The economic turnaround that has taken place since the formation of the Inclusive Government in February is extraordinary. Recent corporate results highlight the sharp recovery that is taking place in almost all industries. Strong monthly volume growth, growing demand, rising capacity utilisation and a move into profitability have all been features of management presentations. True, Zimbabwe’s formal sector is coming from a very low base, but nevertheless momentum is gaining traction. The banking sector, which was all but insolvent in January being the last sector to dollarize, has recently reported strong profit growth for the first six months of 2009, far exceeding expectations. Deposits continue to expand rapidly, rising from virtually nothing in February to $500m in May and we estimate over $1 billion at the end of August. This is significant as the banks are finally beginning to lend at long last. The ‘local’ banks are reporting loan to deposit ratios approaching 50%. The result, given competition and continued monthly gains in deposits, are declining borrowing rates to corporates and a greater availability of capital for industry. Again we are coming from a low base where a few months ago, what credit could be accessed was at exorbitant levels. For the banks whose deposit rates are very low, the margins on loans remain high and hence the profitability. Loan to deposit ratios can rise but with no lender of last resort (ie the Central Bank), the banks themselves have to be cautious in their lending which is not a bad thing in this day and age, not just in Zim but globally too. It remains early days in Zimbabwe’s developing banking industry and money markets and the development of a commercial bond market will only help to put pressure on lending rates. Debit cards are now increasingly available, VISA is back and cheque books are back in use for small denomination payments. In short, holding large quantities of cash is less necessary than it was. Over time, hopefully not too long, we will begin to see the return of mortgages and credit cards. That in itself will result in another major boost to the domestic economy.
Long term capital and credit lines from offshore remain illusory. Despite the ‘talk’ of credit lines being extended to Zimbabwe, in practice those lines are hard to access if at all. There is good reason for this. Whilst the economy is now operating under multiple currencies (largely US dollars and rands), and in effect exchange controls have been eased, the laws have yet to be changed! We are all in effect breaking the law by using foreign exchange and not the now extinct Zimbabwe dollar. With the recent suggestion by the Governor of the Reserve Bank that the Zimbabwe dollar could be reintroduced at some point in the future, it is hardly surprising that foreign bankers and investors are very cautious about placing their money! At the moment, Zimbabwe is one of the few countries in the World where there is no currency risk should you be a US dollar investor. This is a huge advantage over other frontier economies where currency risk is to the fore. It is an advantage that Zimbabwe needs to capitalize on but to do so the law needs to be changed to solidify the multiple currency regime and the removal of exchange controls. Calming words from the Minister of Finance are simply not enough for foreign capital providers in the current global environment, whilst ‘personal suggestions’ from the Reserve Bank Governor are unhelpful to say the least. The economic authorities should be speaking with one voice.
Changing the laws to reflect reality in the monetary system, is just one area. Repealing laws in other areas is equally important. Over the past three months, Zimbabwe has hosted two mining indabas, in both London and Johannesburg. Shortly, there will be another mining conference but this time held here in Zimbabwe. The mining ‘laws’ are a great source of confusion for potential foreign investors. The Prime Minister said in London that the indigenization aspects of the mining laws would be reviewed. At the moment the suggestion is that a foreign investor should in effect provide 100% of the capital to develop a resource but give 51% away to indigenous partners. That is clearly unworkable and the Government knows it. Before any sensible foreign mining company will take advantage of developing Zimbabwe’s many resources, the definitive law needs to be put in place. That will make the forthcoming Harare Indaba particularly interesting as we doubt that the authorities will be speaking from the same hymn sheet, further adding to confusion amongst the foreign investment community! We hope we are proved wrong. The net result is that the only developments taking place in the mining industry today are being undertaken by existing companies that are already on the ground with a resource, but these developments are being held back by a lack of capital.
A further hindrance to development has been the Government’s reluctance to sign any investor protection agreements, the most significant being that with South Africa. Given Zimbabwe’s recent past and the fact that an Inclusive Government is not a long term solution to the country’s political landscape, foreign investors and in this case, South African investors, naturally need a Government to Government agreement that will help to protect any investment that they may make in the country. This might cover sectors such as telecoms, mining, banking, tourism and agriculture in addition to other sectors where strategic partners are required. This agreement has been on the
table since March and yet still the Zimbabwe Government remains reluctant to sign it. As the Minister of Finance has said on many occasions, Zimbabwe is ‘shooting itself in the foot’. We have no doubt that an agreement will be signed, but any delay simply delays Zimbabwe’s further recovery. Again the ‘right’ talk needs to be converted into legal documents.
Meanwhile local industry is being forced to adapt…or die. Dollarisation takes no prisoners. Pricing pressure on traded goods will not disappear so long as Chinese and South African competition is strong. Pricing pressure on non-traded goods, suchas air cuts as an example, can only be increased through local competition. So whilst we have seen prices of products in the shops fall sharply, the price of a ‘hair cut’ has gone up. As the money supply increases and wealth with it, non-traded goods prices will likely rise whilst tradable goods price will stay under pressure. For the manufacturing sector, the pressure on prices is relentless. Under sanctions in the 1970s, Zimbabwe’s manufacturing sector thrived as the country needed to manufacture its own products. The legacy of that is that arguably Zimbabwe manufacturers are producing too many product lines and hence economies of scale cannot be achieved. The Zimbabwe market on its own is tiny. Management should see the region as being the market and should focus production on those products where they have a comparative advantage in the region, especially north of the Limpopo. This may mean producing only one or two products but rather do that and well than not at all. Export those products to the region. Being a member of both Comesa and SADC puts Zimbabwean producers at an advantage, as does the fact that production costs are largely based in dollars as are their revenues. A fluctuating local currency - as Zimbabwe’s regional competition face - makes it hard for them to compete consistently.
Finally some numbers to put Zimbabwe today into perspective. In 1997, Zimbabwe’s GDP according to the IMF was just under US$9 billion. By comparison, Zambia’s economy was around US$3.5 billion, seven years after their economic reform started in 1990 when it had effectively become a basket case. Today, Zambia’s economy is US$13 billion but according to IMF estimates for Zimbabwe in February of this year, GNP was a mere $3.5 billion. That’s some turnaround! We recognize that these numbers are estimates and take account of the formal economy that by the end of 2008, barely existed. As the formal economy once again takes market share from the informal economy, we would expect Zimbabwe’s GNP number to rise rapidly. Indeed, looking at the micro level and hearing what companies are witnessing in terms of volume growth and capacity utilization, we would expect GNP to grow very rapidly indeed in 2009 and 2010 and far faster than current Government and IMF estimates of 6% or so. Indeed it should not take too much to see Zimbabwe’s GNP approaching Zambian levels again in the not too distant future.
At its peak, gold production was one million ounces per annum. At current gold prices, that represents about $1 billion or 30% of estimated GNP. Platinum though is a much larger resource for Zimbabwe. Who knows what diamonds could be or what we might get coal back to. The former British Ambassador suggested that humanitarian aid to Zimbabwe was currently running at about $700 million per annum. Government estimates that potential credit lines could total more than $1 billion. All of these are big numbers relative to $3 billion estimated GNP. Meanwhile the stock market, excluding dual listed counters (Old Mutual and PPC) is capitalized at $3.5 billion. As formal GNP grows rapidly, and given that Zimbabwe has a well diversified and active Stock Exchange a high Market Capitalisation to GNP ratio is well justified, implying the market cap today is way too low relative to the growth potential of the economy.
To date, the credit lines and investments promised by international financiers and businesses have yet to be forthcoming. This has surprised and worried the Inclusive Government. There is a simple reason for this delay though. Zimbabwe has yet to put its words into law, whilst investor protection agreements need to be in place. Until that happens, no funds will be forthcoming from those entities. Foreign investors need to know where the goal posts are before making major commitments and not just where the pitch is. That said, and as we write, the IMF are providing Zimbabwe with foreign exchange reserve support to the tune of $500 million. That is highly significant although at this stage we have yet to hear of any strings that might be attached to this support. For a $3 billion economy, that’s also a big number.
John LegatChief Excecutive, Imara Asset Management
Posts
