LAST week, industry lobby board Confederation of Zimbabwe Industries (CZI) held its annual Economic Outlook Symposium. At the occasion, the board also undertook to partially unpack the Manufacturing Sector Report, which is yet to be fully released.
As is typical, a key takeaway from the annual industry pilgrimage is the findings on the level of economic activity as captured by industry capacity utilisation.
Over the years, industry capacity utilisation has been used as an economic barometer, reflecting on economic progress and growth or lack thereof.
Capacity utilisation refers to the level at which industry operates or produce, given its specific capacity. It is commonly measured against plant and machinery capacity and less in terms of human capital. Generally, a company with a higher capacity utilisation utilises more of its fixed equipment resources, compared to companies with low capacity utilisation.
Equally higher capacity utilisation demonstrates increased production and production quantity, which would have a direct impact on an economy’s gross domestic production. While the measure is highly relied upon as a proxy to economic growth, it has technical limitations in pursuit of the aforementioned end.
For example, in a highly industrialised economy, technological breakthroughs and industrialisation is likely to result in increased capacity as companies invest in the production processes. These investments are also compelled by the need to remain competitive and the need to utilise growing free cash flows.
Once the new plants are procured and installed or current production processes are upgraded, total capacity goes up. However, utilisation of the additional or new capacity in this sense is dependent on the level of aggregate demand.
Companies may not necessarily increase production at a proportionate rate to the increase in capacity without ascertaining demand levels. If demand levels remain constant, then the increased capacity will not be utilised and when it is not utilised the level of capacity utilisation diminishes.
If this is true for the majority of manufacturing entities, then the net result is a falling capacity utilisation brought about by increased investment in new production technologies and processes.
More often however, the characteristic of growing industry capacity is associated with thriving and growing economies where profits are huge and demand is growing. With globalisation, such additional capacity can be utilised to produce goods for the export market.
A look at recent historical data on capacity utilisation for Zimbabwe largely shows an economy with underlying challenges.
The latest data released by CZI shows that Zimbabwe’s capacity utilisation in 2020 came in at 47%, and, while this was an improvement on the 2019 levels, it still remained below 50%, a gross underperformance for any serious economy.
Data compiled from 2009 to date, shows that the manufacturing sector has only surpassed the 50% mark once, that is in 2011, when industry capacity utilisation rose to 57,2%. Data also shows that manufacturing capacity utilisation came off to a lowest of 34,3% in 2015 and has averaged 42,6% over the last 12 years.
As shown in Fig 2, there has largely been direct relationship between capacity utilisation and economic growth of Zimbabwe. In periods of acute low capacity utilisation, economic growth spontaneously dampened. It would be rationale to expect national output to grow as companies produce more. On the outset, it is key to highlight that national output is a function of production derived from different sectors some of which do not have a manufacturing functionality.
For example, a subsistence farmer producing maize using traditional means will get to the point of supplying their maize to GMB or any such contractor, without necessarily indulging in manufacturing. Other sophisticated farmers would value add and in the process indulge in elements of manufacturing.
The same would go for small scale tobacco farmers and artisanal miners. Other sectors, such as tourism and service sectors are divorced from manufacturing, yet contribute meaningfully to GDP.
Likewise, manufacturing could catalyse the country’s exports growth, especially when an economy is operating with a weaker currency and an underdeveloped regional geography. Challenges within the manufacturing sector in Zimbabwe are well-documented and remain at large.
In 2019, power outages were the main driver of lower capacity utilisation. Power utility Zesa, failed to produce and procure adequate power due to low dam levels at Kariba and arrears with regional utilities such as Caborra Bassa and Eskom. Consequently, companies went for many hours without power hence reduced production.
The alternative of diesel energy also saw a jump in costs as the economy liberalised. In the respective year, government undertook the austerity program which consequently drove aggregate demand down.
While electricity availability significantly improved in 2020, aggregate demand dampened further, particularly in the first half of the year. This was as a result of hyperinflation. Companies also continued to face challenges in sourcing of foreign currency for procurement of imported raw materials.
Adjustments to the forex interbank in the second half helped drive forex availability up resulting in production recovery across industry in the second half.
It is important, therefore, to note that the growth in 2020 was from a very low base, the lowest in five years, even as it came out below the 10-year average. While the above are some of the latest challenges to bedevil the sector, long running entrenched challenges include the lack of long-term capital on the market.
Deposits structure, according to the Monetary Policy Statement, remains skewed towards demand deposits. The recurrence of inflation further discourages term deposits as savvy holders factor possibilities of higher inflation. Data also shows that external loans denominated in United States dollars have dwindled over the last two years as the economy de-dollarised.
This means companies do not readily have access to foreign currency, which is required for importation of capital goods such as machinery. Further, a plunge in foreign direct investment over the past three years also reflects on the dwindling fortunes of the sector.
In 2021, CZI said it anticipates a growth in capacity utilisation to a level of 60%. If attained, this will be highest level since 2009. Our view is that this level can be attained, but the odds are more on the downside. The low levels of capacity utilisation are also in line with antiquated equipment.
A greater fraction of companies operating in Zimbabwe, including Lafarge, Hwange, Star Africa, Falcon Gold, RioZim, to name a few, are operating with old machinery, which would typically breakdown often than usual and hence lower capacity utilisation. This remains a key downside challenge as there is no hope for recapitalisation in sight as early as 2021. Aggregate demand is still very low and will likely remain below dollarisation levels for at least over the next two years. This would reduce production upside. We therefore expect a growth in capacity utilisation to 54% in 2021.
Looking ahead, advancements in ICT and its adoption on the local front will have a strong bearing on the sector’s performance going forward.
A stable macroeconomic environment with clear growth prospects also posits as a precondition for industry recovery. A re-organisation of the agriculture sector with a view to reposition it as anchor contributor to GDP, will also drive manufacturing sector fortunes up. A stable currency regime and consistent policy framework is paramount. The outstanding foreign debt obligation affects capital availability and perpetuates forex shortages, which collectively have a bearing on industry recapitalisation.
On the short-term outlook, companies will have to explore ways of partnering external players either as equity investors, technical partners or creditors to fund capital requirements. Exploring regional markets and fostering local partnerships may alternatively come in as game changer.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com