‘Deflationary pressures to persist’

via ‘Deflationary pressures to persist’ – NewsDay Zimbabwe November 20, 2014

ZIMBABWE slipped back into deflation in October, three months after the country had managed to have inflation above 0% with analysts warning that deflationary pressures will persist attributed to depressed domestic demand, tight liquidity and a weak South African rand.

Deflation occurs when there is a decrease in the general price level of goods and services and happens when the inflation rate falls below 0%.

According to data from the national statistical agency, year-on-year inflation for October stood at -0,001% from 0,09% recorded in September.

In a note to investors, research firm MMC Capital said the deflationary pressures will continue until there is meaningful capital injection into the economy and implementation of government-driven stimulus policies.

“Pursuing structural reforms that reduce the saving-investment gap, such as recapitalising banks to better equip them to finance bigger projects within different sectors of the economy also remain key,” MMC said.

It said fresh capital injection would aid the domestic companies to strengthen their capital base to face the increasingly competitive environment from foreign companies and fully utilise the potential of their existing sales channels and to achieve effective deployment of their existing resources.

MMC said deflation makes it more difficult for debtors, including governments, to pay off their debts.

“The local economy is currently overburdened with lower disposable incomes, high levels of unemployment and deindustrialisation, among others,” MMC said.

“Considering the waning revenue base, the government will be forced to spend a greater percentage of income on debt repayments, leaving less for economic interventions such as spending and investments, hence lower economic growth.”

It said some companies are being forced to reduce their selling prices to stimulate demand while others were shifting
their focus to low margin high volume products.

“This has resulted in most companies posting very low to negative revenue growth rates and declines in margins,” MMC said.