What does another recession mean for Zim?

IN Equity Axis’ initial 2020 economic outlook released in January, we projected that the economy would contract by about -5% cognisant of the constrained fiscal space, a persistent drought, residual effects of Cyclone Idai, a volatile macro-economic environment characterised by hyperinflation and exchange rate weakness.

Ceteris Paribus

From 2019, it was evident that the consumer’s purchasing power was being eroded at a very fast pace in line with inflation and this continued into 2020, consequently impacting aggregate demand levels in the economy. We went on to publish a periodic monthly economic review paper, released last week, in which we revised our 2020 projections. In that instalment, we saw GDP falling by almost double our earlier projection at about -9,2%, which is in last year’s range. It is important to point out that while macro-economic dynamics have significantly changed between January and now. Equity Axis is the only research firm to have initially forecast a negative gross domestic product (GDP) outturn for Zimbabwe in 2020.

The International Monetary Fund, World Bank and African Development Bank initially forecast 3%, 4,5% and 4,5% growth rates respectively for Zimbabwe. The government maintained a 3% GDP growth forecast into 2020. The Covid-19 pandemic has necessitated a review of global growth forecasts and every institution worth its salt has revised its numbers to negative across both the developed and developing economies.

Only China, which has been growing at an average of about 6,5% per year over the last 10 years, is seen recording a marginal GDP growth of about 0,9% from initial forecasts of about 6%. China reported about 15% GDP contraction for the first quarter of 2020, a first since 1976. Sub-Saharan Africa is seen achieving about 1% growth in 2020 but the biggest economies, namely Nigeria, South Africa and Angola, are seen reporting sharp economic contractions, which is a big cause for concern. South Africa is Zimbabwe’s biggest trading partner and a slowdown in its economic activity will significantly affect other countries.

Zimbabwe will therefore likely see a slowdown in demand for exports of a manufacturing nature. For commodities, the global slump will pose a risk to prices, which may close the end of the year at depressed levels. Over 60% of Zimbabwe’s export earnings are derived from mineral exports. A disruptive and less defined exchange rate policy, which is already having an impact on the production of gold, further dampens export sector prospects.

Another endogenous factor is remittances, which are likely to sharply contract in light of worldwide lockdowns. Key sources of remittances, the United Kingdom and South Africa, are presently under lockdown and both have been extended the shutdown to about five weeks. This essentially means loss of income at individual level and, in many cases, job losses. About US$1,2 billion is earned annually from remittances, helping boost demand for local produce, both consumptive and capital.

While these endogenous factors are of serious concern, it is Zimbabwe’s own exogenous factors that have a bigger impact and are of great worry. Covid-19 may end today, with residual effects such as high debt levels for countries and much smaller economies, but structural challenges inherent in Zimbabwe’s economy will likely lead to a depression if no urgent measures are taken to reconfigure the economy. A slump in 2020 will mean two successive years of recession, with the magnitude of downturn wider. In a recession, a lot of economic value is shed, companies close down, jobs are lost, taxes forgone and the productive base shrinks, capitalisations are forgone as income dwindles, companies are highly disincentivised to retool and most fall into debt traps and insolvency.

A difference in the case of Zimbabwe is that there is no cushion for sustained recession; it is a freefalling economy. Other countries may experience a V-shaped recession to recovery, but Zimbabwe is already has a U-shaped graph, which means our crisis is deeper and will take a lot to re-emerge. It is imperative for Harare’s administration to rethink currency policy.

Piecemeal gestures will not yield desired results and further procrastination will come at huge cost. This will be a starting point for reconfiguring our economy.

Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net