An analysis: An unpalatable 2017 perhaps?

Source: An analysis: An unpalatable 2017 perhaps? | The Financial Gazette January 3, 2017

A new year usually arises with a wave of positive energy among many. It could be because of the human psychology that views a new period with some level of positivity, an opportunity for a fresh start. Bluntly speaking and risking being the cynic of the New Year, the 1st of January is really just another day.

While one can set resolutions to change their personal life goals, the macro fundamentals require more than just a new year to change. Such is the Zimbabwean situation where the economy is underperforming resulting in serious hardships among the majority, and those problems cannot be wished away by the dawning of a new year.

At the start of 2016, economic forecasts for the year were largely negative.  Unexpectedly at the end of the year, the ZSE industrial indexperformed against forecasts and gained a significant 25,84 percent.This is despite the fact that, save for a very few, most major listed companies continued to recorda fall in earnings. Rightfully, most analysts’ predictions on earnings were quite precise basing on a deteriorating economy. However the announcement of the introduction of bond notes came as a shock to the market and seems to have propelled the market into ‘safe haven’ buying.

Due to legacy issues associated with the Zimbabwe dollar era, even with a clear technical explanation of what the notes were about, investors, including the technocrats were sceptical and opted to hedge the perceived risk by buying into equities. As a result, the market picked up momentum after the announcement of the introduction of bond notes and reversed earlier losses starting October 8 2016. Fourth quarter alone achieved an index gain of 46,05 percent, the biggest quarter growth of 2015 and the year closed on a highly positive note.

Another positive development was the clearance of IMF arrears after the country paid US$108 million. Although new funding may be far from being realised because of factors such as that Zimbabwe still owes other bilateral and multilateral institutions amounts over $6 billion, the restoration of good faith is of credence for long term purposes. Although arguable, another positive policy introduced during the year was the Statutory Instrument 64 (SI64).A number of local companies have been calling for protection for a while, inevitably at some point their call was likely to be heed. Shrinking foreign currency reserves obviously then became the catalyst and the policy was also used as means to reduce pressure off the import bill. The policy was received with mixed feelings with manufacturers in industries under the protection obviously applauding the development while consumers, to some extent, received it with bad taste.

Whether economic developments came as a surprise or not in 2016, the reality is our woes are with us into 2017. The imminent challenge carried over from last year is the underfunded nostro accounts which will remain a bottleneck for international transactions. EcoCash announced that theyhave reduced transaction limits on MasterCard by 55 percent to US$500. This is likely a means of managing international payments obligations. With such events, the fear is that limits will continue going down until a point when such services are disabled altogether.Zimbabwe would become alienated from the global financial system, a development that makes the country quite unattractive, even for a general tourist visit. For the locals, doing any form of international payments becomes further restricted, limiting imports into the country.

Ironically, objectives of policies such as SI64 will be difficult to achieve as a result.According to the 2016 CZI Manufacturing Survey, capacity utilisation for the sector improved by 13.1 percentage points to 47,4 percent, largely resulting from the protectionists’ policies.  It may, however, be difficult to maintain momentum in 2017 as manufacturers are already struggling to import some of their key raw materials. Industries such as the cooking oil processors, who are beneficiaries of the SI64, rely heavily on imported soya. Therefore, although there is enough installed capacity to meet demand, cooking oil processors might be unable to supply enough if they do not get the required raw material in time.

The same would apply to any other manufacturer that relies on imported raw material. Unfortunately, most manufacturers do, as our primary production in the country has fallen below need. As a result, the possibility of supply falling below demand is high. Coupled with imports restrictions and constraints, many fear a fully blown basic commodities shortages.

The establishment of the five percent Export Incentive Scheme is intended to be a partial solution to the liquidity problems through a simple concept; an exporter gets rewarded for bringing in foreign currency into the economy, so does a recipient of foreign currency from the diaspora through formal channels. This is aimed at encouraging exports and also diaspora remittances so as to boost foreign currency reserves. However, to assume that it will be a substantial solution to the challenges of foreign currency and liquidity challenges would be overambitious.

For a start exporters are faced with numerous challenges which an incentive scheme would not solve. As noted by the CZI Manufacturing Survey of 2016, factors such as access to trade finance and access to imported inputs at competitive prices are some of the top problematic factors for exporters.Consequentially, cost of production is relatively higher when compared to peers in the region which they compete with on the export markets. Furthermore, with the strengthening of the US dollar against a basket of currencies, exports from Zimbabwe become even less competitive. Therefore, when trying to grow exports, policies ought to start from the bottom of the value chain. What are the measures in place to address access to capital, to make exports more competitive and is there anything being done to address the currency issue? Only then can an incentive scheme substantially work as grassroots challenges affecting the exporter would have been addressed.

It has been highly debated on whether Zimbabwe should have settled its IMF obligations if the country was not going to unlock further funding. Those who argued against stated that the funds could have been used internally as the country is in dire need of funding. Although somewhat true, the argument carries the risk of being myopic. Rather than channel the funds for immediate consumption, it is of benefit to start making long term investments in restoring relations with international financiers. On a net basis, repayments made amounted to only US$16 million as Zimbabwe utilised its special drawing rights amounting to $92 million to finance the debt repayment.

In essence, what the country paid out on a net basis does very little for the economy, compared to the long term benefits of achieving a credit score with the international financiers. There are plans to repay the World Bank, although these are quite hazy at present. It is highly probable, unfortunately, that no funding might come through in 2017 from the multilateral financial institutions. Even after factoring in the chance that all debt may be cleared, other qualitative factors such as a call for reforms as well as sanctions will remain at play.

The sad reality is that the New Year is merely a carryover of 2016. There are high possibilities that economy may deteriorate further. It is not clear whether safe haven buying into the ZSE will continue throughout the year. Already prices have gone over perceived fair valuations. Shrewd investors may start looking for a different home for their funds such as the property market. There are greater chances that the property sector will record capital gains for the year compared to 2016as a result. Meanwhile, foreign currency shortages are anticipated to worsen putting under threat the importation of key commodities such as fuel. Should fuel supply drop below demand, the ripple effects are highly negative.

Industries would find it difficult to function due to their heavy reliance on fuel.Electricity imports, on the other hand, which accounts for about 25 percent of the country’s demand, may also fall short. Overall, the forecasts for this year looks dire than last year. There should be lesser reliance on policies that gives a short lease of life but rather craft long lasting solutions that deal with structural issues thereby addressing challenges from the root. In the absence of concrete solutions, we all may need to buckle up for 2017, it is looking tough. FinX