A Zimbabwe conference by Africa Confidential prompted this piece which covers one of the most theoretically interesting things I’ve ever seen happen in macro-economics. A country has run out of money and imposed capital controls when it does not even have its own currency. The closest analogy maybe Greece and Cyprus during their recent crises. Zimbabwe has imposed Egyptian/Nigerian style import restrictions while the time taken to do an international transaction widen from 3 days to 5-6 weeks because there are so few dollar notes in the economy and offshore nostro accounts are also close to empty. This matters as Frontier funds have a small overweight on Zimbabwe – an off-index allocation that is larger than that in Tanzania.
When you don’t have your own currency, then running big current account deficits without offsetting capital inflows, should result in deep deflation. But labour markets are not flexible in Zimbabwe. Until August 2015, firms had to pay 3 months salary for every year of service to any worker they dismissed (it is now two weeks salary per year) – and there has only been 6% deflation in prices in recent years. Next door South Africa has seen dollar wages drop about 40% via currency depreciation. Telecoms firm Econet has recently cut wages by an unprecedented 20% which is more than most firms, but even that may not be enough. The government increased employment when the economy doubled to 2012 and has not yet taken the axe to its wage bill which economics says it must – until very recently when it stopped paying wages which is, I guess, one “solution” to the problem, but not sustainable.
The government has a number of ideas to solve the country’s problems. One idea is to try and clear arrears owed to the African Development Bank, the World Bank and the IMF.
Afrieximbank – a pan-African trade promotion bank – is seemingly prepared to increase its large exposure to the country to help achieve this. But even if arrears are cleared to the IFIs, it is not certain this will lead to new IFI financing – the US cannot support any IFI support for Zimbabwe due to sanctions on certain individuals that it has imposed - so we may need to see compromises from Harare to let this happen.
Meanwhile private sector capital inflows are deterred by Zimbabwe being 155/189 in the Ease of Doing Business rankings and 150/167 on the corruption ranking. Its very low ranking in our legal scoreboard exceeds only Venezuela, Bangladesh and Myanmar.
We – a little unfairly – suggest that the IMF was too optimistic in its 1.4% growth forecast for 2016 with the expectation of a 5.6% rise in 2017 as the post-El Nino harvest kicks in. Those IMF forecasts were written in February 2016, on the back of end-2015 data only. The economy has deteriorated significantly since then. Negative GDP is quite plausible for 2016 and the bounce-back in 2017 would require 1) a good harvest (likely), 2) capital inflows (less likely), and 3) higher precious metal/tobacco prices (gold is up 27% YTD). If we look at Greece or Cyprus when they had similar problems – GDP was negative for longer than just one year.
We have strong doubts that investors will be able to repatriate dividends in coming months. We expect deepening deflation in non-food items. Political unrest has risen.
In the long-run, we see population growth, education, the openness to financial markets, and the currency regime – as positives for Zimbabwe. But for now, there are problems in each of these areas (see pages 2 and 3).
CONCLUSION: There are probably some interesting investment opportunities for long-term investors with high risk appetite, but for now – we assume most equity investors will favour Morocco or Kenya, and Nigeria/Egypt if both allow their currencies to trade at fully free market rates in coming weeks.