Morgan & Co
THIS report focuses on our insights on the outlook of the Zimbabwean economy following several monetary policy and capital restriction measures as well as the presentation of the 2022 Mid- Term Budget Review and Supplementary Budget.
A key concern has to do with emerging inflationary pressures in the domestic economy and a deteriorating Zimbabwean dollar (Zimdollar).
This has triggered the Government of Zimbabwe to institute measures that have impacted local capital markets.
Further the introduction of gold coins (Mosi oa Tunya) to the universe of investable assets has implications to traditional investment markets in Zimbabwe (such as the stock market).
Overall, while we expect the country to register modest growth in 2022, extreme economic risks still exist and continue to hamper the potential for a much-solid economic recovery.
The negative impact of the Russian/Ukraine war, a colossal debt overhang (US$13,15 billion in external debt), limited access to credit, country-specific issues, such as power shortages and election-related risks all present significant headwinds for economic growth in 2022 and 2023.
The Zimbabwe syndrome
According to the International Monetary Fund (IMF), debt loads in poorer countries around the world stand at the highest levels in decades.
For example, Zimbabwe currently has unsustainable external debt amounting to US$13,15 billion.
Squeezed by the high cost of food and energy, a slowing global economy, and a sharp increase in interest rates around the world, developing economies are entering an era of intense macroeconomic pain.
This includes limited fiscal space, weak growth, and increased poverty levels. Worse still, for a country like Zimbabwe that is twirling under economic sanctions, it has had to go-it-alone.
As a result, the government has been dipping its fingers everywhere through policy shifts that have largely made forecasting and planning a mammoth endeavour for business leaders and investors on local capital markets.
Our concern is that the policy shifts have become somewhat of a syndrome on the part of policy makers. Instability has become a common feature or condition in the economic structure of Zimbabwe.
Economic growth downgrade
The IMF has revised downwards global economic growth projections to 3,6%, down from the initial projection of 4.9%. The downgrade largely reflects the direct impacts of global tensions and spill overs.
In addition, the IMF trimmed Zimbabwe’s growth forecast to 3,7% from 4,3%.
On the other hand, the Ministry of Finance and Economic Development has revised its GDP growth forecast for Zimbabwe downwards from 5,5% to 4,6%.
The gold coin has triggered a sell-off on the Zimbabwe Stock Exchange (ZSE) as institutional investors are switching to an alternative asset-class that has prescribed asset status.
As a result, the stock market has largely de-rated on weak demand because of tight liquidity on the market.
One fundamental observation is that stock prices have declined significantly in real terms and the market is looking “cheap”. The recent sell-off on the ZSE has resulted in apparent undervaluation of traditional blue chips like Delta, Econet, Innscor, Hippo and Meikles while there has been no fundamental changes to business models.
Additionally, the financial services sector remains undervalued. BUY the ZSE!
New measures and policy shifts
Over the past 24 months, the Government of Zimbabwe has instituted drastic measures in a bid to control inflationary pressures, instil confidence, strengthen demand for the local currency and foster market discipline.
The thinking on the part of the government is that exchange rate movements are being driven by negative sentiments of economic agents as opposed to economic fundamentals.
That said, these measures have had an impact on local capital markets. We summarise some of the measures hereunder;
The suspension of trading of dual-listed stocks on the Zimbabwe Stock Exchange (ZSE);
Capital gains tax for shares held for a period not exceeding 270 days was reviewed to 40%. This measure is set to deter short term speculative buying and selling of shares;
The quarterly reserve money growth target was reduced to 0% per quarter;
Continuation of partial dollarisation (multi-currency system), while working towards a managed de-dollarisation process;
A review of capital markets regulations to curb speculative tendencies (inter account transfers between client sub account with a broker are now prohibited, third party funding of client sub-accounts is no longer permitted, transfer out of client sub account with a broker only allowed to the customers’ bank account and not to third parties);
Foreign currency tax obligations to be settled at interbank exchange rate;
All domestic foreign currency transfers to attract IMTT of 4%;
Entrenching the multi-currency system and inter-bank market exchange rate through legislation for the NDS1 period;
Periodic reviews of the remuneration framework for civil servants to cushion them against increasing cost of living;
Upwards review of the bank policy rate to 200% discourage speculative borrowing;
Introduction of a limit on the number of days for holding foreign currency by exporters to enhance
- Circulation in the economy; and
- Introduction of Gold Coins as an alternative store of value.
- Implications of the new measures
The new measures have had a negative impact on trading volumes on the local stock market given (i) limited access to ZWL liquidity and (ii) an increase in trading costs (increase in CGT). On another note, the punitive tax regime in Zimbabwe is the major cause of the high level of informality in the economy.
Zimbabwe is indeed among the top five informal economies in Africa alongside Benin, Gabon, Central African Republic and Nigeria.
While the informal sector can sustain households, the main disadvantage for government is that it limits revenue collections given that informal businesses do not pay direct taxes and other social security contributions.
In terms of the ease of doing business, the country already ranks poorly according to World Bank Rankings. In 2020, the ease of doing business index for Zimbabwe was 54,47 score. Policy uncertainties further dents the ease of doing business rankings.
All in all, the instability has largely triggered low levels of investor confidence which has been a major impediment in terms of Foreign Direct Investment (FDI) flows into the country. Also, currency risks have also limited inflows.
This is because investors cannot freely move money in and out of Zimbabwe. This remains a barrier to the flow of new money into Zimbabwe. As a result, the country has also not been able to secure adequate lines of credit to capacitate local producers.
Morgan & Co Research contends that Zimbabwe needs to do all the things necessary to attract foreign and regional partners to not just grow but survive in the new global economy. International investors today possess a plethora of investment options in the form of asset classes and projects they can invest in. Zambia, Malawi and even South Africa are competing for investment allocations from the same global investment market.
In other words, Zimbabwe’s political or economic demise can be — in a wa y— an advantage for other African states. Curbing corruption, improving the ease of doing business and upholding democratic ideals goes a long way in attracting capital flows into Zimbabwe. Government policies in Zimbabwe should also be modelled around boosting productivity by focusing more on factors that lead to economic growth. These include (i) accumulation of capital stock, (ii) labour inputs and (iii) technological advancements.
Regional local growth downgrades
Economic recovery in Sub Saharan Africa (SSA) is expected to slow down to 3,8% during 2022, before accelerating to 4% during 2023. The region’s recovery will be supported by elevated commodity prices, gradual recovery in tourism, with vaccinations in some tourism-reliant economies already proceeding at a much faster pace than in the rest of the region.
Morgan & Co is a securities firm.
On the other hand, the Sadc real GDP growth is projected to decelerate to 3,1% in 2022 from a recovery of 4,4% experienced in 2021. South Africa, a major economy in the region, is projected to grow by 1.9% and 1,4% in 2022 and 2023, lifted by growth in trade, tourism, mining and manufacturing, although electricity supply constraints and underperforming state-owned enterprises may weigh down growth.
SSA economies GDP growth
Looking at the Zimbabwean context, the economic outlook remains highly uncertain. More recently, the World Bank trimmed Zimbabwe’s growth forecast to 3,7% from 4,3% on the back of the impact of the Russia-Ukraine war and the Covid-19 pandemic.
The Bretton Woods Institution also expects growth to marginally slowdown in 2023 to 3,6%. On the other hand, the Ministry of Finance and Economic Development has revised its GDP growth forecast for Zimbabwe downwards from 5,5% to 4,6% because of the impact of external global risks such as the Russian/Ukraine Crisis.
In addition, growth has been weighed down by reduced output from the 2021/22 agriculture season. However, government expects the economy to continue on growth trajectory and register 5% in 2023.
This growth is expected to be driven by favourable international commodity prices, stable macroeconomic environment, and improved production in all sectors of the economy.
Morgan & Co Research projects a modest 2022 GDP growth of 3.2% in 2022 and 4.0% in 2023 given that the country is not insulated from geopolitical headwinds and is also facing several regional and country-specific constraints such as power shortages.
Zimbabwe GDP Growth
The Minister of Finance and Economic Development presented the 2022 Mid-Term Budget and Economic Review on July 28 that provided an update on the performance of the economy and the progress on the 2022 budget implementation during the first half of the year.
The presentation was done under the 2022 Budget theme “Reinforcing Sustainable Economic Recovery and Resilience”.
Morgan & Co Research notes that the 2022 National Budget was premised on revenue collections of ZW$850,8 billion (16,8% of GDP and US$1,8 billion at interbank rate of US$1:ZW$465) and expenditures of ZW$968,3 billion (target budget deficit of ZW$76,5 billion/ 1,5% of GDP). The unaudited outturn during the first half indicates revenue collections of ZW$506,6 billion, against expenditures of ZW$534,5 billion, resulting in a budget deficit of ZW$27,9 billion, against a target deficit of ZW$45 billion.
Development partners complemented fiscal resources with an amount of US$190 million having been disbursed towards various projects and programmes. Of this amount, bilateral partners contributed US$164 million and multilateral partners US$26 million.
The Minister of Finance and Economic Development indicated that several constraints emerged during implementation of the 2022 Budget such as:
Requirements to review salaries to improve the welfare of civil servants;
Increase in requests for funding, including for unbudgeted expenditures;
Depreciation of the local currency (ZWL) and erosion of budget provisions;
Increases in international prices of fuel and other critical raw materials, among other key services that have rendered most budget allocations inadequate; and
Rescoping of critical components in some projects due to unforeseen circumstances.
As a result, cumulative expenditures for the first six months of the year amounted to ZW$534,5 billion, against a target of ZW$431,2 billion, resulting in a 19% overrun.
Of this amount, recurrent expenditures amounted to ZW$393,1 billion, against a target of ZW$286,5 billion.
In terms of composition, compensation of employees comprising the wage bill, salaries of staff at extra-budgetary institutions and pensions dominated the expenditures at 36%, followed by use of goods and services at 25% with capital expenditures at 25%.
Our concerns around the national budget include (i) a lean tax base given the rapid informalisation of the economy, (ii) the fact that revenues are not growing in line with inflation and (iii) the skew towards re-current expenditure (employment costs).
- Morgan & Co is a securities firm.