HomeOpinionA tailored approach key to Zim economic recovery

A tailored approach key to Zim economic recovery

By FBC Securities

THE report’s primary objective is to allow the investor to assess/consider creating a diversified investment portfolio taking into account its unique preferences.

The report explores economic variables that affect investment returns, investable securities and their concomitant risks and proposes a diversified investment portfolio within the discussed context and limitations.

This report is intended to provide an analysis of portfolio conformance to the investor’s situation, objectives, preferences and limitations.

It should allow for adaptive management, which greatly enhances the probability of success for the investor in meeting the desired return objectives. In addition, this independent evaluation provides a formal feedback mechanism about the capital markets and investable securities, which gives further opportunities for learning, and may lead to the reconstitution or rebalancing of an existing investment portfolio.

Executive summary

Pursuant to the aforementioned, this report has been prepared to bring to the attention and assist prospective investors in their investment considerations. This report provides an overview of investment opportunities in the country primarily focusing on stock market.

Almost two years into the Covid-19 pandemic, the accumulating human toll continues to raise concerns, even as growing vaccine coverage lifts sentiment. High uncertainty surrounds the global economic outlook, primarily related to the path of the pandemic.

The contraction of activity in 2020 was unprecedented in living memory in its speed and synchronised nature. The ongoing pandemic continues to shape the path for global economic activity, with severe outbreaks continuing to weigh on growth in many countries.  The most recent wave of Covid-19 is centred in some emerging markets and developing economies where more transmissible and virulent strains are spreading amid limited vaccine access.

Vaccination remains feeble especially in low income countries. In contrast advanced economies have generally seen substantial vaccination progress limiting the spread of Covid-19. Amid continued vaccination, economic activity is firming across major advanced economies like United States where fiscal support is high. After an estimated contraction of –3,3% in 2020, the global economy is projected to grow by 6% in 2021, moderating to 4,4% in 2022 (IMF, 2021).

World Bank is projecting growth to moderate to circa 3% over the medium term.

Pandemic developments

The pandemic has continued to spread worldwide particularly in emerging and developing markets. Countries where vaccination campaigns are proceeding quickly, new cases have generally decreased.

New variants that were originally identified in Brazil, India, South Africa and United States are now circulating globally. There is evidence that these new strains may spread more easily and cause more severe disease (Davies et al).

Some of the strains also appear to be resistant to the immune responses triggered by previous infections or the current set of vaccines (Wang, 2021).

All countries remain vulnerable to renewed outbreaks as long as the virus continues to circulate in some areas amid unequal global vaccine coverage.

Despite continued waves on the infection, impact of the virus and associated lockdown measures on economy appears to be diminishing in most countries. Overtime, firms and households have adjusted their behaviour to mitigate disruptions.

Taking stock: Covid-19 impact

Output losses have been particularly large for countries that rely on tourism and commodity exports and those with limited policy space to respond. Many of these countries entered the crisis in a precarious fiscal situation and with less capacity to mount major health care policy responses or support livelihoods.

The projected recovery follows a severe contraction that has had particularly adverse employment and earnings impacts on certain groups. Income inequality is likely to increase significantly because of the pandemic. Close to 95 million more people are estimated to have fallen below the threshold of extreme poverty in 2020 compared with pre-pandemic projections (IMF 2021).

Moreover, learning losses have been more severe in low-income and developing countries, which have found it harder to cope with school closures, and especially for girls and students from low-income households. Unequal setbacks to schooling could further amplify income inequality.

Potential economic rebound

Policies barring a protracted global resurgence of Covid-19, outlook is envisaged to be positive going forward. However, global economic recovery is expected to be uneven across countries depending on policy priorities and international cooperation.

Averting divergent outcomes will require, above all, resolving the health crisis everywhere. Many countries are now left with more limited policy space and higher debt levels than prior pandemic period.

Therefore economic policies have to be better targeted, maintaining ability to support industry activity amid these uncertain times. A tailored approach will be necessary, with policies well calibrated in accordance with pandemic strain, strength of the economic recovery, and socio-economic circumstances of individual countries.

As labour market conditions normalise, targeted support should be gradually scaled back to avoid sudden cliffs. Once the health crisis is over, policy efforts can focus more on building resilient, inclusive, and greener economies, both to bolster the recovery and raise potential output.

The priorities should include investingin green infrastructure mitigating climate change, strengthening social assistance and social insurance, arresting inequality and digitalising economies.

For countries with limited fiscal space like Zimbabwe, improved revenue administration, greater progressivity in taxation, and reorientation of expenditures toward critical health, social, and infrastructural spending will be essential.

Anchoring policies in credible medium-term frameworks and adhering to the highest standards of debt transparency would help in this regard, by containing borrowing costs and reducing fiscal risks.

On the international stage, countries need to work together, ensuring widespread vaccinations across the world. The vaccine industry is attempting to produce three times the level of vaccines produced in a normal year.

Not surprisingly, they are facing major challenges, including input supply bottlenecks. Vaccine access is also deeply iniquitous with highincome countries, with 16% of the world’s population, having pre-purchased 50% of the doses.

Countries will need to work together to resolve production bottlenecks, ramp up production, ensure universal access, including through funding the Covax facility on which many low income countries rely heavily for doses, and avoid export controls.

Overview

The Ministry of Finance and Economic Development is projecting that the economy will rebound with a growth of 7,8% expected in 2021 supported by recovery of the agriculture sector, monetary and fiscal stability.

A globally sustainable vaccination programme is expected to slow down the impact of Covid-19 and facilitate the opening up of economies across the globe.

There are currently several vaccines that have been developed and the Government received several consignments as part of the public vaccination programme.

GDP growth for the year 2021 is projected to remain strong anchored on better 2020/21 rainfall season, higher international mineral commodity prices, stable macroeconomic environment and managed Covid-19 pandemic.

The Government’s efforts to stabilise prices through prudent fiscal policy and rules-based monetary and exchange rate policies have been effective and must be continued to enhance confidence and improve macroeconomic conditions.

On the fiscal side, in addition to measures to improve revenue collection, stringent fiscal policies are required to reduce distortive spending and redirect resources where they are most needed, including social service delivery and re-establishment of human capital. Annual inflation has maintained a downward trend since August 2020.

The slowdown in price level growth in 2021 so far, is highly attributable to sustainable government spending, auction system relative stability, moderate reserve money growth, and reduced Covid-19 strain.

The latest ZimStats figures show that annual inflation outturn for July 2021, as measured by the All Items Consumer Price Index (CPI), plunged 47,2 percentage points to settle at 56,4% from 106,6%  recorded in June 2021. From a month-on-month perspective, July inflation was recorded at 2,6%, down 33 percentage points from 3,9% reached in the prior month. Tight control of money supply and financial sector regulation continues to foster declaration in inflation levels.

Inflation projections were previously anticipated to fall below 135% Y-O-Y whilst month-on-month is expected to be below 1%. Having a July Y-O-Y inflation of 56.4% implies that the government is operating within set targets and government efforts remains commendable.

Local economy

The Covid-19 pandemic had a huge and unanticipated impact on the political, social and economic structure of communities across the globe. The Government, like elsewhere in the world, responded with progressive lockdowns to manage the spread of the virus and this had a far-reaching negative impact on the level of economic activity.

As they say, the best strategy to ride an elephant “is to mount whilst it’s still lying and rise with it”. The Covid-19 pandemic which originated in Wuhan Province in China has ravaged the whole world through morbidity and mortality notwithstanding socio-economic implications of the pandemic on global economies.

Supply chains have been disrupted by this global pandemic as countries close their borders and effected lockdowns in a bid to contain the ailment. These disruptions are creating widespread impacts on companies to an extent of putting some in financial distress. Covid-19 crisis has also exposed major vulnerabilities in company operations and supply chains linked to conditions of work and disaster preparedness. The government has taken extraordinary steps trying to contain the epidemic through general confinements and large scale shutdowns of economic activity as well as issuing aid and recovery packages to support struggling companies and workers.

Many listed and private companies have also stepped up to contribute to the containment effort and to soften the economic blow of workers and supply chains.

Roll-out of vaccination programmes has raised hopes of a turnaround in dealing with the pandemic though new waves and variants continue to pose uncertainty concerns.

The vaccination programme is being carried out as it will help in achieving herd immunity, allowing the economy to open up through removal of travel restrictions and lockdowns that have greatly affected business operations.

Overall business performance

Generally local companies performed relatively well in the first half of 2021 and industry as a whole remains bullish about the second half of the year.

Some major challenges experienced in the first half are outlined below:

Delays in settlement of auction market bids (production bottlenecks)

High labour costs as companies adhered to Covid-19 regulations and digitalisation of operations.

These challenges meant that the industry remained sceptical about sustainable economic growth and medium to long term business prospects. It also meant that costing and pricing of goods remained a challenge as not all foreign currency needs could be met from auction allocations.

Opportunities

Auction system ushered some economic stability

Covid-19 created an opportunity for industry growth through increased local demand as supply chains remain disrupted (through import restrictions)

Agricultural bumper harvest providing raw materials for agri-businesses.

The opportunities present industry stakeholders with a chance to get significant levels of foreign currency through formal channels, thus eliminating price instability.

Secondly import substitution creates room for industry to grow and seize market share from imported brands.

Possible threats going into 2nd Half of 2021

  •  Widening parallel market premium (more than 60%)
  •  Wage pressures (both public and private sector)
  •  Cost pushes Inflation — re-pricing of goods and services
  •  Cash dollarisation —  economic agents resorting to use of USD cash which in most cases remains informal
  •  Resurgence of Inflation in both USD and local currency

This is part   of a series on 2nd Half Outlook Report by FBC Securities Private Limited.As a member of the Zimbabwe Stock Exchange, duly licensed by the Securities Exchange Commission, FBC Securities specialises in the facilitation of ownership and disposal of listed securities on the Zimbabwe Stock Exchange.

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