Zimbabwe, the place to be in 2012 says investment analyst

International surveys have rated Zimbabwe as the worst country to live in but one of Zimbabwe’s leading investment experts says Zimbabwe is the place to be in 2012.

John Legat, the chief executive of Imara Asset Management and head of the Asset Management Division of Imara Holdings, one of the leading investment analysts on the continent, says Zimbabwe’s economy estimated at $12 billion in 2012 is still underestimated.

But, “Either way, there can be no doubt that the Zimbabwean economy is one of the fastest growing in the World let alone Africa,” he says.

Zimbabwe has experienced massive growth since dollarisation and the formation of the inclusive government in 2009. Figures that have been bandied around show that the economy has almost doubled in the past three years.

Legat says one of the problems in estimating the size of economies in Africa is that a large part of a country’s economy is in the informal sector and maybe up to 50 percent or so depending on the country concerned.

“This makes economic projections and analysis that much harder. Of help though in estimating the informal sector, is new technology. For example, the mobile phone that was largely non-existent in Africa ten years ago is now widely in use and spans both the formal and informal sectors,” he argues.

“Statisticians can utilise mobile data to provide estimates for various economic indicators. It is interesting that as recently as 2008 in Zimbabwe, mobile phones were hard to come by since the SIM cards were so expensive and there were limited lines available as the phone companies had to limit their capital expenditure.

“Yet three years into dollarisation that situation has changed and now it is estimated that Zimbabwe has one of the highest penetration rates in Africa at nearly 80%! That suggests that per capita income is likely to be higher than the current numbers imply.”

He says that compared with many countries around the World at the moment, especially those in the developed World, Zimbabwe looks strong and its prospects remain exciting.

Legat concludes: “It could be very much better were the members of government speaking with one voice but it’s rare for things to be perfect!”

Below is Legat’s newsletter in full:

“Global comparisons would suggest Zimbabwe is not a bad place to be!”

Our January 2011 Investment Notes were upbeat for the year ahead based upon the premise that the economy would continue to expand rapidly driven by growth in mining, agriculture and consumer demand. The 2010 budget for the year 2011 expected the economy to grow by over 9% with nominal GDP assumed to be $8 billion. At the time we felt that this number was too low by at least $2 billion based upon our observations of the private sector. Interestingly in his most recent budget, the Minister of Finance estimated that the economy in 2011 was in fact $10 billion and that the budget for 2012 is based on a $12 billion economy. We would not be at all surprised if these numbers were also underestimated. Either way, there can be no doubt that the Zimbabwean economy is one of the fastest growing in the World let alone Africa.

Unfortunately, the Zimbabwe Statistical Office is still upgrading its own data and so cannot be relied upon as yet for accurate numbers. Ghana reformulated their own GDP numbers last year resulting in an upward revision to their economy by 35%. It looks like Nigeria is experiencing a similar result as they investigate their own numbers which could see GDP rising to around $400billion from $250billion currently. Part of the problem in Africa is that a large part of a country’s economy is in the informal sector and maybe up to 50% or so depending upon the country concerned. This makes economic projections and analysis that much harder. Of help though in estimating the informal sector, is new technology. For example, the mobile phone that was largely non-existent in Africa ten years ago is now widely in use and spans both the formal and informal sectors. Statisticians can utilize mobile data to provide estimates for various economic indicators. It is interesting that as recently as 2008 in Zimbabwe, mobile phones were hard to come by since the SIM cards were so expensive and there were limited lines available as the phone companies had to limit their capital expenditure. Yet three years into dollarization that situation has changed and now it is estimated that Zimbabwe has one of the highest penetration rates in Africa at nearly 80%! That suggests that per capita income is likely to be higher than the current numbers imply. This of course also fits in with the volume demand figures being witnessed by the likes of Delta, BAT, Innscor, Edgars, Truworths and PPC to name but a few.

A larger economy would also suggest that tax revenues from domestic sources could be greater than budgeted. Since this Government thankfully runs a cash budget given its limited borrowing ability, higher revenues lead to higher Government spending. The civil servants received a salary increase a few months back and as is typical this usually flows straight back into the economy in the form of consumer spending. That implies higher VAT receipts for Government. Increasing the taxation bands for those working in the formal sector will also lead to higher consumption as NET disposable income rises. The Minister increased the tax bands substantially but disappointingly reversed his decision two years ago to make Zimbabwe a low tax country by increasing the top rate of income tax back to 45% from 35%. Admittedly this rate only applies to those earning in excess of $90,000 per annum, but it does sadly send the wrong signal to foreign investors who were seeing Zimbabwe as potentially another low tax regime similar to both Mauritius and Botswana in the SADC region.

We were hoping to see more foreign direct investment into the country during 2011 following the sale of Ziscosteel to the Indian conglomerate Essar. Unfortunately even this deal has yet to be fully consummated as question marks have been raised concerning the ownership of some of  Zisco’s iron ore deposits. Hopefully this issue will be resolved imminently. The Empowerment laws have also held back much needed foreign investment and capital into the country simply because the ‘rules and regulations’ lack simplicity and transparency to the extent each company needs to negotiate separately its own terms with the Minister. Whilst indigenization is no bad thing, it is if it is not user friendly, easily understood and is applied selectively. Zimbabwe competes for capital on a global basis and investors would rather invest in a country where the rules are consistent and the law is upheld. This has no doubt made it much harder for existing Zimbabwe companies to raise capital and access strategic partners. RioZim springs to mind, a company that would appear to be insolvent after its management accumulated huge debts.

We were also hoping that the adoption of the hybrid debt reduction model by Cabinet in December 2010 would have encouraged the IMF to consider some form of IMF programme. This has not as yet come to light we suspect, and quite rightly, since the members of Government are not moving in the same direction but are more inclined to drive their own personal agendas. This makes the implementation of a full reform programme that much harder. We suspect that this will only occur fully once an election has been held and a new Government has been installed.

Back in January, we stated that we did not expect an election until the end of 2012 at the earliest despite calls by the President and some members of ZANU-PF for elections to be held during the first half of 2011. We continue to believe that elections will only be held once the Constitution has been put before the people in a referendum on the one hand and that electoral reforms have been enacted on the other. Only then will SADC and the AU sanction a credible election. Given that the Minister of Finance only budgeted for a referendum in 2012, 2013 may be a more realistic timeframe for elections. Thus we expect the politicians to continue to argue and bicker whilst driving their own agendas to suit their constituencies. Then again that is exactly what politicians do the World over! But as we have seen since dollarization in 2009, this has not stopped the private sector in Zimbabwe from growing rapidly and per capita incomes rising. Indeed Belgium had no Government for eighteen months and during that time, the economic indicators actually improved!

Agriculture very much depends on a good rainy season. Whilst tobacco production was not as high as some had predicted, it was still 8% higher on 2010. We suspect that more will be planted in 2012 but the fear from our perspective is likely to be on the price. From our analysis the World is awash with good Virginia tobacco following a bumper Brazilian harvest which would indicate much softer prices in the year ahead. Having auction floors dotted around the country may also not help. Cotton production will be higher in 2012 (forecast is 14%) but we doubt that prices which rose substantially in early 2011 will trade at those levels next year. We heard from Hippo Valley recently that sugar production will increase substantially (+50%) over the coming years whilst prices remain high and profitable. Maize planting we understand is likely to rise this year but the harvest will depend on the rain.

Mining will have another good year as capital expenditure projects to expand production especially in gold and platinum start to yield results. As mentioned earlier, mining we believe could have grown much faster had it not been for the politics surrounding the indigenisation law and we would expect more of the same in 2012 and especially in the run-up to any election. A further concern for mining houses will be the uncertainty surrounding the taxation of minerals given the doubling of royalties in the budget for gold and platinum. As we have seen elsewhere in the World, changes can cause serious delays to the implementation of future investment programmes.

As we mentioned in our last set of Notes, we remain very concerned with the banking sector and would not be surprised to see more banks fail in 2012. The potential loan losses that we know about (let alone those that we don’t know about!) are not as yet reflected in the banks’ balance sheets. Under such conditions, the political implications of bank failures will be hard to forecast. It will be essential therefore to diversify our clients’ assets. Accessing capital globally is tough at the moment given investors risk aversion – for a shortage of capital look no further than Europe! Capital would certainly be more forthcoming in Zimbabwe were our existing debt to be rescheduled through a debt reduction programme but that will take time. In the meantime good projects, with strong management and operating in a transparent environment will always find capital; the key is the cost of that capital. As we have seen globally, the cost of capital is rising and we do not see this situation changing in 2012.

Compared with many countries around the World at the moment, especially those in the developed World, Zimbabwe looks strong and its prospects remain exciting. It could be very much better were the members of Government speaking with one voice but it’s rare for things to be perfect! We once again look forward to the New Year with optimism and will continue to selectively pursue good investments for our clients. We wish all our readers a very happy festive season and good fortune for 2012!

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