Half-year economic review

The year began with an expected average inflation rate of 115% for Zimbabwe in 2022 and an expected depreciation of the parallel market rate to the 400–600 range by December 2022.

Tafara Mtutu WE are halfway into 2022, and the economic environment has been more volatile than initially anticipated. The impact of several economic events has necessitated a revision of budgets by companies, and a recalibration of investment portfolios by local investors.

The year began with an expected average inflation rate of 115% for Zimbabwe in 2022 and an expected depreciation of the parallel market rate to the 400–600 range by December 2022.

However, as detailed below, global and local shocks merit a revision of these expectations given that Zimbabwe’s parallel market rates currently range between 650 and 700, while the latest inflation rate stands at 192%.

The Russia-Ukraine crisis that began in February upended global commodity markets and quickly culminated into a global crisis that had economists incorporating a possible recession in their models.

The crisis was marked by a surge in the price of soft commodities like corn and wheat given the magnitude of exports by Russia and Ukraine.

The crisis escalated when Russia leveraged on its oil and gas reserves to maintain currency stability, which underpinned the surge in the price of oil and gas.

The increase in the cost of energy subsequently rippled to all parts of the world at a critical time when the economy is still recovering from pandemic-driven supply chain challenges.

This all resulted in the 40-year high year-on-year inflation rates ranging between 8,1% and 9,2% in developed economies and much higher in several developing economies in the month of May.

The immediate response by major central banks, which was centred on containing inflation by increasing interest rates at the expense of economic growth, was felt on a macroeconomic scale.

The World Bank trimmed initial real GDP growth estimates from 4,1% to 2,9% because of the escalating crisis and the slowdown in China, which remains embroiled in the Covid-19 pandemic.

US equities responded in kind, and this was exacerbated by a tech stock cool-off after pandemic-related fatalities nosedived earlier this year in several parts of the world.

Zimbabwe’s economy has struggled to cope with emerging global developments despite the many policies that have been instituted in the first half.

In the RBZ’s first monetary policy statement of the year, key measures such as increasing foreign currency for exporters and a leeway to pay 50% of royalties in local currency were announced in a bid to stem the depreciation of the local currency and rising inflation.

However, this did little to maintain the short-lived stability as the parallel rate continued to depreciate and global risks overwhelmed these measures. By the end of March 2022, the parallel rate had moved to 680, up from 190 in January, and inflation picked up 12,2 percentage points from the beginning of the year to 72,7%.

The ZSE was unfazed as it picked ZW$312 billion in the month after the monetary policy measures were announced.

In April, the monetary policy committee announced an increase in the bank policy rate from 60% to 100% and the tightening of quarterly reserve money growth from 7,5% to 5%.

In addition, the central bank introduced the quasi-liberal willing-buyer-willing-seller exchange rate. In the month that followed, parallel market rates jumped from 290 to 390 and inflation gained another 23,7 percentage points from the March inflation rate.

The ZSE continued its rally, gaining ZW$1,466 billion over the same period. However, measures announced by the President on May 7 took the economy by surprise and sent the stock market into a tailspin.

Quarterly reserve month growth was reduced to 0% and Intermediary Money Transaction Tax (IMTT) for foreign currency transfers was increased to 4%.

In addition, third party funding in investors’ trading accounts was outlawed and the capital gains withholding tax was increased to 4% for an investment holding period of less than nine months.

Lending activities by banks were suspended for 10 days, and this was met with a steep decline in the stock market of 40,5% in the weeks that followed.

An announcement of an increase in interest rates to at least 100% for individuals and 200% for corporates in June further strained liquidity the stock market without denting the depreciation of the local currency both on formal and shadow markets.

To add salt on the wound, the central bank recently introduced gold coins, which we opine will further withdraw liquidity from the stock market with marginal impact on the parallel market rate and inflation.

A brief look at the sectoral performance of the economy’s pivotal industries – mining and agriculture – prompts mixed feelings. The mining sector was highlighted by a buoyant recovery of gold deliveries to 16 tonnes, up 59,3% compared to last year’s first half deliveries.

We attribute the jump to the appetizing payment modalities to artisanal miners. However, offsetting these upbeat statistics is the agriculture sector’s poor grain deliveries to the Grain Marketing Board (GMB), which are underpinned by the unpalatable payment prices and modalities to grain farmers.

GMB deliveries in the latest market season totalled 5 000 tonnes between April and June compared to 55 000 tonnes in the same period last year despite an above-average agriculture season because of the current purchase price for maize of ZW$75 000/tonne.

Although 30% is paid in foreign currency, input prices have significantly increased, and several retailers have begun selling fertilisers exclusively in foreign currency.

As we step into the second half of the year, we note that global commodity prices have retreated to pre-crisis levels, and this is likely to drive a decline in global inflation expectations for the rest of the year.

We note the very possible decline in gold deliveries on the back of unsustainable trading modalities around the gold coins, while the poor deliveries of grain to GMB will continue unabated without any revision to payment modalities.

While Zimbabwe could experience a reprieve from global supply-side inflationary pressures, we maintain that local drivers of inflation will drive average inflation to increase to c.230%, and parallel market rates to move beyond 1 000 by year-end.

Before we delve into the equity strategy for investors, we note that Zimbabwe’s current economic trajectory firmly follows the country’s turn of events between 2004 and 2007.

This trajectory merits a strong case for continued CPI growth and currency depreciation until a stable currency is adopted. It is on the backdrop of this revelation that we propose that strategy outlined in the next lines.

We recommend investors to overweight blue-chip stocks, which registered a stronger recovery in USD after the economy’s dollarisation in 2009.

Top picks include Delta, Innscor, and Simbisa Brands. We also acknowledge that some investors are bound by their investment mandates, and thus we propose intra-sector switches.

A few worthy of mention include moving from OK Zimbabwe to Meikles, CFI to National Foods, Seed Co Limited to Tanganda, and RTG to African Sun.

  • Mtutu is a research analyst at Morgan & Co. — [email protected] or +263 774 795 854.