EUR 348.10 For Business Accounts Only

IH Zimbabwe Equity Strategy, 2018

The economy recovered strongly from 2016 levels (0.6% growth) to record 3.7% growth in 2017 outperforming the government’s initial forecasts of 1.7%. This growth was underpinned by the government’s intervention in the 2016/17 farming season through the Command Agriculture Programme. This resulted in a growth rate of 14.5% in the sector, albeit coming off a very low base (a 3.7% contraction). The mining sector, which was aided by improved metal prices in 2017 recorded an 8.5% growth, up from a growth rate of 6.9% as output, particularly in gold, coal and chrome ore increased by 20.3%, 27.3% and 1000% respectively. Growth in the manufacturing sector is estimated to have been a marginal 1% for 2017 owing to liquidity challenges that affected companies’ ability to import raw materials. The Government expects the economy to maintain its upward trajectory forecasting growth of above 4.5% for 2018. The growth is premised on Govt’s economic and investment recovery measures titled the “New Economic Order”, underpinned by strengthening of cooperation with global partners. The agriculture sector is expected to grow by 10.7% supported by the successful implementation of the extended command agriculture programme to include soya beans and livestock production and expected good weather conditions. It is our view that this growth rate will be much lower at around 5.5% following the dry spell that has affected the maize crop. The mining sector is expected to grow by 6.1% on strong performance in gold, diamonds, chrome and coal. Diamond output in particular is expected to grow by 40% following the successful consolidation of the ZMDC. It is worth pointing out that there is significant scepticism around whether the increased diamond output will mean increased revenue for the country. To this end we have forecast a growth rate of about 4.8% for the sector. The manufacturing sector is expected to grow by 2.1% based on improved agro-processing value chain in foodstuffs, drinks and ginning, also aided by supportive import management measures. It is our view though that based on forex liquidity challenges the sector will grow by 1.5% as this will still be a significant impediment to the sector’s growth. The World Bank and IMF have forecast growth rates of 0.9% and 0.8% respectively for 2018, however, they have both pointed out that these forecasts were done in June 2017 and will be revised by next month. Our own forecasts point to a bear case scenario of 3.0% growth as we believe sectors such as mining and tourism (expected to grow by 7.8% in 2018) will offset potential weakness in agriculture and manufacturing. Key economic themes in 2018:

• Key policy shifts: The MoF in his 2018 national budget announced that the limiting indigenisation 49/51 policy will only be confined to the extractive sector consisting of diamond and platinum only, with indications that this may be further revised. Efforts are also being made to address property rights by beginning to regularise the land issue, as a start Govt has agreed to compensate dispossessed farmers. Effective re-engagement has begun with the international community which is also critical for our recovery. Afreximbank has been supportive with 2 deals signed already for $1.5bn and $600mn. Progress on the Ease of doing business reforms have been positive so far and the bills that concern these reforms will be fast tracked. We believe that these policy shifts will stimulate and increase foreign and domestic investment.
• Addressing the trade deficit: The country’s nostro accounts remain under pressure, however there has been significant improvement in the current account deficit which closed 2017 at an estimated 600mn (vs. circa $3bn in 2015). This has been driven by lower imports courtesy of SI64 and increased exports most likely aided by incentives. We believe this gap will continue to close particularly as the investment climate begins to improve suggesting higher FDI and potentially new lines of credit. The fiscal deficit ($1.72bn 2017) will be harder to address without budgetary support, however the new government appears to be showing greater will to curb expenditure through enhanced discipline. This includes a smaller cabinet, enforcing retirement ages, streamlining embassies, cutting down on travel expenditure amongst other measures.
• Addressing foreign exchange policy: A limitation to foreign investment will continue to be the lack of a clear and transparent exchange rate fairly pricing a USD on arrival given that it is now clear that ‘local’ dollars do not trade on par to the USD in practice. It is unclear whether the govt has the will to liberalise the exchange rate at this point but there does seem to be a clear desire to re-introduce the Zim dollar once the economic conditions are suitable most likely in the medium term. Naturally this will have to be handled delicately given the lack of confidence in the system by locals coming from a recent hyperinflationary experience. Recently President Mnangagwa ruled out rand adoption (another popular suggestion) repeating that
  the country is geared to reintroducing its own currency once all economic fundamentals are met. However, in the short term we look forward to how Govt intends to address this issue and await the Monetary Policy due soon for possible answers.
• Potential timelines elections: Constitutionally our impression is that the earliest elections can be held is July 23, and the latest date would be the 21st of August; however, the new President has been talking of holding elections in June. It is our view that significant FDI which would impact areas like infrastructure spend would prefer to wait for an electoral outcome given the history of controversial electoral processes and outcomes in the country’s past. We believe that it would be best for Govt to call the election as soon as possible to minimise further delays in the country’s economic program for 2018. Given the positive sentiment around the new administration and policy shifts announced, we believe that this will be a tough election for the opposition in the absence of a very convincing election manifesto.