IN my new column I will continue with the analysis of economic matters and also expand the scope of my coverage to investments, both of which are my key areas of specialisation.
RESPECT GWENZI: ANALYST
In the one-year period over which I have contributed to this publication, I have largely been biased towards economic matters, particularly key developments around currency, inflation and economic growth of Zimbabwe. The bias was deliberate in that the country was at a crossroads, with almost all key economic variables underperforming. This was a time the country was predisposed at reconfiguring the economy through radical fiscal changes such as austerity and within a very short space of time, currency reformation.
These collective measures had a far-reaching impact on the economy primarily that it changed the prevailing order and hence some shocks were noticeable which could not be ignored.
These shocks include a quicker jump in inflation following liberalisation of the currency. Inflation closed 2019 at an annual rate of 521%, having begun the year at just a 10th of that December level. This was a scary experience as we witnessed the country making a U-turn to the dreaded hyperinflation era. Into 2020, inflation remained unabated scaling further to a high of 837,5% in July before easing at below 450% in October.
Typical of hyperinflation, availability of key products became problematic while the erosion of purchasing power grossly reduced aggregate demand. Companies confessed that inflation was making it difficult to plan, while workers found it difficult to maintain consumption levels and even live a decent life.
The gruelling hyperinflationary experience emanated from exchange rate weakness given a liberalised currency regime. The Zimbabwean dollar fell by 87% from its flotation in February 2019 to December 2020. It remained on that trajectory into 2020. This background is important because it contextualises the deliberate focus on economic matters. The macro-economic view is a critical element of fundamental analysis.
This stems from the view that all other variables play within the broader sphere of the economy and their performance is thus dependent on what happens on the broader economic sphere.
If we assume that the economy is stable, predictability of outturn increases and thus it reduces focus on the macro-economy.
However, with increased economic volatility, a macro focus takes precedence as it has more weight in swaying performance at micro elements such as a company operating within that respective environment.
At Equity Axis, we publish monthly and quarterly economic research notes, as part of our efforts to help decision makers in business and investment to make more informed decisions given the status of the economy. We also give forward guidance on our expectations on performance of key economic variables, going forward. We believe this focus is pivotal in aligning company specific strategies to the broader operating environment.
As I assume this new column, quite a number of key developments have and are taking place on the economic front. Inflation is recovering at a rate not seen in 10 years (coming off) and may hit single digit in a few years if currency stability is maintained.
Improving inflation is predictably largely a function of a stabilising exchange rate, which in turn has been driven by a revamp of the interbank market and tighter exchange control measures.
Flows on the interbank have increased from a low of US$15 million a week in the first five weeks to an average of almost US$30 million a week over the last five weeks. This translates to a daily average of US$6 million and when looked at against the 2019 average of US$2 million, the current levels are significantly improved.
The escalated levels help rebalance the forex market in that it signifies a surge in supply and given the compressed demand levels due to low disposable incomes and the relative costliness of imports (falling exchange rate), a sustainable equilibrium may be achieved.
Data from Zimbabwe National Statistical Agency (Zimstat) show that imports have been coming off at a constant average growth rate of -13% per annum between 2018 and 2020. From an average monthly import bill of US$590 million in 2018, down to US$400 million in 2019 and $385 in 2020, the trajectory has been adverse on the import side since liberalisation of the exchange rate and the drastic depreciation of the local currency.
As highlighted earlier, the reduced level of imports given a stable export level has contributed to a more improved BOP position or generally a more favourable forex currency position. But one key matrix worth noting is the variance between the total monthly import and the current average monthly trades on the interbank. While the current average daily trade stands at US$6 million, the import implied daily demand level is US$17,5 million which gives a negative variance of US$11,5 million.
The next question, in the quest of trying to establish stability of currency, is the source of funds satisfying the variance. Assuming that all the remainder is funded through the parallel market, it would follow that the current stability on the interbank cannot be sustained. But the above assumption is an oversimplification because not all of the US$11,5 million is funded by the parallel market. Part of the outstanding import bill is due to exporters who require some raw materials to feed into their production processes. The funds utilised in that quest are netted out, outside of the interbank since these are not to be purchased. My assumption is that 40% of the total US$11,5 million is funded by exporters acquiring own raw materials from outside the country. This assumption is arrived at after considering the net contribution of the extractive sector to GDP.
The net funding gap is further reduced to US$6,9 million and this variance is largely met through twinning arrangements and the parallel market. Given that these trades are still outside the purview of the RBZ’s control, and that the balance is higher than actual trades going through the interbank market at present, it would follow that currency stabilisation is yet to fully materialise.
Looked at from another key angle of the fiscus, the country has performed well in terms of managing its spending relative to income. Data show that Zimbabwe is on course to achieve a positive budget balance for the second year running. This year, it is projected that the economy will post a higher surplus given revenue outperformance in the third quarter period to September.
Two things are pertinent in the review of the performance and further quest to establish sustainability of the run. The quality of earnings in question is highly compromised given the inflationary environment.
Unlike the private sector, government’s revenue numbers are not adjusted for inflation, yet the impact of exchange rate is factored on earnings emanating from exports and some locally generated foreign currency earnings by operating companies. The inflationary phenomena thus have the impact of inflating income. When adjusted for the exchange rate, it is evident that the national purse is shrinking. The reason why the cake is shrinking is because aggregate expenditure is coming off and there is less expend on capital consumption. To clearly demonstrate this phenomenon, in 2020 all respective Zimbabwe Revenue Authority (Zimra) revenue performance numbers showed an outperformance to budget and target but when adjusted for exchange rate, the numbers lagged prior years.
The cumulative revenue for 2020 (January-December) will come in at close to US$2,2 billion which compares worse off to all the past years since 2011. It is however encouraging that expenditure has begun picking up as reflected by the third quarter numbers which amounted to about US$725 million, a performance last seen in 2018. This trajectory can be sustained given that government has already revised its expenditure after increasing the civil service wage bill.
Overall, this column will remain focused on key macroeconomic dynamics around the exchange rate, inflation, GDP, money supply, external trade, real sector performances and developments and broad economic policy reviews. My persuasion is that until a real turn in economic fortunes is realised, the key focus will remain around economic diagnosis.
The column will however periodically delve into company performances, looking at earnings performances, stock market developments, valuations and all matters affecting the corporate world in Zimbabwe.
It is my hope that readers will benefit from the data, updates and analysis shared, which is pulled from years of experience in economic and financial research, as well as from the most reliable economic data sets which my team has built over the last 10 years.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com