The Zimbabwe crisis- the deeper underlying problems

Sixth, and as noted above, the government might succeed in winning IFI support and even consider a HIPC debt-write off deal, which could in theory pave the way for capital inflows. The IFC is expected to prepare proposals for possible investments in Zimbabwe. We are not certain that the IMF itself would consider lending to Zimbabwe (the US does not back this), but the IMF’s latest review on Zimbabwe, published in May 2016, confirms that Zimbabwe has been adhering to promises made under a Staff Monitoring Programme, and says this “would serve them well should they request an eventual financing arrangement with the Fund”.

It recommends a significant reduction in the wage bill, while noting the government intends to keep the total wage bill constant in nominal terms through to 2019 (the government intends to cut wage costs from 66% of expenditure in 2016 to 50% in 2019, by cutting numbers of employees). Any deal with the IMF would enable the government to blame the IFIs for imposing hardship on Zimbabwe.

The IMF is pretty bullish on 2017 growth, assuming that a bounce-back from El Nino will let GDP rise by over 5% producing real per capita GDP growth for the first time since 2014. They have an alternative benign scenario of 9.5% growth in 2017 and another 9% in 2018.

We are not publishing forecasts that differ from this, but a similar currency experience to Greece and Cyprus suggest investors should be more pessimistic. Cyprus saw GDP shrink 2% in 2012, 6% in 2013 and 2% in 2014. Greece saw a 0% change in GDP in 2015 when capital controls were being imposed, but this was after big GDP declines in previous years.

Rising gold prices will help Zimbabwe, but to achieve significant private capital inflow from abroad, we suspect the country will have to reconsider its indigenisation law, or make dramatic improvements on the ease of doing business and corruption. A significant political change could make a big positive difference.

Lastly, improving relations with the IFIs might help too.

In the meantime, we suspect there are opportunities that would produce strong returns for long-term investors, if any of the above reforms happen. For the vast majority of investors in publicly listed equities, we suspect Egypt and Nigeria will prove more interesting once both have fully resolved their exchange rate challenges.

Zimbabwe has introduced a priority list for those seeking to import goods to Zimbabwe. It is similar to something we have seen for Egypt – which also prioritises food (iii), and export-generating investment imports. It is notable that payments for foreign education are a low priority – this has been a controversial issue in Nigeria too. Nigeria also has a list of goods for which the CBN will not provide foreign exchange.

By Charles Robertson of Renaissance Capital’s Global for The Source

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