Yamamoto: Why 2016 will be far worse

via Yamamoto: Why 2016 will be far worse – New Zimbabwe 24/08/2015

Five key reasons why Zimbabwe’s economy will be far worse in 2016

“Since international capital is a coward, no one is prepared to risk their money in a tiny overrated economy like Zimbabwe whose leaders are, in fact, giant pillaging marauders whose appetite for corruption and lawlessness makes that of the yakuza look like child’s play”.

ZIMBABWE’S economy is leaking like a sieve. On second thoughts, that is an understatement, the economy is crashing like a waterfall! This started in 2013 when its ruling party Zanu PF, under the misguidance of Robert Mugabe, took sole charge as captains of the Zimbabwean ship soon after the GNU.

In 2014, I co-wrote a commissioned paper for some of Japan’s largest corporations that work with our institute. It was about Zimbabwe’s prospects as a destination for investment for the period 2015-2016. I intended to paraphrase and translate that paper as an op-ed at the end of 2014 for my Zimbabwean readers, but got way too busy to do it. Some of the issues I predicted in that paper are a reality now. In this op-ed, I use more or less the same basis to argue that Zimbabwe’s economy in 2016 will be far worse than it is now. This is explained in laymen’s parlance – no advanced econometric modeling and jargon.

And here are the top reasons why this will be a reality in order of significance.

Robert Mugabe

When capable chief executives join struggling companies, they infuse a dose of confidence that in some cases cause the firm’s share price to rise. For example, when Steve Jobs rejoined Apple in 1997, the company was worth $3 billion (just over half of Zimbabwe’s GDP of $5.2 billion the same year), but when he died in 2011, the company’s value has soared to a world-record $624 billion. Apple’s stock price rose more than 9,000% since Steve Jobs returned in 1997. In the meantime, Zimbabwe’s GDP had grown by only 100% to just over $10 billion in 2011, the same period that Jobs had grown Apple’s share price by more than 9000%.

My point here is: chief executives and their capabilities matter in growing or killing companies the same way they matter in growing economies. To use an African example, since Uhuru Kenyatta took over as Kenyan President in 2013, the Kenyan economy has added about $15 billion between 2013 and now to its $50 billion GDP of 2012. That is an addition of the size of the entire Zimbabwean economy in a space of two years. When Hu Jintao took over as paramount leader of China in 2003, the economy grew almost 800% from just $1.2 trillion in 2003 to 8.5 trillion in 2012 when he passed on the button to Xi Jinping. National chief executives therefore matter in changing the course of a country for better or for worse.

Zimbabwe’s economy is has become worse than a headless chicken. It is going nowhere fast. As the chief executive of Zimbabwe, Mugabe’s ineptitude in matters economic is the stuff of legend. He is so incompetent that he has very little to show for his 35 years in power. Numbers don’t lie, and 35 years is long enough for any leader to show that they are incompetent. The record speaks for itself, and the fact that Zimbabwe uses its ‘enemy’s’ currency is a serious indictment on its leadership.

The only thing that Zimbabweans and non-Zimbabweans agree on is that the country has potential, but that potential will never be realized with that level of ineptitude in the highest office in the land. I understand that Mugabe has several degrees he earned in jail. Perhaps he should receive a new PhD on the fastest way to increase vendors on the street, and on how to kill an economy and cause hardship.

Mr. Mugabe seems very small minded, and blinded that he can hardly see far from his nose. He also seems oblivious to the suffering around him. In Japanese we say, I no naka no kawazu, taikai o shirazu, meaning a frog in a well cannot conceive of the ocean. Citizens get the leaders they deserve. Zimbabweans elected him. At 90, Zimbabweans made a record in recent years of electing the oldest president into office. The only other country to come close to this feat is Tunisia where Essebsi who is two years Mugabe’s junior was elected President in 2014. You may argue that Mugabe rigged his way into office, but the point is Zimbabweans allowed him to remain there.

Strangely, Mugabe actually thinks he owns Zimbabwe. No wonder he views the people of Zimbabwe as his subjects. He was recently quoted complaining about Côte d’Ivoire’s refusal to give his plane the clearance to land in Abidjan where he wanted to fly in an give a mere speech.

“The President cannot just go to a country without being cleared by another president who owns the country. That is the protocol. So what has happened? Then they said Ouattara has fallen sick. He is in bed. He is in bed and so no clearance was given. So we didn’t go to Cote d’Ivoire to deliver the speech to our African Development Bank. It is the only country in Africa that has denied us entry.”

How does this reality affect the economy in 2016? The answer is no one trusts him. He flip-flops on policies. Today he may be for foreign investors and tomorrow he is chasing them away for political expediency, because he thinks a president owns the country. He surrounds himself with an equally incompetent coterie of bootlickers who have no record of performance. He could not get a bailout from South Africa, he won’t get one from China. He won’t get any from Japan either. So buckle up! With Mugabe at the helm, brace for a worse 2016.

Political inertia

While Robert Mugabe remains President, there will be no succession plan of any sort. Even if Mugabe wants to be a life president, which is not far from the truth, he should at least have the heart to have a succession plan to prevent possible instability. When you don’t plan, you plan to fail, and that there is no succession plan for Zimbabwe’s leadership is a disaster.

Since Mugabe’s wife started running around the country like a lunatic in an asylum last year, culminating in the firing of several politicians from the government, she engrained a deep sense of political inertia. No one, including the two new vice presidents, will be prepared to make ground-breaking moves to stop the country from further malaise and dig it out of its mess. Her recent utterances about her being a paramount leader to the two Vice Presidents demonstrates the depth of political inertia the country is grappling with.

“… in the short time that these two men have been appointed to office, I cannot count how many times I have sat down with them and discussed the development of Zimbabwe. That is the leadership that we (read I) want… They know that they must sit down with Amai to discuss about developmental issues…”

The negative multiplier

This is Economics 101 – very basic. But not everyone is schooled in economics, so I will take a bit of time to explain this concept. In economics, the negative multiplier can be modeled mathematically, but in street parlance, it’s about the reality that an initial fall in total demand in an economy has a damaging effect which subsequently leads to a much larger fall in total national output (GDP). The initial decline increases in momentum creating a larger domino effect on the economy over and over until something happened to stop it.

Since 2013, Zimbabwe has seen a complete reversal of its growth trajectory, and shows strong signs of deflation. To see how damaging the effect of the negative multiplier to the Zimbabwean economy will be, here is an illustration. The agricultural and manufacturing sectors in Zimbabwe are in a near-comatose state. Several banks have collapsed and, with them employment, deposits and other positive spinoffs to the economy.

Common corporate measures to cope with the hardships include cutting down on costs and retrenching workers. This year alone, Zimbabwe has lost over 100,000 formal sector jobs. National income, also viewed as aggregate demand (AD), is a summation of what people consume (C), investment inflows (I), what the government spends (G) and net exports (X-M).The first round of large scale unemployment causes a gigantic drop in private consumption (C). Since C is a component of AD, therefore AD must necessarily fall

In reality, real GDP begins to slow down and disinflations starts and can gravitate into a deflation. Since consumers spend less on the high street (or on vendors as is the case across Zimbabwe towns), businesses experience losses or falls in profitability. With low demand for their goods or services, it makes no economic sense to maintain those workers who are now idling around in a quiet shop. Therefore this leads us to second round of retrenchment. Unemployment rate increases again. Further falls in C cause the economy to shrink at a much faster pace causing prices to shrink again. As this happens, banks tighten their lending, investors shy away, property markets get depressed and the cycle continues over and over.

It takes a radical measure to stop this negative momentum. In the past, Zimbabwe stopped this radical decline when it was forced to have a unity government which sort of improved the economic environment, and the economic ministries were handed over to the former opposition. In addition, it gutted its worthless Zimbabwe dollar in favour of the greenback, something Robert Mugabe was forced to accept by the markets. Unfortunately, there is no indication at all that anything will happen to jolt and reverse the negative multiplier’s momentum. So buckle up because 2016, a far worse year economically is nigh.

No bailout, no foreign investment

One way of reversing the negative multiplier is to jolt its effects by injecting large sums of money in the economy, sometimes known as a bailout. But Zimbabwe cannot inject large sums of money into its economy because it is broke. In fact, Zimbabwe is technically insolvent.  Robert Mugabe is a tax-and-spend leader. His government is in a perpetual mode of throwing good money after bad. He has no sense of austerity whatsoever.

To see this, the devil is in the numbers, which show a decline. In 2013, Chinamasa’s announced a 2014 budget of $4.1 billion. At that time, he started planning a budget deficit into the economy, contrary to former minister Biti’s ‘eat what you kill’ budgeting philosophy. The reality was lower than that at $3.9 billion, creating a larger deficit than planned. In 2014, he announced a 2015 budget of 4.1 billion with a $3.99 billion revenue projection. Half a year down the road, in a mid-term fiscal review, he walked back on his projections, lowering the revenues budget to $3,6bn from $3,99bn.

Because of the negative multiplier effect, Chinamasa will collect $3,6 billion in his dreams because the reality will be far lower than that. It will be far from that because with the current wave of retrenchments, tax collections will be lower, lowering the profits for businesses with the domino effect going round and round, shrinking the economy further.

I have written before that there will be no bailout from China. There will be no bailout from anybody else for that matter. No one trusts Robert Mugabe and his government. In any case, a 91-year-old approaching 92 years cannot inspire the confidence of lenders.

I did say that investment forms a critical part of the national income matrix. When it scales back, that exacerbates the negative multiplier. Since international capital is a coward, no one is prepared to risk their money in a tiny overrated economy like Zimbabwe whose leaders are in fact giant pillaging marauders whose appetite for corruption and lawlessness makes that of the yakuza look like child’s play.

Zimbabwe’s FDI inflows were a measly $105 million (2009), $166 million (2010) $387 million (2011), $400 million (2012), $410 million (2013) and $545 million (2014). Compare this with Mozambique which got FDI as follows in the same period: $898 million (2009), $1 billion (2010), 3.5 billion (2011), 5.6 billion (2012), $6.1 billion (2013) and $4.9 billion in 2014. The average FDI that has gone into Mozambique during this period is roughly equal to Zimbabwe’s entire annual budget. Zambia has also fared far better than its southern neighbour, receiving in the same period the following FDI amounts: $426 million (2009), $634 million (2010), $1.1 billion (2011), $2.4 billion (2012), $1.8 billion (2013) and $2.5 billion (2014).

Meanwhile, Zimbabwe’s $10 billion dollar debt will remain an albatross around its neck. So yes, 2016 will be far worse economically than 2015.

A second hand economy with archaic infrastructure

In addition to a trade deficit, culminating in a current account deficit (importing more than you export), Zimbabwe’s economy is a costly economy with painful inefficiencies and unbelievable red tape. Businesses and individuals for example, run mostly on second hand cars imported mostly from here (Japan). This means that the economy has to grapple with further imports of car parts to keep them running. The roads are in scary state of disrepair, causing further damage to the second hand cars. Companies are operating on archaic technology, plant and equipment, which makes their products uncompetitive. There is also an explosion of the trade of second hand clothes from abroad, killing domestic production.

Power plants, all of them built by the colonial regime are also now so old that they frequently break down. During his decades in power, Mr. Mugabe did not build a single power plant, leaving the country in a perpetual power deficit. This deficit will get worse for the country as more and more power consumers fail to pay their bills, affecting the country’s ability to import power from neighbours, creating another domino effect that affects the whole economy. So brace for more blackouts in 2016.

Increased emigration and xenophobia risk

Zimbabwe’s neighboring countries need to brace for a further influx of economic refugees running away from Zimbabwe’s catastrophic economic failure. In the same vein the region needs to prepare for and work to prevent further xenophobia. In the same vein, Zimbabweans scattered in many countries across the world, mainly in the UK and South Africa, must prepare themselves to feed and take care of their folks back home.

By electing Mugabe in 2013, Zimbabweans did a disservice not just to themselves but the whole continent. Nobody won. Everybody lost. Africa lost, Zimbabwe’s neighbours lost. All Zimbabweans lost too. Everyone lost, including Mugabe, his party, his children, and his children’s children.

As things stand, Zimbabwe is a lost nation with a lost agenda with hardships eating the national conscience away. Never missing an opportunity to miss an opportunity, all Zimbabweans squandered an opportunity to change course. The country’s collective intellectual capital is frittered away, with some of its graduates labouring as waiters and farm workers in neighbouring countries. It’s a very sad situation.

In the meantime, brace for a worse and brutal economic situation in 2016!

Ken Yamamoto is a research fellow on Africa at an institute in Tokyo. He researches and travels frequently in Uganda, Kenya, Rwanda and Zimbabwe. Yuki Nakata contributed in this article. You can contact Ken on yamamotokensan@gmail.com.