A bumpy road ahead for Zim

In this review, we present findings and insights on the economic developments that took place in H1 2022 and our expectations for H2 2022 for the global and Zimbabwean economy and investments market. We expected 2022 to be a bumpy ride with the most turbulent first half the world has ever seen. We can refer H1 2022 as a record breaking 6 months world over. The first half of 2022 has delivered a series of historical records, few of which investors can cheer about; i. The commodity market has reached all-time highs ii. Equities have had their worst first 6 months in over half a century iii. Inflation in most countries is at 40-year record levels iv. Interest rates increases is fastest in decades. Q1 2022 saw a further weakening of the local currency and rising inflation which weighed down on the economic recovery which had gained momentum at the end of H2 2021. The Covid 19 pandemic negatively affected business and consumer confidence and activities, household incomes and increased socio-economic risks. This was exacerbated by the effects of the RussiaUkraine war which brought turbulence in commodity, food and energy prices globally. Zimbabwe’s monthly trade deficit widened by 303% to US$201.4 million as at the end of May 2022. The decline came as a result of a 31% decline in monthly exports to US$513.1 million and a 12% rise in monthly imports to US$714.5 million. Total receipts for 2022 to date reached US$2.6 billion which is a 31% increase from 2021 comparable period. Over the same period, imports have increased by 18% to US$3.3 billion. As such, the trade deficit for the period under review (up to May) stood at US$689 million. It is our view that with the increase in global food inflation and a rapidly weakening currency coupled with a forecasted fall in commodity prices, the country faces a longer spell of widening monthly trade deficits. The table below shows GDP growth from 1980 to 2021. The Finance ministry, IMF and World Bank remain optimistic about Zimbabwe’s economic growth. The growth prospects are anchored on improved agriculture, mining, manufacturing, infrastructure and real estate projects. However, we opine that economic growth for H2 2022 remains sluggish at around 1.5% which is more conservative that any of the growth estimates. H1 2022, the almost perfect storm: Money Supply and Inflation Fears of rising inflation globally dominated the first half of 2022. H1 2022 was the arrival of much higher inflation and the consequent policy pivot (rising interest rates) by global central banks which has driven markets for much of the first half of 2022. In the EU and US, inflation is now running at 8.6%. This generated more restrictive central bank policy and tightening financial conditions which poses a challenge to this outlook. We still see the expansion continuing through this extended phase of negative shocks, but the risks are skewed decisively to the upside on inflation and to the downside of growth. Inflation increased and is increasing in many emerging markets due to higher fuel and food prices and supply chain disruptions. Inflation remains a major threat for economic growth in Zimbabwe in 2022. The growth in money supply amid reduced national output and the effects of the Russia Ukraine war resulted in price increases which saw Y-o-Y inflation reaching 191.7% in June 2022. The surge in commodity prices and rising interest rates resulted in imported inflation which has further strengthened inflationary pressures. Exchange rate crisis The local currency (ZWL) has suffered a huge blow from several factors which includes a huge public debt (over US$18 bln), sustained fiscal deficit (over $2.3 bln) in the last three fiscal years, high inflation and other factors. Other economic analysts attribute the current currency woes to stem from the central bank’s propensity to print money. Since the government announced its intervention measures in May, levels of market instability have increased. The gap between the formal exchange rate and the parallel exchange rate remains wide above 50%. This shows that the measures have failed to stem the currency crisis. It is likely that these measures will not be effective in any way in achieving its intended goals. The ZWL does not enjoy goodwill as a currency given historical experiences. As such, in our view the unabated, worsening currency crisis is a culmination of oversupply of the local currency, panic and negative sentiments among citizens. The real elephant in the room is the willy-nilly levels of money supply at a broad level. Warning confidence and the search for exchange rate stability 2022 began with positive growth prospects for the country and the world after the devastating effects of the Covid 19 pandemic. However, along the way a number of economic and political events necessitated policy makers and economic participants to revise downwards their growth prospects. As of January 2022, we forecasted a sluggish growth for the economy with an expected average inflation of 210% by December 2022. An expected depreciation of the local currency to the range of 500-700 to the dollar by December 2022. However, the local currency is currently trading between 750-850 to the dollar range which is above what we had projected. The inflation rate is currently at 192% which is close to our estimate of 210% by December 2022. This clearly shows that our local economy has struggled to cope with emerging global and local developments despite a raft of policies and measures which were instituted especially in the second quarter of the year. Agriculture The 2021/2022 agriculture season started off with late rains and the rainfall pattern was erratic. This resulted in lower-than-expected yields for most crops. Like any other sector in the country, it was affected by a rise in input costs which raised the risk of food security. The golden leaf delivery declined this season due to the decline in the number of new tobacco growers by 50% compared to the previous year. The season started well on March 30 2022 and closed on 20 July 2022. The golden leaf has been sold at an average price of US$3.04 per Kg compared to US$2.80 per Kg last year with more that 180 million Kg sold. Erratic rainfall pattern which characterized the 2021/2022 season hampered grain production in the country. Most of the downstream industries which rely heavily on agriculture produce have felt the decline in grain production comparing with the previous year. A winter wheat planting target of 75,000 hectares (to produce around 383,000 metric tonnes) was achieved this year with the country on course to achieving wheat self-sufficiency. This will in a way alleviate the global supply shocks emanating from the Russia-Ukraine War. Russia and Ukraine accounts for nearly 30% of global wheat exports combined. Since the war broke out, wheat prices have hit record highs increasing global food insecurity. Pre-planting producer price of wheat was reviewed upwards by 217% to $175,742.86 per tonne for ordinary grade to incentivise farmers. Premium grade price was set at $193,316 per tonne. Government lifted the ban on importing grain which was set in February 2022 in a bid to increase local stocks. In June 2022, a US$90 per tonne fixed payment on top of the $75,000 per tonne was announced. All these measures were in a bid to increase grain stocks in local silos. It is our view that the government is likely to miss its target output. The likely cause will be the continued depreciation of the local currency against the US$. This depreciation will likely wipe out margins in forward contracts. The parallel market will remain the preferred market for farmers as they get double what the government is offering them. Mining The government estimated that the mining sector grew by 3.4% in 2021 and forecasts an annual growth of 8% in 2022. This was supported by firm international commodity prices and measures taken to build a US$12 billion mining industry by 2023. Export incentive schemes an exemption from surrender requirements have led to gold production yielding 55% Y-o-Y outturn to 29.6 tonnes compared to 2020. Average capacity utilisation for the gold industry is expected to reach 87% in 2022 up from 80% in 2021. As of April 2022, gold contributed 30% (US$176.9 mln) to Zimbabwe’s total exports. Commodity prices have retreated since March 2022 due to a number of reasons with nickel retreating from an all-time high of US$100,000 per tonne. Platinum also retreated by 6% from an average of US$1,029 per ounce to around US$965 per ounce. It is our view that the recent hikes in key policy rates by central banks will likely lead to a further decline in commodity prices of several metals including gold, platinum and chrome. To add on to the above, the government should review its policy on unutilized retained export receipts as it is likely to affect companies. According to the Chamber of Mines of Zimbabwe, diamond production is forecasted to grow by 43%, coal 40%, chrome 33% and gold is expected to increase by 21%. We are confident about the commodity prices outlook, improvements in capacity utilization and anticipated output growth. However, the investment environment remains depressed characterized by high costs of capital coupled with foreign exchange constraints and poor infrastructure. Banking Sector The banking in the new reality Zimbabwe banking sector has significantly changed as a result of the Covid 19 pandemic, the rise of mobile money, the uptick in electronic money usage in light of hard currency challenges and the increase in digitalisation drive to reduce costs. The banking sector has shown resilience to these various shocks. We believe banks are at a make-or-break moment with digital transformation never ending. Despite the uptick in interest rates in H1 2022, low rates in the short term should keep interest income suppressed. However, the rise in non-interest income and feebased business could be more pronounced and lead to overall top-line growth. H2 2022 Economic Outlook The first half of the year will be remembered as a horrible six months for practically every asset class and investment portfolio. The second half could potentially be more of the same. The year ahead is likely to be challenging on account of high inflation, weak domestic currency, high poverty levels and widening inequality, slowing consumer disposable incomes, negative real interest rates, policy inconsistencies etc. Economic activity is likely to remain sub-optimal in the short term with pockets of improvement in the economy likely to be threatened by high inflation. Investors are expected to favour value preservation opportunities ahead of growth. That said, 2022 will be a critical year in which the imbalances brought by the pandemic will likely begin to resolve and the business cycle normalizes. — WealthAccessAssetManagement