How can you have a cash crisis when you don’t have a currency?

We see the indigenisation law deterring foreign investment in mining; related to this, China believes Zimbabwe has bitten the hand that feeds it and is unlikely to provide significant new funding.

Zimbabwe fell two places last year in the Ease of Doing Business (EODB) rank to 155/189 which deters foreign direct investors (FDI) and is 150/167 in Transparency International’s corruption ranking which deters equity investors; while its legal score is only higher than Myanmar, Bangladesh and Venezuela.

We think changing the indigenisation law, or improving corruption, EODB and legal scores, would help provide capital inflows. Significant political change could also trigger inflows. Debt forgiveness and a possible IMF financing arrangement are other options.

Most of the above measures are a wish-list. In the near term, the reserve bank governor says a 20% internal devaluation is required, which we see as the optimistic end of a 20-40% spectrum.

This will be very harsh on the population and implies a deep fall in GDP. The IMF is far more optimistic with its 1.4% growth forecast for 2016 and 5-10% rebound in 2017.

Zimbabwe is not alone in suffering from lower commodity prices. But its poor business environment contrasts with Kenya, and it does not have the relative luxury (that Nigeria and Egypt have) of softening the pain through devaluation.

There probably are very interesting opportunities for long-term (private equity?) investors with a very high-risk appetite, but for now, we expect problems to intensify. The positives are the post-El Nino rebound, the likely clearance of external debt arrears, and rising gold prices.

Aside from the many great Zimbabweans we know, there are four clear positives about the country.

First, the UN estimates the working age population will rise by 15% every five years which means that annual growth should be at least 3% a year, just to keep pace with this population growth.

If we assume the average EM/FM country grows at an underlying 2-3%, then base GDP growth in Zimbabwe should be 5-6%.

The finance minister (who I shared a panel with on 5 July in London at Africa Confidential’s Zimbabwe 2016 Conference) stated that at least 5%, and up to 10%, is the target Zimbabwe seeks. We agree.

Second, education is broad enough for Zimbabwe to be able to escape poverty. We estimate countries need to educate 25-30% of their secondary school age (11-17) children to be able to escape poverty within 20 years.

Zimbabwe in 2012 educated 46%, well over this threshold. At Africa Confidential’s conference, there was plenty of anecdotal evidence that human capital is plentiful.

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