ACCORDING to Economist magazine, the world economy will carry troubling echoes of the late 1990s.
The Ritesh Anand Column
The financial crash in Russia, falling oil prices, a resurgent American economy; weakness in Germany and Japan, and tumbling currencies in emerging markets from Brazil to Indonesia.
In many respects, conditions that prevailed in the late 1990s are somewhat similar to those of today.
What are the implications for emerging markets in general and Africa more specifically? What are the risks for Zimbabwe if the world economy stumbles? Given that Zimbabwe has adopted the US dollar, what are the consequences of a stronger dollar?
Inevitably the parallels aren’t perfect. China played an insignificant role in 1999 but is now the second largest economy in the world, contributing disproportionately to global growth. But there are three trends at work that destabilised the world economy then and could do the same now.
The first is the gap between the US, where growth is accelerating and the rest of the world, where growth is slowing. The US economy is expected to grow by 3% versus 1,1% in Japan and Euro Zone.
China’s growth is expected to fall to around 7%. The higher growth rate in America is likely to lead to a stronger US dollar, making exports uncompetitive. This has implications for Zimbabwe as it looks to reduce its ballooning trade deficit by expanding its exports.
A stronger dollar will make Zimbabwe’s exports uncompetitive while making imports cheaper. While government forecast growth of 3,2% in 2015, I expect growth to be lower at 1%, with a risk to the downside.
The second parallel is the dismal outlook for the two biggest economies, Germany and Japan, where growth is expected to fall to below 1%. This matters less for Africa, but is a cause for concern internationally.
The third echo of the 1990s is the danger in emerging markets. The issue then was the fixed exchange rates and high foreign debts. This time debts are lower, exchange rates flexible and governments have built up some reserves. However, significant risks remain with growing signs of trouble in Russia and other commodity driven markets, especially in Africa.
Oil accounts for 95% of Nigeria’s exports and 75% of its government revenue. Ghana has already gone to the IMF for support.
Commodity-related exports account for over 50% of Zimbabwe’s exports and contribute over 30% to the fiscus.
Gold and platinum prices are down over 40% and expected to fall further in 2015. This has significant implications for growth next year. Furthermore, the end of quantitative easing in the US and Europe means there will be less money flowing to emerging markets including Africa.
Add all of this up and 2015 is likely to be a bumpy. It will only take a few emerging market crises to prompt a downturn in the US.
Foreign trades account for over 70% of the activity on the Zimbabwe Stock Exchange.
The recovery of the economy depends heavily on foreign direct investment, which will become increasingly more difficult to attract if the world economy stumbles. The options are limited.
Zimbabwe needs to either find ways to drive growth internally or create an attractive environment to lure investment. Fortunately, valuations in Zimbabwe at circa 12 times earnings are lower than many other African countries.
Furthermore, political stability and international perception of Zimbabwe is improving, making it an attractive destination for investment. What we need is an attractive, clear and consistent investment policy.
2015 is likely to be a challenging year for Zimbabwe notwithstanding global headwinds. If the world economy does stumble, restoring stability will be harder this time around because policymakers have so little room to manoeuver.
Unlike the 1990s when US base interest rates were 5%, interest rates are close to zero today. The political landscape has also changed and not in a good way.
Global tensions have increased in recent years making policy coordination more complex.
While Zimbabwe will certainly benefit from lower oil prices, the uncertain global outlook in 2015 will make it extremely challenging for the country.
Lower commodity prices will depress export revenues while heightened risk in emerging markets will result in depressed fund flows to Africa. FDI flows to Africa are likely to exceed US$80 billion in 2014. I expect this figure to fall in 2015.
African countries will compete for limited global fund flows. It is critical that Zimbabwe creates a conducive and attractive environment for investing if it is to compete on the world stage.
The economics of 2015 may look similar to the late 1990s, but the politics will be rather worse. This will no doubt have implications for emerging markets in general and Africa in particular.
Zimbabwe will need to find a way to navigate through these increasingly challenging times.