Zimbabwe Economic Outlook2013-14

ZIMBABWE ECONOMIC OUTLOOK 2013-2014
Prof Tony Hawkins Graduate School of Management University of Zimbabwe July 16, 2013
ECONOMIC RECOVERY
After a 10-year meltdown the economy is in
recovery mode Strong, short-run boost from dollarization in 2009 Progressively run out of steam since late 2011 reflecting two main influences: (a) Sluggish global economy and weaker commodity prices, and (b) Political and policy uncertainty and instability ahead of the 2013 polls
Copyright 2013 IHS Inc. 2
REAL GDP GROWTH (% p.a.)
Copyright 2013 IHS Inc.
POLITICS DOMINATE
The conduct and outcome of presidential and
parliamentary elections within the next few weeks will drive short-term economic performance. Three main scenarios: Worst Case chaotic election, indecisive result Base Case Zanu-PF clear cut victory recognized regionally and internationally Best case clear-cut MDC victory recognized regionally and internationally
WORST CASE ANOTHER COALITION

Months of political wrangling over new coalition
agreement Political uncertainty entrenches Policy uncertainty deepens and Most investors not all foreign and local, sit on their hands International lending and development agencies limit engagement Economy stagnates, poverty and unemployment worsen and social unrest mounts
BASE CASE ANOTHER FIVE YEARS OF ZANU-PF

Short-term uncertainty over:
International reaction and responses, and who succeeds President Mugabe and when?
Intra-party faction fighting intensifies Policymaking paralysed exchanging current
uncertainty for a different type Militants push hard for indigenization, more state ownership and limited engagement with donors and BWIs Focus on Look East policy China, Russia, India
BEST CASE MDC WINS OVERALL MAJORITY

Greater economic policy rationality extreme
economic policies diluted or dropped Closer engagement with international community at all levels Focus on strengthening institutions especially rule of law, free media Focus on foreign capital, especially for infrastructure but also FDI generally Focus on job creation and poverty reduction
MDC DOWNSIDES
Disappointing track record since 2009 blamed
(partly rightly) on dysfunctional coalition. Leadership lacks credibility perceived as indecisive and prone to policy u-turns. No reversal of land reform nor indigenization omelettes (land) cannot be unscrambled. No political, popular support for efforts to revert to past agricultural models, meaning change will be evolutionary. Strong popular support for sensibly-managed indigenization.
OUTCOMES
In a country with no opinion polling and a possibility
some would say certainty of intimidation and vote-rigging no sane person, let alone economist, would dream of trying to call the outcome. For what it is worth, the conventional wisdom is that it will come down to the turnout. A low turnout favours ZPF and a high one especially if the MDC can get the youth vote out favours Tsvangerai.
As an economist I cannot imagine how voters who
lived through hyperinflation and the 10-year Mugabe Meltdown could give his party yet another chance, especially given the uncertainty surrounding the succession. Despite the MDCs disappointing track record, the election is theirs to win, always remembering that they may not be allowed to do so if the dark arts of vote-rigging and intimidation prevail.
Outright MDC victory sets the stage for annual
growth in the region of 6% annually In the other two scenarios growth would be significantly slower (4% best, probably less) Much would depend on global economic conditions and International political responses All three scenarios but especially the latter two are at risk from mounting socio-political unrest
THE ECONOMY
ECONOMIC PROSPECTS
Depending on the conduct and outcome of
elections, Zimbabwes open economy means GDP growth will depend heavily on global conditions, especially demand and prices for commodities metals, including gold and diamonds, and tobacco, cotton, sugar, etc. This global reality plus five inter-related binding constraints underline the degree to which policy is constrained in Zimbabwe. In other words, dont expect miracles from a severely-constrained new government.
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BINDING CONSTRAINTS
a) Overvalued exchange rate (US$ in Zimbabwe) b) Infrastructure deficit electricity, transport, water c) Balance-of-payments deficit and debt overhang d) Finance of all kinds long-term, working capital,
private equity and venture funding

e) Skills especially at technical (blue-collar) level
CONTEXT AND PATH DEPENDENCE

Growth prospects must be seen in context
Zimbabwe is where it is today because of its past. Too many analysts ignore this path dependence. For them any kind of change from UDI in 1965 to Independence in 1980, the Structural Adjustment Programme (1991), land reform (2000) and the inclusive government (2009) was heralded not just as a hopeful omen of better days ahead, but as a signal that conditions will indeed must improve.
AN OVER-HYPED STORY
The following slides provide the necessary context
over a period of 53 years World Bank data show that Zimbabwes economy has grown 1.5% annually over that period Population grew faster until the 2000s income per head fell, so that today the man/woman in the street is poorer than in 1960
16
INCOME PER HEAD (US$ constant prices)

US $
700 600 500 400 300 200 100 0 1960
1974
1979
1991
1998
2008
2013f
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ZIMBABWE: THE LONG HAUL

Period
1960-1974 1975-1979 1979-1991
Years
14 5 12
GDP (% p.a.) 6.4

- 1.5 5.4
GDP per head (% p.a.) 2.9

- 4.0 1.7
1991-1998
1998-2008 2009-2013 (f) 1960-2012
7
10 5 53
2.3
- 6.0 6.6 1.5
0.6
- 6.3 5.2 -0.2
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EVAPORATING MIDDLE CLASS

The 1998-2008 meltdown depleted the middle class
professionals left, others slipped from middleincome to low-income market segments. Average wage excluding agriculture was approximately $550 a month (mid-2011). Only 800 000 formally employed (excluding agriculture) down 20% from 1998 peak. Only 15% of the labour force has a paid job in the formal sector.
NON-FARM EMPLOYMENT
000s
1200 1000 800 600 400
200
0 1980
19085
1991
1998
2000
2009
2010
2011
20
INFORMAL ECONOMY
2011 data put the informal economy at about 20% of
GDP way below previous World Bank estimates (50% plus) Seen by many as a serious under-estimate Over half (53%) is informal farm activity and 47% nonfarm Some 3.7 million people are engaged in the informal economy which means they generate an annual income per head of some $520 less than the monthly average non-farm wage and below the monthly cost-ofliving shopping basket for a family of 5 ($567)
These numbers highlight the extent to which market
analysts over-hype the value of the informal sector in Africa. It is a low-productivity, low-wage, low-technology, nontax-paying drag on development, used by governments and donors to camouflage the reality of poverty. Zimbabwes large informal sector is associated with very high poverty levels of 63% (16% of the population living in extreme poverty). In rural areas the poverty rate of 76% is double the urban rate.
ECONOMIC OPENNESS
TINY PLAYER
Because Zimbabwe is a tiny player $11.7 billion in
a $74 trillion world economy global influences have a major impact on economic performance, both immediately and in the long-term. Exports account for a third of GDP, but imports are much greater at 52% of GDP. As a result, net exports i.e. imports funded from offshore are 25% of GDP.
TRADE GAP NARROWS

In 2012, Zimbabwes exports dipped for the first
time since 2009. Fortunately, imports also declined reflecting weaker domestic demand so that the trade gap narrowed from $3.1 billion to $2.7 billion. The trade gap is huge because: Zimbabwe is a serial over-consumer (90% of GDP) so that demand spills over into imports. Worse, it has become a high-cost, low-productivity economy that attracts imports and undermines export competitiveness.
FOREIGN TRADE (US$ Millions)

8000
7000
6000
Exports
Imports
5000
4000
3000
2000
1000
1993 1996 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
HUGE DEPENDENCE ON FOREIGN LOANS

With domestic savings have been wiped out by
hyperinflation and dollarization the country is unhealthily and unsustainably dependent on foreign capital of all kinds. Since 2009 Zimbabwe has run up a cumulative balance-of-payments deficit of some $11.6 billion. Just over half has been covered by net capital inflows. A quarter is unrecorded inflows and the balance the further build-up in arrears, now totalling some $7.5 billion.
Seven primary products, dominated by precious
and semi-precious metals, contribute two-thirds of exports. Four tobacco, platinum, diamonds and gold make up almost 60%. This highlights just how vulnerable the economy is to commodity price fluctuations, especially those for gold, platinum and diamonds, where Zimbabwe is a volume producer of low-quality gems.
LEADING EXPORTS 2012

Product Tobacco PGMS Diamonds Gold Cotton Ferrochrome Sugar
$ Millions 775 775 770 715 198 126 110
% of Total 19.1 19.1 19.0 18.5 5.0 3.1 2.7.

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BIG BORROWER
This excessive dependence on foreign capital is
deeply ironic given the governments indigenization policy. True, Zimbabwe has attracted some $6.7 billion of foreign capital since 2009. But 80% of this was borrowed offshore. Only 20% was fresh investment (FDI and portfolio). By the end of 2013, foreign debt including arrears will have almost doubled in just 5 years.
FOREIGN DEBT AND ARREARS

16 14
Debt Arrears
12 10
8 6
4
2 0 2009
2010
2011
2012
2013f
Most of this steep increase in offshore borrowing is
short-term funding by the private sector while longterm inflows, including FDI, have been disappointing. In 2012/13 foreign funding of all kinds including inflows from the Diaspora are averaging over $2.25 billion (18% of GDP).
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OFFSHORE BORROWING
1000 800 600
400 LONGTERM SHORTTERM
200 0
-200 2009 2010 2011 2012
PRIVATE
2013 Forecast
33
TWO MESSAGES
Two messages flow from this:
Zimbabwe cannot go on borrowing at such a rate,
and must negotiate a debt-relief agreement with creditors sooner rather than later. The recently-signed SMP is a first step towards that goal but it is one that could be derailed by either a ZPF election victory or another electoral stalemate.
DOLLARIZATION DOWNSIDE
Historically, Zimbabwe solved its competitiveness
problem by devaluing the local currency. At Independence in 1980, the Zimbabwe dollar was worth US 160 cents. By the time the local currency collapsed in 2008, it was worthless. Such devaluation is no longer an option.
INTERNAL DEVALUATION?
Last year the IMF estimated that the US dollar was
15% overvalued (in Zimbabwe) thereby making the economy highly uncompetitive. Zimbabwe, ranked 132nd on the Global Competitiveness Index, is using the same currency as the US, ranked seventh. In 2013, the choice is stark Eurozone-style Internal Devaluation Or increasing even further its reliance on foreign capital.
UNPALATABLE OPTIONS
Both policy paths are unpalatable: a) Internal devaluation (austerity) is simply not a
viable strategy given current income, poverty and employment indicators b) Foreigners are not going to supply the requisite capital so long as economic and resource nationalism dominate the policy agenda and there is no debt-restructuring agreement
37
THE DRAWBACKS OF FOREIGN CAPITAL

In any event, foreign capital dependence is not an
optimal growth path. Those countries that reduce consumption as a percentage of GDP and boost domestic savings, use their capital better to grow faster than those that rely on foreign borrowing, especially foreign aid. FDI is more closely correlated with growth, but Zimbabwes current hostile stance towards FDI limits such inflows.
COMPETITIVENESS AND THE DOLLAR-RAND THREAT

A key concern is the widening gap between a
stable US dollar and a falling rand. Over the last year the dollar has gained 3% while the rand is down 15% an 18 percentage point gap. If South African exporters pass on their devaluation gains in the form of lower import prices to Zimbabwe, the country would benefit. But because Zimbabwe is a captive market there is really no reason why they should.
CURRENCIES EERs
115 110 105 100 95 90 85 80 75 70
US$ RAND
The 2012-13 SLOWDOWN
The slowdown over the past year is reflected in Static employment Wages growing faster than productivity
Falling mining and industrial output

Sluggish agricultural growth except tobacco
Lower imports, flat exports

Reduced electricity consumption
MANUFACTURING: (1980=100)
Vol Index
160 140 120 100 80 60 40 20 0
1980 1990 1997 2000 2004 2008 2009 2010 2011 2012
INDUSTRY
Manufacturing production is only 60% of its 1980
levels and output is lower than in the late 1960s. Mining production trebled after dollarization to peak at $2 billion (70% of exports) in 2011. Supply-side constraints and weaker prices have since taken their toll and output in 2013 is likely to fall below $1.8 billion.
MINING OUTPUT FALLS

Gold output at 15 tons is little more than half its
peak of the 1990s But diamond production has jumped from nowhere to 12.5 million carats while platinum has grown to 11 500 kgs.
MINING PRODUCTION ($ millions)
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REVISIONISM
Recently, itinerant academics, journalists, and even
politically-motivated World Bank consultants, have sought to claim that land reform in Zimbabwe is turning out to be a success. The facts tell a very different story Excluding estate-grown sugar, agricultural output is less than half its 2000 levels, while maize production has more than halved.
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In 2013 a country, which in the 1990s was food
self-sufficient, will import over $700 million of food. While tobacco output has trebled since 2008 thanks to the influx of over 70 000 new small-scale growers, production at 180 million tonnes is still 20% below its peak in 2000.
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FARM PRODUCTION VOLUMES

TONNES
4500 4000 3500 3000 2500 2000 1500 1000 500 0
Some 70% of tobacco is grown by small-scale
farmers, much of it by those on resettled properties. Next year there will be over 100 000 growers compared with less than 10 000 in 2000. In this one industry, resettlement is working though as stressed already it will take at least until 2015 to regain 2000 levels of output
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Inflation
Almost overnight, dollarization solved the
hyperinflation problem in 2009. In the last 4 years, inflation has averaged 3% a year, slowing to 2.2% in mid-2013. It is likely to nudge higher in the latter half partly because food and fuel prices are rising and there is a high pass-through rate (60%) of SA inflation into Zimbabwe.
INTEREST RATES
Interest rates are more likely to go up than down,
reflecting the tight liquidity situation itself a function of a huge BOP deficit. There has been no deposit growth in 2013 and banks are fully loaned up (81% of their deposits). Credit is very expensive = 10% for corporates and 14.5% for individuals, mostly short-term finance.
PROFITS
In the most recent reporting period, 19 of 50 ZSE-
listed non-financial firms incurred losses. The graph shows how margins collapsed after dollarization but have since stabilized. However, average margins are well below those of the 1990s, which is partly a reflection of the much lower inflation.
CORPORATE MARGINS RECOVER (%)

45 40 35 30 25 20 15 10 5 0
WHERE TO NOW?
For half a century, the Zimbabwe economy
has underperformed, aside from a number of brief growth spells. Industrialization has stalled and the country is currently de-industrializing. Mining coal, methane gas, gold, platinum, diamonds, nickel and ferrochrome will drive the economy over the next decade.
ELEPHPHANT IN THE ROOM

But growth will be seriously constrained by
infrastructure bottlenecks ($20 billion needed in new investment), scarce capital and the vagaries of global demand. The elephant in the room for all investment especially mining and banking is the indigenization legislation, which is all but certain to be radically revised.
But a country with such massively high levels
of poverty and unemployment cannot rely on capital-intensive mining growth to create jobs and alleviate poverty. And manufacturing is unlikely to step up to the plate.
58
The days of inward-looking industrial
strategies in tiny low-income markets have long gone. Manufacturers will have to become betterquality, predominantly niche players and forget trying to compete on price with Asian imports.
59
Small-scale farm successes as in tobacco
and to lesser extent, cotton are not growth drivers for a modern economy. Over time, Zimbabwes agricultural revolution (land reform) will self-reverse. More and more people will leave the land and farms will agglomerate again, though not to anything like the same extent or in the same way as before.
Globally, the long-run outlook for farm
production and prices is good and Zimbabwe is well placed to revive its agricultural sector provided: Policies are market not politically driven, and The focus shifts from agricultural policy to agribusiness policy that emphasizes the central role of value chains.
CONCLUSION
THE MODEL HAS TO CHANGE

Today, Zimbabwe is on an unsustainable growth
path. Unsustainable in both economic and sociopolitical terms. Changing the countrys business model is not rocket science. It is not a matter of economic expertise or even of resources but of political will.
AT THE CROSS ROADS

It is not the private sector farmers, industrialists,
miners and bankers that are underperforming. It is the system politicians, institutions, infrastructure. There is a chance that the environment will change after this months polls.
CONCLUSION
But change has to be meaningful in the sense of a
more committed, more competent and more economically-oriented administration with a focus on the population as a whole not a narrow elite of rent-seekers. Zimbabweans dare I say it, South Africans have to move on from ideology-driven policies to pragmatism, and from politics to economics.
65
50 YEARS OF FALSE DAWNS

2013 could be the watershed year.
Many believed that in 1965 (UDI);

In 1980 (Independence); In1991 (Structural Adjustment);
In 2000 (Land Reform) and

In 2009 (The Government of National Unity) Perhaps this time it will be different it had better
be.
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ZIMBABWE ECONOMIC OUTLOOK 2013-2014

REAL GDP GROWTH (% p.a.)

Copyright 2013 IHS Inc.

WORST CASE ANOTHER COALITION

BASE CASE ANOTHER FIVE YEARS OF ZANU-PF

BEST CASE MDC WINS OVERALL MAJORITY

As an economist I cannot imagine how voters who

Outright MDC victory sets the stage for annual

private equity and venture funding

CONTEXT AND PATH DEPENDENCE

Copyright 2013 IHS Inc.

INCOME PER HEAD (US$ constant prices)

ZIMBABWE: THE LONG HAUL

GDP (% p.a.) 6.4

GDP per head (% p.a.) 2.9

EVAPORATING MIDDLE CLASS

These numbers highlight the extent to which market

Copyright 2013 IHS Inc.

TRADE GAP NARROWS

FOREIGN TRADE (US$ Millions)

HUGE DEPENDENCE ON FOREIGN LOANS

Seven primary products, dominated by precious

LEADING EXPORTS 2012

$ Millions 775 775 770 715 198 126 110

% of Total 19.1 19.1 19.0 18.5 5.0 3.1 2.7.

FOREIGN DEBT AND ARREARS

Most of this steep increase in offshore borrowing is

Copyright 2013 IHS Inc.

Copyright 2013 IHS Inc.

Zimbabwe cannot go on borrowing at such a rate,

Copyright 2013 IHS Inc.

Copyright 2013 IHS Inc.

THE DRAWBACKS OF FOREIGN CAPITAL

COMPETITIVENESS AND THE DOLLAR-RAND THREAT

Copyright 2013 IHS Inc.

The 2012-13 SLOWDOWN

Falling mining and industrial output

Lower imports, flat exports

Copyright 2013 IHS Inc.

MINING OUTPUT FALLS

Copyright 2013 IHS Inc.

MINING PRODUCTION ($ millions)

Copyright 2013 IHS Inc.

Copyright 2013 IHS Inc.

In 2013 a country, which in the 1990s was food

Copyright 2013 IHS Inc.

FARM PRODUCTION VOLUMES

Copyright 2013 IHS Inc.

Some 70% of tobacco is grown by small-scale

Copyright 2013 IHS Inc.

Copyright 2013 IHS Inc.

Copyright 2013 IHS Inc.

CORPORATE MARGINS RECOVER (%)

Copyright 2013 IHS Inc.

For half a century, the Zimbabwe economy

ELEPHPHANT IN THE ROOM

But a country with such massively high levels

Copyright 2013 IHS Inc.

The days of inward-looking industrial

Copyright 2013 IHS Inc.

Small-scale farm successes as in tobacco

Globally, the long-run outlook for farm

THE MODEL HAS TO CHANGE

AT THE CROSS ROADS