Fundamental analysis (II)

BY BATANAI MATSIKA

Following on the article on economic indicators, Piggy notes that changes in the monetary and fiscal policies of a country can also have a significant impact on the economy and capital markets.

This article focuses on economic policies as well as other important indicators that investors and traders should keep an eye on.

Monetary policy

These are the broad set of actions taken by a country’s monetary authority (usually Central Banks). Central Banks tend to control interest rates to support the economy and particularly to control inflation.

They also closely monitor the exchange rate. How strong or weak a currency is has implications for inflation. As such, Central Banks tend to pay attention to the exchange rate.

A weaker currency means that your exports become more competitive abroad (they are cheaper for foreigners). It also means that imports to your country become more expensive (higher prices = higher inflation).

In some extreme cases, the central bank must step in the market to balance the supply and demand for its currency. In case the currency is weaker than desired, it will buy its own currency or sell its foreign reserves.

There is a limit to how much they can sell, because eventually they run out of reserves. If the currency is stronger than desired, they just print money and use it to buy foreign currencies.

 Fiscal policy

These are actions taken by a country’s government usually to improve unemployment rates and boost economic growth. It also covers issues to do with government revenues and expenditure management.

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to influence a nation’s economy. They spend money and/or cut taxes when the economy slows.

They cut back their spending and increase taxes when growth gets back to normal. Government borrowing, tax and spending plans affect growth and interest rates and thereby affect the exchange rate. It can also affect the country’s credit rating and its attractiveness as an investment destination.

On November 26, 2020, the Minister of Finance and Economic Development of Zimbabwe presented the 2021 National Budget Statement.

A major highlight in the statement was that the Zimbabwe economy has experienced sustained recessions in 2019 and 2020, with GDP estimated to have contracted by -6% and -4,1%, respectively. As part of its National Development Strategy 1 (NDS1), the Government of Zimbabwe has set new growth expectations for 2020 and beyond.

The NDS1 in targeting to steer the economy onto a growth path and realise an average of 5% GDP growth rate per annum from 2021 to 2025. The new estimates also suggest that the Zimbabwean economy will rebound by +7,4% in 2021 on the back of recovery in agriculture. The long-term target is to reduce inflation to single digit of between 3% and 7% by 2025 in line with the Sadc macroeconomic convergence target.

The government of Zimbabwe also set a ZWL421,6 billion (cUSD4,2 billion) budget for 2021. Total capital expenditures constitute ZWL131,6 billion (5,5% of GDP), while current expenditures are expected to consume ZWL290 billion (12,1% of GDP). A budget deficit of ZWL30,8 billion (-1,3% of GDP) is targeted in 2021.

This target is within the Sadc target of below 3% of GDP. Key allocations under the 2021 Budget are goods and services (ZWL59,4 billion), employment costs (ZWL142,6 billion), interest (ZWL1,5 billion) and transfers (ZWL86,5 billion), with the balance reserved for capital development programmes.

Several revenue enhancement proposals were put in place to boost the National Treasury coffers.

These included:

  • Cannabis levy;
  •  An increase in excise duty on tobacco and alcoholic beverages,
  •  Payment of excise duty in foreign currency and
  •   Presumptive taxes.

Overall, monetary and fiscal policies in Zimbabwe have remained tight and are centred around reduced expenditures and limited money supply growth.

However, this is against a backdrop whereby the civil service has been going on incessant strikes in a bid to pressure the government to improve working conditions and salaries.

Government wages have not been meeting the increased cost of living. There are also concerns that disposal incomes are constrained and this may culminate to reduced aggregate demand. This has a direct impact on listed consumer-facing companies. That said, Piggy believe investors should also watch the following key economic indicators:

GDP — Market value of all final goods and services produced within a country in a given period;

Industrial production — Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining and utilities;

Consumer price index — A measure of the average change over time in the prices paid by consumers for a basket of consumer goods and services. The annual rate of change in the CPI is usually referred to as “the inflation rate”;

Unemployment rate — Possibly the most widely known labour market indicator, it measures the number of unemployed people as a percentage of the labour force;

Retail sales — Purchases of finished goods and services by consumers and businesses. By measuring consumer demand for finished goods, retail sales help gauge the pulse of an economy; and

Consumer indices — Surveys used to measure the degree of optimism of consumers on the state of the economy.

In conclusion, investors and traders should always follow:

  • Communications from the central bank;
  •  Release of company earnings reports; and
  • Daily stock prices.

Chapter 2 of the Investment 101 Handbook provides a thorough overview of inflation and other economic indicators. Download a copy of the Investor 101 Handbook from www.piggybankadvisor.com

Matsika is the head of research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com/batanai@piggybankadvisor.com