zimbabwe economic outlook2013-14

8/12/2019 Zimbabwe Economic Outlook2013-14

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ZIMBABWE ECONOMICOUTLOOK 2013-2014

Prof Tony HawkinsGraduate School of ManagementUniversity of ZimbabweJuly 16, 2013


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Copyright 2013 IHS Inc.

ECONOMIC RECOVERY

After a 10-year meltdown the economy is inrecovery mode

Strong, short-run boost from dollarization in 2009

Progressively run out of steam since late 2011reflecting two main influences:

(a) Sluggish global economy and weaker commodity

prices, and(b) Political and policy uncertainty and instability

ahead of the 2013 polls

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REAL GDP GROWTH (% p.a.)

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POLITICS DOMINATE

The conduct and outcome of presidential andparliamentary elections within the next few weekswill drive short-term economic performance.

Three main scenarios:Worst Casechaotic election, indecisive result

Base CaseZanu-PF clear cut victory recognized

regionally and internationallyBest caseclear-cut MDC victory recognizedregionally and internationally

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WORST CASEANOTHERCOALITION

Months of political wrangling over new coalitionagreement

Political uncertainty entrenches

Policy uncertainty deepens and Most investorsnot allforeign and local, sit ontheir hands

International lending and development agencieslimit engagement

Economy stagnates, poverty and unemploymentworsen and social unrest mounts

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BASE CASEANOTHER FIVEYEARS OF ZANU-PF

Short-term uncertainty over:

International reaction and responses, and

who succeeds President Mugabe and when?

Intra-party faction fighting intensifies

Policymaking paralysedexchanging currentuncertainty for a different type

Militants push hard for indigenization, more stateownership and limited engagement with donors andBWIs

Focus on Look East policy China, Russia, India6


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BEST CASEMDC WINS OVERALLMAJORITY

Greater economic policy rationalityextremeeconomic policies diluted or dropped

Closer engagement with international community at

all levels Focus on strengthening institutions especially ruleof law, free media

Focus on foreign capital, especially forinfrastructure but also FDI generally

Focus on job creation and poverty reduction

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MDC DOWNSIDES

Disappointing track record since 2009blamed(partly rightly) on dysfunctional coalition.

Leadership lacks credibilityperceived as

indecisive and prone to policy u-turns. No reversal of land reform nor indigenizationomelettes (land) cannot be unscrambled.

No political, popular support for efforts to revert to

past agricultural models, meaning change will beevolutionary.

Strong popular support for sensibly-managed

indigenization.8


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OUTCOMES

In a country with no opinion polling and a possibilitysome would say certaintyof intimidation andvote-riggingno sane person, let alone economist,

would dream of trying to call the outcome. For what it is worth, the conventional wisdom is thatit will come down to the turnout.

A low turnout favours ZPF and a high oneespecially if the MDC can get the youth vote outfavours Tsvangerai.

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As an economist I cannot imagine how voters wholived through hyperinflation and the 10-yearMugabe Meltdown could give his party yet another

chance, especially given the uncertaintysurrounding the succession.

Despite the MDCs disappointing track record, the

election is theirs to win, always remembering that

they may not be allowed to do so if the dark arts ofvote-rigging and intimidation prevail.

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Outright MDC victory sets the stage for annualgrowth in the region of 6% annually

In the other two scenarios growth would be

significantly slower (4% best, probably less) Much would depend on global economic conditionsand

International political responsesAll three scenariosbut especially the latter twoare at risk from mounting socio-political unrest

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THE ECONOMY


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ECONOMIC PROSPECTS

Depending on the conduct and outcome ofelections, Zimbabwes open economy means GDP

growth will depend heavily on global conditions,

especially demand and prices for commoditiesmetals, including gold and diamonds, and tobacco,cotton, sugar, etc.

This global reality plus five inter-related binding

constraints underline the degree to which policy isconstrained in Zimbabwe.

In other words, dont expect miracles from a

severely-constrained new government.13


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BINDING CONSTRAINTS

a) Overvalued exchange rate (US$ in Zimbabwe)

b) Infrastructure deficitelectricity, transport, water

c) Balance-of-payments deficit and debt overhang

d) Finance of all kindslong-term, working capital,

private equity and venture funding

e) Skillsespecially at technical (blue-collar) level

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CONTEXT AND PATHDEPENDENCE

Growth prospects must be seen in contextZimbabwe is where it is today because of its past.

Too many analysts ignore this path dependence.

For them any kind of changefrom UDI in 1965 toIndependence in 1980, the Structural AdjustmentProgramme (1991), land reform (2000) and theinclusive government (2009)was heralded not

just as a hopeful omen of better days ahead, but asa signal that conditions willindeed mustimprove.

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AN OVER-HYPED STORY

The following slides provide the necessary contextover a period of 53 years

World Bank data show that Zimbabwes economyhas grown 1.5% annually over that period

Population grew faster until the 2000sincome perhead fell, so that today the man/woman in the street

is poorer than in 1960

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INCOME PER HEAD(US$ constant prices)

0

100

200

300

400

500

600

700

1960 1974 1979 1991 1998 2008 2013f

US $

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ZIMBABWE: THE LONG HAUL

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Period Years GDP(% p.a.)

GDP per head(% p.a.)

1960-1974 14 6.4 2.9

1975-1979 5 - 1.5 - 4.0

1979-1991 12 5.4 1.7

1991-1998 7 2.3 0.6

1998-2008 10 - 6.0 - 6.3

2009-2013 (f) 5 6.6 5.2

1960-2012 53 1.5 -0.2


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EVAPORATING MIDDLE CLASS

The 1998-2008 meltdown depleted the middle classprofessionals left, others slipped from middle-income to low-income market segments.

Average wageexcluding agriculturewasapproximately $550 a month (mid-2011).

Only 800 000 formally employed (excluding

agriculture)down 20% from 1998 peak. Only 15% of the labour force has a paid job in theformal sector.

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NON-FARM EMPLOYMENT

0

200

400

600

800

1000

1200

1980 19085 1991 1998 2000 2009 2010 2011

000s

20


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INFORMAL ECONOMY

2011 data put the informal economy at about 20% ofGDPway below previous World Bank estimates(50% plus)

Seen by many as a serious under-estimate Over half (53%) is informal farm activity and 47% non-farm

Some 3.7 million people are engaged in the informal

economy which means they generate an annualincome per head of some $520less than the monthlyaverage non-farm wage and below the monthly cost-of-living shopping basket for a family of 5 ($567)

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These numbers highlight the extent to which marketanalysts over-hype the value of the informal sector in

Africa.

It is a low-productivity, low-wage, low-technology, non-tax-paying drag on development, used by governmentsand donors to camouflage the reality of poverty.

Zimbabwes large informal sector is associated with

very high poverty levels of 63%(16% of thepopulation living in extreme poverty).

In rural areas the poverty rate of 76% is double theurban rate.

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ECONOMIC OPENNESS


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TINY PLAYER

Because Zimbabwe is a tiny player$11.7 billion ina $74 trillion world economyglobal influenceshave a major impact on economic performance,

both immediately and in the long-term.

Exports account for a third of GDP, but imports aremuch greater at 52% of GDP.

As a result, net exportsi.e. imports funded fromoffshoreare 25% of GDP.


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TRADE GAP NARROWS

In 2012, Zimbabwes exports dipped for the first

time since 2009.

Fortunately, imports also declinedreflecting

weaker domestic demandso that the trade gapnarrowed from $3.1 billion to $2.7 billion.

The trade gap is huge because:

Zimbabwe is a serial over-consumer (90% of GDP)so that demand spills over into imports.

Worse, it has become a high-cost, low-productivityeconomy that attracts imports and undermines

export competitiveness.


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FOREIGN TRADE (US$ Millions)

10002000

3000

4000

5000

6000

7000

8000

1993

1996

1998

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Exports Imports


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HUGE DEPENDENCE ON FOREIGNLOANS

With domestic savings have been wiped out byhyperinflation and dollarization the country isunhealthily and unsustainably dependent on foreigncapital of all kinds.

Since 2009 Zimbabwe has run up a cumulativebalance-of-payments deficit of some $11.6 billion.

Just over half has been covered by net capital

inflows.A quarter is unrecorded inflows and the balance thefurther build-up in arrears, now totalling some $7.5billion.

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Seven primary products, dominated by preciousand semi-precious metals, contribute two-thirds ofexports.

Fourtobacco, platinum, diamonds and gold makeup almost 60%.

This highlights just how vulnerable the economy isto commodity price fluctuations, especially those for

gold, platinum and diamonds, where Zimbabwe is avolume producer of low-quality gems.

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LEADING EXPORTS 2012

Product $ Millions % of Total

Tobacco 775 19.1

PGMS 775 19.1

Diamonds 770 19.0

Gold 715 18.5

Cotton 198 5.0Ferrochrome 126 3.1

Sugar 110 2.7.29


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BIG BORROWER

This excessive dependence on foreign capital isdeeply ironic given the governments indigenization

policy.

True, Zimbabwe has attracted some $6.7 billion offoreign capital since 2009.

But 80% of this was borrowed offshore.

Only 20% was fresh investment (FDI and portfolio). By the end of 2013, foreign debtincludingarrearswill have almost doubled in just 5 years.


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FOREIGN DEBT AND ARREARS

0

24

6

8

10

12

14

16

2009 2010 2011 2012 2013f

Debt

Arrears


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Most of this steep increase in offshore borrowing isshort-term funding by the private sector while long-

term inflows, including FDI, have beendisappointing.

In 2012/13 foreign funding of all kindsincludinginflows from the Diasporaare averaging over

$2.25 billion (18% of GDP).

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OFFSHORE BORROWING

-200

0

200

400

600

800

1000

2009 2010 2011 2012 2013

LONGTERM

SHORTTERM

PRIVATE

Forecast

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TWO MESSAGES

Two messages flow from this:

Zimbabwe cannot go on borrowing at such a rate,and

must negotiate a debt-relief agreement withcreditors sooner rather than later.

The recently-signed SMP is a first step towardsthat goal but it is one that could be derailed byeither a ZPF election victory or another electoralstalemate.


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DOLLARIZATION DOWNSIDE

Historically, Zimbabwe solved its competitivenessproblem by devaluing the local currency.

At Independence in 1980, the Zimbabwe dollar was

worth US 160 cents.

By the time the local currency collapsed in 2008, itwas worthless.

Such devaluation is no longer an option.


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INTERNAL DEVALUATION?

Last year the IMF estimated that the US dollar was15% overvalued (in Zimbabwe) thereby making theeconomy highly uncompetitive.

Zimbabwe, ranked 132nd

on the GlobalCompetitiveness Index, is using the same currencyas the US, ranked seventh.

In 2013, the choice is starkEurozone-style

Internal Devaluation

Or increasing even further its reliance on foreigncapital.

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UNPALATABLE OPTIONS

Both policy paths are unpalatable:

a) Internal devaluation (austerity) is simply not aviable strategy given current income, poverty andemployment indicators

b) Foreigners are not going to supply the requisitecapital so long as economic and resource

nationalism dominate the policy agenda and thereis no debt-restructuring agreement

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THE DRAWBACKS OF FOREIGNCAPITAL

In any event, foreign capital dependence is not anoptimal growth path.

Those countries that reduce consumptionas a

percentage of GDPand boost domestic savings,use their capital better to grow faster than thosethat rely on foreign borrowing, especially foreignaid.

FDI is more closely correlated with growth, butZimbabwes current hostile stance towards FDI

limits such inflows.

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COMPETITIVENESS AND THEDOLLAR-RAND THREAT

A key concern is the widening gap between astable US dollar and a falling rand.

Over the last year the dollar has gained 3% while

the rand is down 15%an 18 percentage pointgap.

If South African exporters pass on their devaluationgains in the form of lower import prices to

Zimbabwe, the country would benefit.

But because Zimbabwe is a captive market there isreally no reason why they should.

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The 2012-13 SLOWDOWN


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The slowdown over the past year is reflected in

Static employment

Wages growing faster than productivity

Falling mining and industrial output

Sluggish agricultural growthexcept tobacco

Lower imports, flat exports

Reduced electricity consumption42


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MANUFACTURING: (1980=100)

0

20

40

60

80

100120

140

160

1980 1990 1997 2000 2004 2008 2009 2010 2011 2012

Vol Index


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INDUSTRY

Manufacturing production is only 60% of its 1980levels and output is lower than in the late 1960s.

Mining production trebled after dollarization to peak

at $2 billion (70% of exports) in 2011. Supply-side constraints and weaker prices havesince taken their toll and output in 2013 is likely tofall below $1.8 billion.


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MINING OUTPUT FALLS

Gold output at 15 tons is little more than half itspeak of the 1990s

But diamond production has jumped from nowhere

to 12.5 million carats while platinum has grown to11 500 kgs.


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REVISIONISM

Recently, itinerant academics, journalists, and evenpolitically-motivated World Bank consultants, havesought to claim that land reform in Zimbabwe is

turning out to be a success. The facts tell a very different story

Excluding estate-grown sugar, agricultural output isless than half its 2000 levels, while maize

production has more than halved.

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In 2013 a country, which in the 1990s was foodself-sufficient, will import over $700 million of food.

While tobacco output has trebled since 2008 thanks

to the influx of over 70 000 new small-scalegrowers, production at 180 million tonnes is still20% below its peak in 2000.

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FARM PRODUCTION VOLUMES

0

500

1000

1500

2000

25003000

3500

4000

4500

TONNES


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Some 70% of tobacco is grown by small-scalefarmers, much of it by those on resettled properties.

Next year there will be over 100 000 growers

compared with less than 10 000 in 2000. In this one industry, resettlement is working thoughas stressed already it will take at least until 2015 toregain 2000 levels of output

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Almost overnight, dollarization solved thehyperinflation problem in 2009.

In the last 4 years, inflation has averaged 3% ayear, slowing to 2.2% in mid-2013.

It is likely to nudge higher in the latter half partlybecause food and fuel prices are rising and there

is a high pass-through rate (60%) of SA inflationinto Zimbabwe.

Inflation


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INTEREST RATES

Interest rates are more likely to go up than down,reflecting the tight liquidity situationitself afunction of a huge BOP deficit.

There has been no deposit growth in 2013 andbanks are fully loaned up (81% of their deposits).

Credit is very expensive = 10% for corporates and

14.5% for individuals, mostly short-term finance.


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PROFITS

In the most recent reporting period, 19 of 50 ZSE-listed non-financial firms incurred losses.

The graph shows how margins collapsed afterdollarization but have since stabilized.

However, average margins are well below those ofthe 1990s, which is partly a reflection of the much

lower inflation.


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CORPORATE MARGINS RECOVER (%)

0

5

10

15

20

25

30

35

40

45


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WHERE TO NOW?


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For half a century, the Zimbabwe economyhas underperformed, aside from a numberof brief growth spells.

Industrialization has stalled and thecountry is currently de-industrializing.

Miningcoal, methane gas, gold,

platinum, diamonds, nickel andferrochromewill drive the economy overthe next decade.

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ELEPHPHANT IN THE ROOM

But growth will be seriously constrained byinfrastructure bottlenecks ($20 billion neededin new investment), scarce capital and thevagaries of global demand.

The elephant in the room for all investmentespecially mining and bankingis the

indigenization legislation, which is all butcertain to be radically revised.

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But a country with such massively high levelsof poverty and unemployment cannot rely on

capital-intensive mining growth to create jobsand alleviate poverty.

And manufacturing is unlikely to step up to

the plate.

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The days of inward-looking industrialstrategies in tiny low-income markets havelong gone.

Manufacturers will have to become better-quality, predominantly niche players andforget trying to compete on price with Asian

imports.

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Small-scale farm successesas in tobaccoand to lesser extent, cottonare not growthdrivers for a modern economy.

Over time, Zimbabwes agricultural revolution(land reform) will self-reverse.

More and more people will leave the land

and farms will agglomerate again, though notto anything like the same extent or in thesame way as before.

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Globally, the long-run outlook for farmproduction and prices is good and Zimbabweis well placed to revive its agricultural sector

provided:Policies are marketnot politicallydriven, and

The focus shifts from agricultural policy toagribusiness policythat emphasizes thecentral role of value chains.

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CONCLUSION


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Today, Zimbabwe is on an unsustainable growthpath.

Unsustainable in both economic and socio-

political terms. Changing the countrys business model is not

rocket science.

It is not a matter of economic expertise or even ofresources but of political will.

THE MODEL HAS TO CHANGE


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AT THE CROSS ROADS

It is not the private sectorfarmers, industrialists,miners and bankersthat are underperforming.

It is the systempoliticians, institutions,infrastructure.

There is a chance that the environment will changeafter this months polls.


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CONCLUSION

But change has to be meaningful in the sense of amore committed, more competent and moreeconomically-oriented administration with a focuson the population as a wholenot a narrow elite ofrent-seekers.

Zimbabweansdare I say it, South Africanshaveto move on from ideology-driven policies to

pragmatism, and from politics to economics.

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50 YEARS OF FALSE DAWNS

2013 could be the watershed year.

Many believed that in 1965 (UDI);

In 1980 (Independence);

In1991 (Structural Adjustment); In 2000 (Land Reform) and

In 2009 (The Government of National Unity)

Perhaps this time it will be differentit had betterbe.

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