The Sunday Mail
AS global economic headwinds continue mounting, the fledgling local economy continues to be on the precipice as the liquidity crunch continues to be entrenched. However, market watchers believe that the renewed commitment from Government to reform the legislative framework governing local investments will most likely be an added fillip to local economic growth prospects.
Foreign direct investment, considered a key recipe to creating sustainable growth and development as compared to private portfolio investments, has been progressively improving since 2009. A recent research note from MMC Capital shows that inflows into Zimbabwe have been trending up even at times when allocations into the sub-Saharan region have been dropping.
In 2010, more than US$168 million, or 0,7 percent of total FDI to the region, was poured into Zimbabwe, with the figure improving to US$378 million or 1,2 percent in 2011. Investments further climbed to US$403 million and US$478 million or 1,4 percent and 1,5 percent of the US$28,8 billion and US$31,9 billion that was sunk into regional countries in 2012 and 2013 respectively.
But despite the improvement, fostering local organic growth remains challenging. Recently, the World Bank downgraded this year’s economic growth projections to 2 percent from the January forecast of 3 percent.
However, the projections from the international financier are bullish relative to the 1,5 percent growth estimate made by MMC Capital Research last year. Government believes that the economy is likely to grow 6,1 percent this year anchored on wide-reaching reforms in the current economic blueprint, Zim Asset, and strong growth in agriculture, mining and construction.
Strong headwinds
There are, however, indications that Government’s forecasts will be downwardly reviewed as recent statistics show declining gold and platinum production.
Figures from the Chamber of Mines of Zimbabwe show that gold production for the January to May period plummeted 8 percent to 5,5 tonnes from six tonnes a year ago.
First quarter platinum production also dropped to four tonnes from 4,2 tonnes in the comparative period a year earlier. Conversely, bullish nickel prices are expected to temper sectoral decline.
The metal, which is used as a raw material in the manufacture of nickel pig iron, has seen its prices rise 30 percent this year on sanctions imposed on Russia, which contributes 17 percent to global supply, and a ban on nickel ore exports in Indonesia, the world’s largest producer.
Unsurprisingly, Bindura Nickel Corporation has been performing above expectations. A fortnight ago, BNC announced that it expects its second half profit to be in excess of US$3 million. The miner reported a US$12,9 million loss last year.
The Zimbabwe Stock Exchange galloped last week buoyed by strong gains in BNC. There has also been strong growth in coal and chrome production.
Analysts are, however, worried that weaker-than-anticipated growth in China and currency weaknesses will affect demand and commodity prices.
Deflationary pressures persist
Though there are indications that deflationary pressures are relenting, with the year-on-year inflation rate gaining 0,07 percentage points in May to -0,19 percent, the continued softening demand is considered worrying.
But shrinking disposable incomes, which, by extension, have also affected the local savings stock continue to undermine prospects to grow the local economy organically.
Domestic savings finance the bulk of any country’s investments.
The international benchmark that is considered ideal to sustain economic growth is about 35 percent of the Gross Domestic Product. The Ministry of Finance forecasts that savings will rise to 16,2 percent of GDP this year.
“Organic growth is proving to be a mammoth task in Zimbabwe, considering the low rate savings. Our view is that there is an urgent need for policymakers to address investors’ jitters relating to policy inconsistency and clarity in a bid to attract FDI.
“Treasury recently hinted that it is in the process of reviewing the regulative legislation such as the Securities Act, as well as synchronising investor policies in a move to restore investor confidence in Zimbabwe.
Not only can FDI add to investible resources and capital formation, but, perhaps more important, it is also a means of transferring production technology, skills, innovative capacity, organisational and managerial practices between locations, as well as of accessing international marketing networks,” said MMC Capital in a recent research note.
Bullish outlook
Despite worsening global economic conditions, which have also seen the World Bank revising the global economic growth rate from 3,2 percent to 2,8 percent in 2014, it is widely believed that stable conditions in sub-Saharan Africa, including policy reviews and moderate recovery in agriculture, will underpin recovery.
Growth in the region is estimated to “remain broadly stable at 4,7 percent supported mainly by investments in natural resources, infrastructure, improved agricultural output and firming external demand”.
The discovery of oil in both Uganda and Kenya, including further discoveries of huge gas deposits in Mozambique, have increased investor traffic into the region.
Government is currently in the process of reviewing the empowerment policy in order to ensure that it becomes clearer. There are also reforms on the local capital markets that are considered to be accommodative to investors.
In addition to the Zimbabwe Stock Exchange being automated, trial runs for a Central Securities Depository are underway. A CSD essentially provides a platform where the bulk of securities transactions are processed in an electronic book entry form, a development that naturally quickens the settlement of equity transactions and ensures compliance with international best practice.
The research note added: “Our view is that the weak economic fundamentals in Zimbabwe will continue to be the major risk impacting negatively on the upside potential of the local bourse.
“On the other hand, Government’s commitment to review legislation as well as synchronising investor policies in order to ensure clarity and consistency is a welcome development that would see sanity being restored on our markets in the medium to long term.”
Observably, the agricultural sector has also added to strong growth sentiments. Recent reports suggest that the maize output is likely to be 1,4 million metric tonnes, breaching Treasury’s target of 1,3 million metric tonnes.
As of Monday last week, more than 193 million kilogrammes of tobacco had been sold, on course to record the highest growth in 14 years. In the 2012/2013 season, tobacco output rose to 166,5 million kilogrammes.
