Get ready for next commodity boom!

04 Oct, 2015 - 00:10 0 Views

The Sunday Mail

Chris Chenga Open Economy
Fundamentally, understanding an economy is meant to be simple. A guiding stick is the repetition of transactions. An individual manufactures or buys a product; he then puts that offering on the market and after receiving payment from a willing buyer, the individual goes through this transaction again and again.

Every economic agent practically functions in this repetitive manner.  As an economy is a sum of countless repetitive transactions, it is inherently cyclical.  It makes sense then that the most successful practitioners in any profession that requires economic analysis happen to be the ones best able to grasp the cyclical nature of economies.

In equity markets, for example, the highest earning investors are concerned with respective companies’ stages within the business cycle.
Seasoned financial advisors make their names after showing sound discretion and consistency in maintaining returns over economic booms and busts.

To the more widespread interests of society, the best policy-makers have been the ones who make the right policy decisions in response to whatever stage of macro-economic cycles their economies are at a given point in time.

Spotting cyclical trends is an invaluable skill for either one of its two ends — economic management or profit seeking.
It takes experience and regular grooming of the competence to have an eye for tracing economic patterns.

Central banks, academic research institutes, investment funds, and financial institutions all exert considerable effort and commit significant budgets towards the accurate tracking and forecasting of economic patterns.

The difficulty in identifying the phase of an entire macro-economy can be attributed to the fact that most cyclical phenomena are influenced by convergences of different factors, all working at the same time.

To illustrate this point, consider the challenge of trying to project Zimbabwe’s economic state at year-end in 2015.
A seemingly proper analysis would have to be inclusive of as many cyclical occurrences that may be interconnected and have subjective implications on each other.

Some cycles themselves may be vulnerable to unforeseen shocks from extraordinary or unexpected events.
For instance, there is an agricultural cycle that conforms to seasonal patterns.

As the weathermen and respective agricultural ministry have shown, accurately forecasting rains, especially under climate change, can be extremely tricky.

Economic agents within this sector have to be responsive to these cyclical uncertainties, and their individual responses are open to a vast margin of discretion.

If, indeed, it turns out that there may be drought in parts of the country and yields fall, costs for the entire food processing industry will rise.
Interconnected to another cycle, food processors themselves are already subject to global monetary cycles.

Currency exchange rates, for instance, are having an appreciative effect on the US dollar.
Thus, while output was already losing competitiveness due to these monetary cycles, weather cycles potentially add onto pre-existing challenges.

That is not all.
These same food processors work within the confines of financial cycles that currently offer higher interest rates compared to foreign competitors.

While often attributed to “a liquidity crisis”, it is more precise that these interest rates are actually a result of the tail end of national debt cycles adopted from government defaults — a situation at the end of a debt cycle where a debtor is unable to service loans and goes into arrears.

It is evident just how one sectoral analysis in an economy is subject to multiple cycles (weather, global monetary, local financial and national debt cycles).

As one can imagine, to complete the study of the entire economy, analysis would have to be inclusive of numerous other cycles which we will not be getting into for now.

To get an understanding of a country’s economic circumstance, one must be cognisant of as many cyclical phenomena as possible and analyse them accordingly, consciously finding interconnectivity where it exists.

I can be critical of many African countries in that we do not approach our economic analysis in this manner.
I would argue that African economic perspectives are very rigid, causing reactive responses based on things we see at a picture shot view instead of cycles over time periods.

A case in point is the commodity cycle.
The commodity cycle is a time period for some researchers, spanning from as far back as 1894 to 2010, which captures the up and down swings in the price of commodities.

The cycle basically traces trends in commodity prices and finds correlation between other influential factors that mainly work on the demand side of commodities.

It is peculiar that as a continent which boasts the largest reserves of natural resources, theories on commodity cycles remain absent from our economic discourse.

Ironically, in 2011, a piece in The Economist magazine sparked the “Africa Rising” narrative.
Unbeknownst to many across the continent who gladly embraced this narrative, hopes of a rising continent were not pinned on an increased faith in good economic governance, an expectation of improved institutional structures, or any notable advancement in economic management on the continent.

The Africa Rising narrative was largely premised on Africans almost certainly capitalising on the commodity cycle.
Unfortunately, not many of us did.

Granted, the factors behind the author’s optimism itself were exaggerated and not as long lived as he had hoped.
At the start of the last global recession in 2007, there was a boom in commodity prices.

For the West, commodities were the safest investment after credit bubbles led to recession.
For the East, an investment-led strategy focused on construction was driving demand from China.
Commodities reached peak prices.

Unfortunately, African countries were slow to pick up on these trends — if they did at all.
On the hopes that revenues from commodities would stay high, many African countries ventured into issuing sovereign bonds. Unfortunately, having caught the tail end of a brief boom, revenues for most of these African countries did not turn out to be as lucrative as hoped for.

Thus today, countries like Zambia, Nigeria, and Ghana, which all get upwards of 80 percent of their revenues from commodities are stuck with accumulating debt and dwindling revenues.

These are the negative effects of rigid perspectives, being reactive, and having a picture shot view of our economies instead of capturing time periods of cycles.

Nevertheless, contrary to gloomy mainstream narratives that would have you believe that there is endless strife awaiting ahead for African commodity economies; I believe that there is reason to be optimistic in the near term.

There will be another commodity boom soon enough.
Zimbabwe especially needs to take heed. For a country which frequently alludes to pursuing an export-led growth strategy, our discourse on foreign economic occurrences is very thin.

At most, it is adoptive in context, instead of fitting a custom understanding in line with our own ambitions.
To manage export output, we have to understand demand trends influencing targeted global markets of our offerings.
For instance, oil producing countries like OPEC do this quite well and to an extent of enviable power of discretion.

While our commodities do not give us as controlling a share of the global market, we should strive towards better discretion of our resources on the market.

This is why Zimbabwe’s first order of business with regards to natural resources should be acquiring adequate technical capacity to have proper comprehension of the regular state of our resources.

That means we should have capacity for aero-magnetic surveys, exploration, and other technology that gives us better quantitative awareness of the resources at our disposal.

Any salesman has to know his stock!
After doing so, we must be cognisant of demand influencing factors for our commodities, and this is where the commodity cycle comes into play.

China has slowed down its demand for resources, but I believe that much of the developed world will fill in for the demand, if not surpass it soon.

Europe and North America have experienced prolonged stagnation.
There are only two ways in which they will get out of it.

Firstly, they must pursue unconventional and politically provocative structural reforms that attend to increasing real wages, enhancing public spending, and — most importantly — definancialising their economies.

Due to the dominance of austerians and financial elites, along with slow political progression, this first option will take some time to find traction.

Secondly, and more likely, Europe and North America will require stimulus in the form of huge development projects, particularly in infrastructure.

This option is pretty familiar.
The Marshall Plan, which developed Europe after 1945, was the driver of the most prolonged boom in the commodity cycle lasting into the 1970s.

Similar stimulus will be called on again in the near future.
The G20 group of economies estimates that necessary global spending on infrastructure will need to reach between US$15 and US$20 trillion by 2030.

Last year, the EU set plans to mobilise EU315 billion for investment in infrastructure in Europe.
Knowledgeable about infrastructure led growth, it is no coincidence China formed Asia Infrastructure Investment Bank just this year.
Infrastructure is the next frontier for the world economy!

This could have significant meaning if Zimbabwe informs itself on commodity cycles.
I am optimistic.

We can look forward to prices for our commodities picking up in the near term.
However, how much we stand to benefit and make use of our natural resources is all dependent on our grasp of economic cycles.
The implications are crucial.

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