Finance and Economic Development minister Mthuli Ncube presented the midterm fiscal policy review statement on Thursday. Brokerage firm, IH Securities analyses the review statement.
Shocks put global GDP under pressure
Political risk has upstaged the pandemic on the global front with the Russia/Ukraine conflict negatively impacting global supply chains.
The resultant themes echoed across the sphere are those of food inflation, rising energy costs, high interest rates and narrowing fiscal space.
The World Bank reviewed its global GDP growth forecast to 2.9% for FY22 from earlier estimates of 4.1% (FY21 5.7%).
While the IMF forecasts global growth of 3.2% from the earlier 3.6%. The World Bank Estimates that growth in Sub Saharan Africa will slow to 3.7% in 2022 from 4.2% in 2021 as the inflation pressures mentioned above, are sharply reducing food affordability and real incomes across the region.
Policy in the region is having to delicately balance social-welfare-spending needs, containing public debt, and mobilising tax revenues.
Traditional local economic driver, agriculture giving way to mining
On the local front, the World Bank and IMF anticipate the GDP will recover by 3.7% and 3.4% respectively in 2022.
Government has revised downwards its growth forecast from 5.5% to 4.6% citing developments in the global space as well as a lacklustre agriculture performance.
Government forecasts agricultural output is now below earlier expectations given erratic, unevenly distributed rains with maize expected to come in 43% lower than the previous harvest leaving a deficit of at least 300,000 tons.
GDP growth outlook is premised primarily on improved performance from the mining, manufacturing and as well as energy sector.
Mining is expected to grow by 9.5% (revised up from 8%) in 2022 benefiting from favourable international commodity prices, reopening of closed mines and increased exploration by the private sector.
In the manufacturing sector, average industry capacity utilisation has reach 56% from 47% in 2021. High cost of doing business, erratic power supply and archaic machinery remain major hindrances to high productivity.
The hospitality industry is expected to recover by 50% (revised from 19%). The growth prospects for the economy are, however, heavily dependent on currency stability, moderate inflation and policy stability.
Year to date the parallel rate has deteriorated by 253% to US$1: ZWL$760 representing a 72% premium to the auction rate of US$1: ZWL$440. M-o-m inflation accelerated to 30% in June crystallising the hyper-inflation status.
Containing expenditure while widening the revenue base
Inflation necessitates supplementary budget
The revised budget deficit for CY22 is now expected to come in at ZWL$157.5bn from the previous target of ZWL$76.5bn.
The deficit remains within the targeted 1.5% of GDP. The deficit will be funded through issuance of government securities, utilisation of the country’s SDR allocation and external loans. The 2022 National Budget projected revenues of ZW$850.8bn for the year.
However, indications are that ZW$1.74trn (16.6% of GDP) will be realised by December 31 primarily driven by value added tax (replacing Corporate Income Tax as the lead driver, this revenue head came in below target).
Collections are projected to increase in line with inflation expectations. With the focus on expenditure containment, employment costs have been marginally increased from a targeted 6.7% of GDP to the now projected 7.9% of GDP. However, recurrent expenditure still makes up a significant portion of the budget at 73%.
Imports growth set to outpace merchandise exports despite increased mineral receipts As at 30 June 2022, reserve money was ZWL$35.09bn an annual growth rate of 35%. Reserve money growth targets were set at 0% in line with a tight monetary stance to rein in inflation.
As at June 2022, the public and publicly guaranteed debt comprised of ZWL$1.3trn and US$13.2bn of domestic and external debt respectively.
Exports are expected to close the year at US$7.3bn, spurred by increases in mineral receipts as well as increases in agriculture and manufactured exports. Merchandise imports are expected to close at US$8.1bn driven by fuel, machinery and raw material imports, speaking to a trade deficit with potential to frustrate efforts to stabilise the local currency.
Increasing the revenue base to support increased spend
The platinum royalty rate was revised from 2.5% to 5% effective 1 January 2023. The royalty rate of 5% will also apply on lithium. PGMs surpassed gold as the country’s highest forex earning mineral in 2021. The Value Added Tax (VAT) threshold for businesses has been lowered from US$60,000 to US$40,000 to widen the government tax base. The VAT act will be revised to make it a clear obligation for businesses to remit VAT in the currency of trade.
Our thoughts: Cushioning the consumer to maintain production momentum
Confidence levels have weakened over the first half of the year as evidenced by frequent, erratic movements in the parallel exchange market and an increase in rent seeking behaviour. The recent fluid policy environment ironically re-affirmed pre-existing investor apprehension.
Policy measures introduced prior to the 2022 Mid Term Budget attempted to preserve gains made in the productive sector during the 2020/21 period by employing mechanisms to contain inflation. The Mid Term Budget itself seemed aimed at the consumer side of the equation to defend disposable incomes and therefore support consumer demand levels.
Reviewing civil servants’ salaries and tax-free thresholds will go a long way in cushioning the formally employed consumer. The recently released Delta trading update is a testament to resilient demand despite rampant inflation.
Consumer facing stocks are likely to benefit from the upward adjustment in the tax-free threshold and increase in the exempt portion of bonus. A combination of restricted lending and higher interest rates compelled investors to unwind positions and unlock funds from the stock market. The bear market has resulted in the ZSE trading far below the 7-year average speaking to BUYING opportunities in selective counters.—IH Securities
