GOVERNMENT must institute key reforms to enhance the business climate and attract Foreign Direct Investment (FDI), a leading stockbroking firm says.
In a report issued on Monday, titled Zimbabwe Equity Strategy 2015: At a Crossroads, Inter-Horizon Securities (IH Securities) – a local securities trading firm offering brokerage and advisory services to various investors – says urgent measures are needed to address structural and policy issues affecting the economy as Gross Domestic Product (GDP) growth continues to decelerate amid company closures.
GDP growth for 2014, according to the government, was 3,1%, which was way below Sub-Saharan Africa’s average GDP growth rate of 5,4% during the same period. Inflation entered negative territory in 2014, closing the year at an annual rate of -0,8%.
IH Securities said government must implement productive reforms to woo investors and restore the country’s external position.
“The Zimbabwean economy is coming under increasing stress characterised by depressed aggregate demand, high unemployment, pervasive structural issues linked to poor funding and weak commodity prices in Zimbabwe’s key sectors, mining & agriculture, and a persistent current account deficit,” the report says. “It is now imperative that government implements productive and proactive policy reform to attract the much-needed FDI and restore the country’s external position as a prerequisite for accessing external financing.”
Policy clarity, transparency and key structural reforms need to be instituted in order to enhance the business climate to attract FDI, boost productivity and competitiveness and build confidence, it says.
The report says the largest impediment to growth was policy inertia and the lack of a solution to the indigenisation policy.
Going forward, the firm sees government softening its position on indigenisation.
“We believe that 2015 will see Government becoming compelled to take a more moderate approach to indigenisation and continue to take proactive measures to normalise relations with creditors and the foreign community,” the report say.
While the economy is forecast to grow by 3,2% in 2015, this projection is fraught with downside risks emanating from depressed commodity prices, stagnant domestic demand, adverse weather conditions and liquidity problems.”
The report says government’s growth projections are too ambitious.
“In our view, GDP growth in the year will likely be closer to 2%. We expect deflation to persist in 2015 on subdued demand, a softening rand and bearish oil prices; corporates that are highly leveraged will be hardest-hit by the pervading deflationary pressures,” it notes. “The fiscus and external accounts under increasing pressure, however international relations appear to be thawing at best.”
Owing to lack of fiscal space, Zimbabwe continues to run a budget deficit. Recurrent expenditure, which constitutes 92% of total expenditure, is crowding out capital projects.
“Particularly problematic is the ballooning and unsustainable wage bill, which makes up 80% of total public spend, well above the World Bank’s recommended target of 25%,” the report indicates. “Reversing the budget from consumptive to developmental has become a key priority for the government and this can only be done by managing the wage bill. The external position remains unsustainable with a large current account deficit, low international reserves and an overvalued real exchange rate.”
The current account deficit constitutes about 24% of GDP compared to the Sadc average of below 9%.
“Imports so far have been in line with our expectations and we expect them to remain relatively flat to lower in 2015 on the back of low domestic demand, further depreciation of the Rand and declining oil prices,” says the report.
Exports are seen remaining flat on the back of softening commodity prices and subdued output forecast for 2015. Against such a background, the report says no meaningful change to the current account deficit will be recorded.
“We reiterate the urgent need for government to take proactive measures to attract FDI to restore the country’s external position as a prerequisite for accessing external financing,” it says.
“Encouragingly the IMF has re-opened its Zimbabwean office (July 2014) and the EU has formally lifted sanctions (November 2014) on the Government of Zimbabwe both of which bode well for the restoration of constructive foreign relations.”