Reasons to be optimistic about Zimbabwe

With all economic indicators facing southwards, difficult times certainly lie ahead for Zimbabwe’s distressed economy. But the country is not without cause for optimism to get out of the rut.

Zimbabwe has a 14.15 million population. Of this, the median age is 20 years. This implies that Zimbabwe has a very young population compared to European countries whose median age is close to 40 years. Furthermore, this population is growing at 2.1 percent per annum.

This again is significantly higher than most developed countries that are growing at close to 0.5 percent. According to a study done by the UN, Zimbabwe is among the countries likely to double in population by 2030 (from 2010 population) meaning that both labour force and the consumption capacity could double in the next 15 to 20 years.

From an operational point of view, Zimbabwe offers a much more enabling infrastructure framework for business operators than most other regional peers. With a road network of 25km/100sqm Zimbabwe is behind South Africa (at 30km/100sqm) and Uganda (at 27km/100sqm).

This implies that intra-country distribution costs are lower in Zimbabwe than elsewhere in the region, holding all other factors equal. In addition, every part of the country has got basic mobile network coverage with a mobile penetration rate of above 90 percent.

Another interesting characteristic of this 14.15 million population is that it has a youth literacy rate of 90.7 percent, the highest in Africa.

An educated employee is most likely to be more efficient, whilst an educated consumer is also highly likely to have understanding of more sophisticated products and services that the market will offer, over and above the basic ones. Higher literacy rates therefore improve both productivity and consumption capacity.

Projecting 10-20 years from now, Zimbabwe’s population should therefore be more productive.

About 39 percent of Zimbabwe’s population lives in urban areas and that ratio is growing at a fast rate as the economy slowly shifts away from being an agricultural economy to being more diversified.

 According to our estimates, over half the population 50% of the country will be living in the urban areas by 2040, which in turn should improve consumer spend.

The importance of urbanization to an economy’s development and growth is that it increases access to diversified income streams for the worker and being in an urban setting exposes the consumer to a wider range of products and services thereby increasing his/her spending.

There is a positive correlation we have observed between urbanization and both mobile penetration and alcohol consumption.

The current economic slowdown in our view will slowly be corrected as FDI inflows begin to grow. The timing may be difficult to accurately predict, but we believe the current inroads being made in rebuilding foreign relations as well as re-aligning policies with guidance from multilateral lenders means that Zimbabwe is set to recover soon.

Furthermore, recent engagements with both Eastern and Western Investment representatives and subsequent investment pledges will in due season bear fruit, thereby re-igniting economic growth. As such, our recommendations are that investors take positions in stocks that can weather the current proverbial “storm” while also positioning themselves for the forecast recovery.

With all economic indicators facing southwards, difficult times certainly lie ahead for Zimbabwe’s distressed economy to bounce back to life. The economy is expected to remain subdued with chances of it shrinking even further as economic pressures exert their toll on companies forcing them to restructure or shut down completely.

A sharp rise in companies filing for judicial management or liquidation was recorded in 2014 with the figure growing from 96 to 147, whilst the number of retrenchments rose 63 percent to 6 338 in 2014. This has resulted in reduced consumer spending capacity through increased unemployment, reduced salaries and increasing household credit.

The above mentioned closure of companies also suggests a negative growth in investment which is exacerbated by the slowdown of FDI inflows. In 2014, FDI stood flat at $400 million bringing cumulative FDI into Zimbabwe since 2009 to a paltry $1.5 billion.

Compared to neighbours Zambia and Mozambique that received cumulative FDIs of $8 billion and $15.7 billion for the same period respectively, there is every reason to expect Zimbabwe to grow at a much slower rate than the region’s 4.5 percent.

Government expenditure also has been far too merger to spark any meaningful growth in the economy. In the 2015 budget government targets expenditure of $4.1 billion with 81 percent of it going towards employment costs leaving less than $800 million for development expenditure which is too small a figure to stimulate significant job creation or make much economic impact since not every dollar will be spent locally.

The real impact of government expenditure will therefore probably come from the consumption expenditure by civil servants who constitute a greater chunk of the few formally employed persons. Therefore, in as much as government needs to drop recurrent expenditure to free finances for capital expenditure, they have to do so in an appropriate way that will not cancel out the consumption impact of civil servants.

Loans and deposits are no longer growing at the prior rates they used to. Between 2009 and 2011, loans and deposits grew at a 3-year compound annual growth rate (CAGR) of 50 percent and 34 percent respectively.

On the contrary, 2014 loans growth dropped to eight percent while the deposit growth dropped to a mere 1 percent. In addition to these are the earlier mentioned flat FDI at $400 million and $3.3 billion trade deficit. The net effect has been a reduction in money circulating in the economic system.

Interestingly the stability of deposits suggesting that it is likely that it is the informal sector that has been hit the hardest by this surge in net flows out of the economy.

The consumer has retreated slowly over the past few years and is likely to remain constrained for the rest of 2015. However, hope lies in Zimbabwe’s infrastructural and demographic strengths which will present a competitive edge when FDI’s resume.

By James Chiutsa- an analyst with BancABC. The Source- Originally published in the Zimbabwe Financial Mail Magazine

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