By Willing Zvirevo
THERE is convergence of opinion amongst economic analysts that the 2008 budget presented by the Minister of Finance last week failed to provide the pl
atform required to deal with the country’s major challenges, chief among them the spiralling inflation, acute foreign currency shortages and declining productivity.
The main source of inflation in Zimbabwe is excessive money supply growth, itself a result of burgeoning government expenditure and the deluge of concessionary funding into the market from the central bank.
The 2008 budget projects total revenues of $6 080 quadrillion against projected expenditures of $7 840 quadrillion, implying a budget deficit of $1 760 quadrillion or 11% of the country’s Gross Domestic Product (GDP). GDP is forecast at $16 trillion in 2008, representing a growth of 4% over 2007. Given the absence of external credit, the budget deficit is expected to be funded through domestic debt.
Analysts have ruled out the projected GDP growth of 4% as overly unrealistic, particularly given that the fiscal budget lacked clear-cut policies to deal decisively with high inflation and low productivity.
The minister’s economic growth projections are premised on the expected recovery in the agricultural sector on the back of the ongoing Farm Mechanisation Programme and continued concessionary funding under the ASPEF facility, as well as the anticipated, albeit unspecified, growth in the SME sector.
Agriculture contributes 15 to 20% of national output hence the recovery of this sector alone would not reverse the negative growth that the economy has experienced for nearly a decade.
Activity in other real sectors such as manufacturing, mining and services is expected to remain depressed in the short to medium term given persistent foreign currency shortages, persistent power cuts and undercapitalisation. This makes overall economic growth projections for 2008 highly unrealistic.
Performance in the manufacturing sector is also expected to be weighed down by price controls.
Whilst the minister expects the budget to drive down inflation to 1 978% by the end of 2008, it remains unclear how this will be achieved when the 2008 expenditure figures look astronomical in comparison to 2007 budgetary figures, and considering that the budget will be partly funded through expensive debt.
Increased borrowings by government and the RBZ’s continued quasi-fiscal activities are expected to fuel inflationary pressures, thus giving a gloomy inflationary outlook in the short to medium term.
With the current fiscal framework, the country’s economic fundamentals, particularly the inflation outlook, do not look promising in the short to medium term, hence investors should protect the value of their money by going for investment options whose returns match or beat inflation.
The stock market has historically done that and, barring any injudicious policy measures from the authorities, we expect the stock market to remain the most profitable investment option.
Admittedly, the budget was crafted under very difficult conditions. The market is still awaiting the second half monetary policy statement for 2007 from the Reserve Bank of Zimbabwe (RBZ). The RBZ is expected to come up with monetary policy measures that support the budgetary objectives for 2008.
However, the central bank will be in a catch 22 on interest rate policy, as increasing interest rates in line with inflation will result in a bloated debt position for government. The central bank is also expected to continue pumping concessionary funding into the market via Bacossi and Aspef, thus fuelling money supply growth. We therefore expect the current upward trend in inflation to continue in the short to medium term. Given the foregoing, the stock market is likely to remain the main attraction for investors in the first half of 2008.
However investors should resist instinct and base their investment decisions on fundamentals.
The ghastly trading environment is expected to bring with it viability challenges for businesses. It is therefore recommended that investors park their money in companies that are expected to survive the current torrent and have good long-term prospects.
There is no better advice than that provided by Warren Buffet, the renowned American fund manager: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
As the market slows down ahead of the festive season, investors should dismount from their current excitement and take advantage of any temporary weaknesses to pick quality stocks on a medium term view.
The cash crisis entered its fifth week with no solution in sight.
Consumers who had pinned their hopes on the “imminent” launch of Sunrise 2 are now totally disillusioned. The cash crisis has become so calamitous that an urgent, albeit momentary, measure was expected from the central bank to alleviate the situation.
Whilst the central bank governor, Gideon Gono, has taken the stiff position that he will not inject additional liquidity into the market until the about $30 trillion “missing” from the official banking system has been returned, black market activities have continued to prosper and cash barons have continued to benefit from selling off their cash holdings. It is the poor consumer that continues to suffer. It is them that will have a sordid festive season.
The cash crisis has also created opportunities for corrupt activities within the banking system.
The central bank could request banks to submit daily returns of cash withdrawals, listing all amounts withdrawn by customer. We bet you some banks would cringe to such a request.
Indications are that the crisis has created thriving cash black-market wherein consumers are being asked to pay a 10 percent premium on cash.
For the benefit of consumers currently outside Zimbabwe who cannot understand this phenomenon, lets say you have Z$200 million in the bank and you want to withdraw all of it. A cash baron, will charge you Z$20 to $30 million to give you cash, reducing your hard earned money value to Z$170 million.
Options are few, if you keep the money in the bank; it is worth less the next day. Our economic crisis has resulted in Zimbabwe being the only country where consumers have to buy money.
Exchange rates for cash transactions have remained soft as cash shortages persist. The US dollar is currently trading between $1,5 million and $1,6 million for cash transactions, whilst the Rand is in the $180 000-200 000 range. The US dollar is currently quoted between $4,5 million and $5 million for RTGS transactions, whilst the Rand is trading between $250 000 and $300 000.
The disparity between RTGS and cash rates is expected to continue widening as the cash crisis deepens. The pound rate continued to adjust upwards. The rate in London was hovering around £1: $9,8million on Wednesday, changing more than three times within the same week.
* Willing Zvirevo is a Financial Consultant at Coronation Financial plc, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at email@example.com.