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Gloomy prospects for economic recovery

THe following is an edited 2014 first-half economic analysis for Zimbabwe by Econometer Global Capital.

Highlights
Annualised GDP growth for first half is 1,8%;
By December 2014, official unemployment levels to tops 92%;
Non-performing loans to rise from 16% to average 18,5% by year end;
Average profitability levels for listed companies to shed between 18-20% in the first half of the year as compared to same time last year;
Capacity utilisation levels at 33%;
Corruption costing the Zim economy about US$2,5 billion annually;
Deflation to persist till the second quarter of 2015.

First half performance
On an annualised basis, the GDP growth for the H1 (first half) of 2014 averaged 1,8% with the major drivers in abyss. A sense of false hope dawned upon Zimbabweans following electoral promises steered by both the ZimAsset and the Juice document from MDC-T.

Compared to the 2008 economic meltdown, 2014 has taken a new twist with all levers of economic growth blocked as policy ineffectiveness is compromised.

The year 2008 allowed government to bankroll printing mania regardless of its inflationary implications; the current state can only cause extreme poverty as the sitting government is clueless on the strategy to raise the GDP levels.

By year end, unemployment would have topped 92% with most companies intensifying staff rationalising exercises, including government-controlled institutions such as Hwange Colliery Company and ZBC which is evidence of how gloomy the jobs data is going forward.

An average of two medium size corporates, five small enterprises and 0,5 large corporates close shop every month in Zimbabwe with smaller towns the most affected by de-industrialisation.

This calls for the nation to urgently revise policies which directly and significantly impact negatively on the job creation prospects which includes the blanketing indigenisation policy, the revision of title deeds regime and toning down on racially biased language which discriminates Zimbabweans based on colour or creed.

Contrary to the official position of government, the banking sector is indeed safe but not sound with signs of widening cracks in the quality of assets which calls for urgent attention. By year end, we expect at most two indigenous banks either to falter or request for curatorship as their liquidity positions worsen while attracting deposits is becoming almost impossible.

RTGS (Real Time Gross Settlement) processing is a nightmare with some banks feeling the heat much more.

Ever-dwindling fiscal space
The tax performance for Zimbabwe is a worrisome trend given the escalating informalisation of the economy, a total of US$1,72 billion was collected in the first half against an already disappointing target of US$1,74 billion, rendering the need for a mid-term policy review a “superfluous talk-show”.

The second half is expected to be much tougher with at most US$1,68 billion expected to be collected hence worsening the fiscal deficit within the country. A slump in capacity utilisation following Zanu PF’s electoral victory in July last year is evidenced by an -18% variance in Value Added Tax (VAT) collection to US$456,6 million.

The downside risk is the possible machinations by the present government to bring back the local currency.

For a nation of 13 million people to record interim tax collection levels of US$1,72 billion smacks of impending economic crisis which will manifest in infrastructure decay and economic stagnation. The 2015 national budget to be announced around November will just be a fulfilment of statutory requirements as events on the ground proves that it is a budget which will be announced under worst economic conditions since 1980.

Informal banking shaping
With the entire economy becoming informalised at all strata, the financial services sector has not been spared the scourge of going grey or underground.

As most banking institutions had turned to become conservative in their loan deposit ratios, the same cannot be said of unregistered money lending syndicates who continues charging usurious interest rates averaging 25% per month on the backdrop of over-collaterised facilities leaving the vulnerable members of the society exposed to loss of their valuable assets due to failure to honour up obligations on time.

This has left the conventional monetary policy (MPS) as a less effective tool to manage the economic performance thus calling upon the incumbent administration to implement stringent measures to combat the exercise of overcharging for loans.

With aggregate deposits at US$4,8 billion as at the first quarter (Q1) of 2014, most banks in Zimbabwe no longer have appetite to lend to the productive sectors thus further clogging the potential of any meaningful recovery in H2, 2014.

With the mid-term MPS looming, newly appointed RBZ governor John Mangudya can only promote moral suasion as a mechanism to achieve harmony with the much vaunted US$100 million Afreximbank facility unable to reboot the now defunct interbank market.

We believe reported NPL of 16% is an underestimation of reality on the ground, our estimates project a 25% NPL for some institutions which is well above the prudential regional benchmark of 5%.
First half analysis

It was a difficult trading period for most of the listed counters as evidenced by the so called “voluntary retrenchment” being thrown around with stocks such as Hwange Colliery, RTG and the unquoted Steward bank laying off staff as a cost containment measure.

The overall profitability levels are expected to dwindle by an average of between 18%-20% due to the harsh operating environment thus eroding Ebita margins thus dragging the performance of the ZSE. We had observed a trend where most financial institutions are concentrating on the balance sheet management ahead of their income statements with a mere analysis of gap analysis confirming the behaviour. The agro-processing and mining stocks will be the hardest hit with the retail sector expected to record a flattened turnover curve.

Capacity utilisation dives

The industrial capacity utilisation for H1; 2014 paints a gloomy picture of the prospects of recovery notably in the manufacturing sector with the cost of capital worsening the woes.

We had recorded a capacity utilisation of 33% in the first half of 2014 with official unemployment rate averaging 87,5% on an annualised basis. Structural unemployment has been witnessed with the emerging black market economy straining the current nominal GDP levels; the consumption spending is mostly biased to the external sector whilst the investment spending has been restricted by both an undefined interest rate regime and unattractive investment laws of the country.

By year end, capacity utilisation within the country’s manufacturing sector will be averaging 27%-29%. For every five companies with a balance sheet size of at least US$1 million, three of those companies are resorting to retrenchment as a cost containment measure. Large firms have been much more profitable than smaller firms for the first half period. The return on capital invested for large firms was 9,2%.

Inflation dynamics
The Consumer Price Index (CPI) had reached -0,08% year on year from -0,19 same period last year. The deflation zone the economy was exposed to could be mainly attributed to a depressed economic activity which also manifested itself as price correction.

Without reduced aggregate demand, price levels in Zimbabwean economy were never to correct themselves. Going forward, Zimbabwe might not experience above 1,1 % inflation rate annualised by year end of 2014.

With tightening liquidity risk and depressed CPI levels, most asset prices are definitely bound to tumble exacerbating the quantum of toxic assets some banks are sitting on as “safe” collateral.

Corruption burden
Zimbabwe continues slipping backwards in terms of Ease of Doing Business Index as espoused by the World Bank; corruption had a direct bearing on the ranking level.

We estimated that between 19% -21% of the funds allocated in the Zimbabwean national budget are either misused or abused for self enrichment by those in privileged positions. On average, Zimbabwe annually loses an estimated US$2,5 billion through corruption, and for every five bureaucrats who interface with the public, at least three of them practise corruption as a survival means.

The failure of the present Harare administration to reign in on reported corruption cases since Zanu PF won the July 2013 election is a cause for concern with the leadership succession matrix within the ruling party being the major impediment to arresting corruption in Zimbabwe.

Recommendations
Significantly review and restructure the current indigenisation and economic empowerment model to allow convergence with both regional and economic treaties and conventions.

Widen the presumptive tax base in order to discourage proliferation of the underground economy which manifests as small and medium enterprise sector.

Econometer Global Capital is a Harare-based research organisation

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