 1x, the market is cheap and any improvement in macroeconomics will firm sentiment in the medium to long term.
The counters that constitute the bulk of the index are expected to post earnings growth in line with inflation and, therefore, the market deserves a re-rating though some counters are likely to post disappointing results due to the tough operating environment.
However, this will probably not be possible until the preoccupation with bank deadline, the budgetary and monetary policy statements has subsided.
It appears most of the bad news have been largely accounted for in the current share prices and for the longer-term investors, this might be a good buying opportunity. There seems to be more upside than downside at current price levels.
Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.