A few years ago, after the hyperinflationary meltdown in 2008, Zimbabwe was in strong recovery mode. GDP doubled by 2012, on the back of rebounding commodity prices, a surge in wages and consumption of imported goods.
Since then foreign capital inflows have dried up and exports have fallen. Consumer prices have fallen just 6% from their peak even as neighbouring South Africa has seen a 40% currency depreciation. The lack of downward wage adjustment in Zimbabwe has maintained excessive import demand which has now used up most of the foreign currency in the country. Dollar deposits in the banking system have become theoretical, a little like euro deposits did in the recent liquidity squeezes in Greece and Cyprus. The government might put money into employee bank accounts, but there is no cash to withdraw from the bank account. Zimbabwe is bust. Again.
The government’s responses range from unsustainable to sensible (and overdue)
The government is trying a variety of approaches to deal with this problem. It has stopped paying wages in full, but this has triggered a strike. It has banned the import of some consumer items, which has added to protests. It appears to be restricting the repatriation of export earnings; this is not a sustainable policy choice. The government is pushing forward a 99-year land lease law to encourage investment in agriculture, but we have not seen evidence that this will attract cash inflows. The authorities are trying to encourage locals to price in rand, but coming after five years of rand deprecation, this will still require deep price cuts to improve the current account. Zimbabwe is borrowing US$200m to back new ‘bond notes’ due for release into the system in October, which many fear will lead to unbacked currency issuance in the future. Of all the measures, the most high profile is the aim to borrow money to clear arrears to the IMF, World Bank and African Development Bank, with the aim of encouraging private capital inflows by end-2016.
The underlying problem is that Zimbabwe has no savings, and fails to attract foreign capital inflow
The underlying problem is that hyperinflation wiped out private sector savings, and the government failed to grow its own savings during the boom-time. It is reliant on export values to pick up (gold is up 27% YtD, but all exports need to rise 100% to close the trade deficit) or foreign capital to improve liquidity. We see the indigenisation law deterring foreign investment in mining; related to this, China believes Zimbabwe has bitten the hand that feeds it and is unlikely to provide significant new funding.
Zimbabwe fell two places last year in the Ease of Doing Business (EODB) rank to 155/189 which deters foreign direct investors (FDI) and is 150/167 in Transparency International’s corruption ranking which deters equity investors; while its legal score is only higher than Myanmar, Bangladesh and Venezuela. We think changing the indigenisation law, or improving corruption, EODB and legal scores, would help provide capital inflows. Significant political change could also trigger inflows. Debt forgiveness and a possible IMF financing arrangement are other options.
Most of the above measures are a wish-list. In the near term, the reserve bank governor says a 20% internal devaluation is required, which we see as the optimistic end of a 20-40% spectrum. This will be very harsh on the population and implies a deep fall in GDP. The IMF is far more optimistic with its 1.4% growth forecast for 2016 and 5-10% rebound in 2017.
Agriculture should help in 2017 but we expect problems to intensify in coming months
Zimbabwe is not alone in suffering from lower commodity prices. But its poor business environment contrasts with Kenya, and it does not have the relative luxury (that Nigeria and Egypt have) of softening the pain through devaluation. There probably are very interesting opportunities for long-term (private equity?) investors with a very high-risk appetite, but for now, we expect problems to intensify. The positives are the post-El Nino rebound, the likely clearance of external debt arrears, and rising gold prices.
Charles Robertson is global chief economist at Renaissance Capital