Market commentary: Developments in Zimbabwe

What Happened: The winds of change.

Early yesterday morning, Major General SB Moyo of the Zimbabwean Defence Forces made official what had been until then, rumours, that President Robert Mugabe was under house arrest and that the military was now to a great degree in control of the Government of Zimbabwe. According to General Moyo, the move, was focused on “targeting criminals around him (President Mugabe) who are committing crimes that are causing social and economic suffering in the country in order to bring them to justice.”

What the markets think: Is this the turning point?

Although markets remained open, no trades had gone through to discern a market direction. However, sentiment from commenters and analysts hint towards positive ‘relief’ that perhaps going forward, economic policy will be anything but what has become normal in Zimbabwe and that this is the turning point observers have been waiting for.

General Moyo: “Our wish is that you will enjoy your rights and freedoms and that we return our country to a dispensation that allows for investment, development and prosperity that we all fought for…”

What we think: Too early to tell. Watch from the side lines.

Zimbabwe’s economy relies on commodity exports (primarily platinum), public sector spending (primarily civil servant salaries) and diaspora remittances (5% of GDP). The source of funding for public spending was historically driven by borrowing from abroad. When that source of funding dried up, the funding was replaced by local asset expropriation and more recently by borrowing in the domestic market.

Cash shortages and allocation of scarce capital into local equity markets as an alternative to bank deposits has created a bubble on the Zimbabwe Stock Exchange (up 304% year to date). This points to a fracturing of the status quo, similar to the hyperinflation caused by run-up to dollarisation in 2009.

The macroeconomic relief this year – resulting from a recovery from last year’s drought and better commodity prices – is likely to be temporary, with next year’s outlook poised to be very weak. The IMF forecasts from 2017 to 2018 a deceleration in real GDP growth from 2.8% to 0.8% and an acceleration in inflation from 2.5% to 9.5%.

Over the last decade, unlike most African economies, Zimbabwe has contracted in constant currency terms. This creates a very low base from which to recover. From a policy reform perspective, low hanging fruit include doing away with the infamous indigenisation policy. The fact that it will not take much to grow from this very low level, creates a temptation to believe that any change to the status quo is positive. We are more sceptical of this, given how little we know about the economic policy leaning of whichever administration emerges from the current evolution.

Africa fund positioning.

Our fund has no exposure to Zimbabwe. Early this year as we saw the economic situation in Zimbabwe deteriorate, we took a decision to exit our small (c. 4%) position on the Zimbabwe Stock Exchange. We are unlikely to re-invest in Zimbabwe until the outlook is much clearer. In the meantime, we keep a close eye on developments as they occur.

Interested in investing in the Absa Africa Equity Fund: For more information, please phone the call centre on 0860 11 456, email to utenquiries@absa.co.za or ask your financial adviser.

Find out more about investing in Africa here.