HARARE,– Zimbabwe’s macroeconomic environment remain largely weak although pockets of positives have been noted registered since mid-year of 2017. This counterbalance has resulted in mixed interpretations on whether the economy is progressing or regressing. Here, we highlight and review the macro environment over the six month period between January and June, 2018.
Inflation and money supply
- The growing variance between M3 and M1 money, which is real notes and coins either in USD or Bond Notes to broad money including less liquid assets, has resulted in price distortions and fluctuations.
- Money creation by government through issuance of treasury bills has quickened the rate of money supply growth in the economy. This has been made worse off by a weaker trade balance position which remains in sharp deficit.
- In the six month period, inflation as measured by ZimStat has remained low, falling from 3.52% in Jan to 2.71% in May although prices across a wider range of goods have spiked significantly depending on the point within the triangular price system prevalent in the economy, that one is transacting on.
- It is likely that inflationary pressures will remain high in the current year as expenditure mainly on the part of the fiscus exceeds budget levels.
External trade
- Cumulative trade deficit for the 4 months period to May 2017 came in at -$1 billion which implies that on the net the country is losing an average of -$250 in forex outflows through trade per month since January.
- A resurge in aggregate demand fuelled by money supply has pushed up production levels across a number of manufacturing companies. Consequently appetite for forex has increased, sought for purposes of inputs sourcing from beyond borders.
- As local production picks up so is the maintenance and retooling, which further exert pressure on forex demand. The 3 key imports remain production factors of energy nature namely Diesel, Petrol and Electricity.
The weak aggregate poses a threat to envisaged further growth in production, financial sector stability and economic growth prospects.
Agriculture performance
- Late rains in the 2017/18 season weighed on expected yields from agric produce notably that of maize. From production levels of 1.2 million tonnes in 2017, maize produce for the current year is expected to be at least 50% lower at 600,000 tonnes and of this, 250,000 tonnes have been delivered to GMB as at June.
- Countering the maize underperformance is a big performance by tobacco, which at 225 million kgs as at day 72 has set a new post dollarization high and marginally shy of touching a year 2000 high of 232 million kg.
Government has extended its hand in agriculture and this year is committed to increase command funding to over $400 million. This measure unsupported fundamentally by available resources, is likely to have a reciprocating negative effect on money supply, weak yields and higher prices.
Mining
- All major resources performed ahead of the comparable first quarter period last year in terms of production.
- Gold which is a key export commodity realized a 68% production jump from 4.6 tonnes in Q1 2017 to 7.8 tonnes in Q1 2018. Although both small scale and primary production has improved, the former has realized a sharper growth to dominate overall contribution in the current year. Aspects such as artisanal formalization and funding support have had a huge impact in driving volumes. Other notable gains were recorded in Diamond and Nickel the former is coming from a very low base after ZCDC took over while the latter is inspired by recovering global prices for the base metal.
- A major development in the mining sector include the ceding of a piece of resourced land by Zimplats to government after years of litigations which dampened the country’s status as an investment destination. The piece of land is part of the land allocated to Karo Resources in a $4.2 billion deal which will see Karo develop a PGM mine along the Great Dyke and a refinery.
Foreign arrivals
- In the first 3 months of the year arrivals spiked by 15% to 554,417 ahead of the same period last year. Asian arrivals recorded the sharpest jump at 109%.
- Consequently receipts rose by 20% to $190 million from $160 in the first 3 months of the previous year.
- Occupancy levels in key areas of Harare, Vic Falls and Bulawayo went up by 12%, 7% and 2% respectively. 2 top hospitality entities achieved average occupancies of about 55%.
- Foreign arrivals into Zimbabwe as an aggregate has significantly picked up since the November transition which raised hope of an economic turnaround through an undisputed election.
Regional arrivals have surged on the back of deflating dollar which in prior years had strongly firmed against regional currencies. Operators have also largely adopted flexible pricing models for regional arrivals.
Manufacturing
- A demand induced production lift extended into the first quarter of the year with at least 15 manufacturing companies listed on the ZSE realizing sharp volumes and profitability growth ahead of the same period last year.
- Notable developments include the commissioning of a $30 million Pepsi bottling plant and a $3.5 million Splash Paint and Plastics plant.
- Most companies hamstrung by forex shortages have failed to implement substantial capital projects utilizing own flows. Most forex denominated facilities are strategically allocated to exporters as financial institutions hedge against repayment risk.
Financial sector
- Money supply stood at $7.8 billion as at February which is an exorbitant year on year growth of 36%. Transferable deposits have been the force behind the growth having spiked by 47% over the same period. As a result, domestic credit went up by 38.5% to $10.5 billion between February 2017 and February 2018.
- Credit growth was largely stimulated by a growth of $2.3 billion in credit extended to government from $3.9 billion to $6.8 billion as at February.
- Trends in banking show a sustained upsurge in transactional business which in turn, has overlapped the impact of partial funded income slowdown to drive overall incomes up. Fee and commission income growth is supported by increased transactions volume as banks refocus.
Funded income is hamstrung by declining interest rates and high default risk in private sector lending. Sovereign paper remain the preferred interest earning asset and a slowdown in TB issuance may lower income from net interest income.
Stock market performance
- In the first half of the year stocks have hovered in either direction although having closed the period with residual gains. The performance is best split between the 1st and 2nd quarter as in the former the performance was negative and positive in the latter.
- The weaker first quarter performance saw a downward rerating after a prolonged inflation induced and confidence inspired growth in late 2017. However the northward trending in Q2 was driven by firm reported earnings as companies largely enjoyed increased volumes and revenue performances, thus driving profitability up. Consequently upward valuations were supported.
- Agitated investors largely risk averse also supported Q2 price recovery on increased buying a trend likely to be enjoyed up-to elections.
Turnover levels for the first half were significantly higher than the same period last year and trades were largely concentrated in cherry-picked heavies Econet, Old Mutual and Delta.
Government revenue
- In the first quarter period gross collections totalled $1.11 billion which is 35% above the prior year and 8.1% above target.
- In each of the 3 months, gross revenue collections outperformed both the prior year and respective monthly target.
- At $1.11 billion the quarterly revenue was 3% ahead of the previous quarter (Q4-17) which is typically the best of 4 quarters in an average year.
- The overall firming trend is a carryover from the prior year where ZIMRA reported a sharp surge in revenue to achieve the best performance since dollarisation at $3.75 billion.
- This trend is expected to be maintained to the full year owing to a surge in corporate profitability and a seemingly re-emerging demand.
Respect Gwenzi is managing director and lead analyst at Equity Axis, a Harare-based research firm. This article was first published here by the Source.
