Low inflation, high growth

V-shaped recovery

The Zimbabwean economy is exhibiting strong growth in a single-digit inflation environment, following several years of negative growth. The economy grew by an estimated 5.7% in 2009, following a contraction of 14.8% in 2008, and is projected to grow by 8.1% in 2010 by the Ministry of Finance (MoF) from a low base. The government expects this growth trajectory to continue in 2011, for which it has pencilled in growth of 9.3%.

Dollar peg implies improvement in competitiveness in 2011

Local producers will benefit from an increase in demand for their output in 2011, in our view, as Zimbabwean consumers substitute expensive SA imports for local goods. Under the multi-currency regime that the Zimbabwean authorities put in place in February 2009, an estimated 70-80% of transactions are conducted in dollars. The impact of quantitative easing (QE) on the dollar points to stronger emerging market (EM) currencies, including the currency of Zimbabwe’s biggest trade partner, the SA rand. This implies an increase in the cost of imported goods, which will improve the competitiveness of locally produced goods.

Improvement in liquidity on the back of stronger commodity prices

 Forex earnings are projected to increase on the back of our projection of strong commodity prices. This will further improve earnings from Zimbabwe’s exports, of which 65% are made up of metals and minerals, to $2.8bn (29% of GDP) in 2011, from a projected $2.5bn in 2010 (31% of GDP), according to the MoF. In 2010, the increase in banks’ deposits was equivalent to the increase in forex receipts. Our projection of an increase in forex inflows in 2011 thus implies a continued improvement in liquidity that will stimulate lending in the credit squeezed economy and, consequently, boost growth.

A more flexible approach to indigenisation. Indigenisation will happen

However, the degree to which various sectors and companies will be affected is uncertain. There is a growing realisation amongst the political leadership that the economy needs foreign capital to augment liquidity in the credit-squeezed economy, and that indigenisation is scaring away foreign capital. This realisation led to the announcement on 7 December 2010 that the government would allow for flexibility in the application of its indigenisation plans across sectors. The government’s divestment of 60% of the Zimbabwe Iron and Steel Company (ZISCO) to an international steel conglomerate in 4Q10 is indicative of the government’s more flexible sector-by-sector approach to indigenisation. Having said that, President Mugabe’s Zimbabwe African National Union – Patriotic Front (ZANU-PF) party will continue to use the indigenisation bill to gain political mileage ahead of the next elections.

Robert Mugabe has indicated he wants elections to be held in 2011, and, according to the constitution, elections have to be held in 2013. The ZANU-PF congress will be held this week (13-17 December 2010), at which the date for the next elections will be decided. It is unlikely that elections will be held before June 2011 as Morgan Tsvangirai’s Movement for Democratic Change (MDC-T) is likely to only accept elections in late 2011 or early 2012.

We were in Zimbabwe over 7-8 December 2010 to meet with the monetary authority, independent economists and officials at international financial institutions, to get a comprehensive range of views on the economic and political climate.

By Kim Polley
Director, Southern Africa
Africa practice.

The author can be reached at "Kim Polley" <[email protected]> for a full report.