Economic reports out of China indicate that its economy expanded 8.1% in 2021.
However, weakening growth in the closing months of 2021 suggest that trouble is still on the horizon as the country contends with (i) a deepening real estate crisis, (ii) renewed Covid outbreaks and (iii) strict no-tolerance approaches to controlling the virus. Gross Domestic Product (GDP) expanded just 4.0% in the last quarter of 2021.
China has been contending with a plethora of problems recently, including tumult in its property sector. Chinese real estate developer Evergrande, which has cUSD300 billion of total liabilities has been struggling to pay its debts and was recently ordered to demolish a few dozen buildings in the country.
In addition, policymakers in Beijing are grappling with the impact of the Omicron variant, which was reported for the first time on January 15th.
Unlike other countries, China has no intention to “live with” the virus, even if its latest iteration is less severe than earlier ones. Economists have warned that China’s zero-Covid approach to containing the virus could spell serious problems for the economy in 2022.
Goldman Sachs, for example, slashed its projection for Chinese economic growth in 2022 to 4.3% from 4.8%. The country’s strict measures have therefore highlighted lingering weaknesses in consumption.
A nationwide slowdown in the crucially important property sector has also weighed on the wider economy and sparked a global reckoning over the health of the industry.
The implication is that slow growth in China will negatively impact on commodity prices which in turn hurts countries in Sub Saharan Africa (including Zimbabwe). In 2021, Sub Saharan Africa grew by a modest 3.7% according to the IMF, driven by a partial resumption of tourism, a rebound in commodity prices and the rollback of pandemic-induced restrictions.
However, the outlook for 2022 looks barely unchanged as IMF predicts that Sub Saharan Africa’s growth will only increase by 0.1% to 3.8%. Sub Saharan Africa is expected to continue to face Covid-19 related problems, compounded by a vaccination rate that lags well behind most other regions. In the absence of vaccines, the emergence of deadly and more transmissible new variants threatens to make Sub Saharan Africa a global outlier on the road to recovery.
In our view, a Chinese slowdown will have negative ramifications on the Sub Saharan African region. Looking at the Zimbabwean context, the total value of export receipts is driven largely by minerals and agricultural commodities.
According to the Ministry of Finance & Economic Development, merchandise exports increased by 19.2% to US$4 053.4 million in the nine months to September 2021, spurred by increases in agriculture and mineral exports, while manufactured exports remained subdued. Chinese demand is an important part of the equation given that it determines the prices of key commodities such as tobacco, gold and PGMs.
Total Export Receipts (USD4.053 billion) – 9 Months to Sept 2021
An interesting research paper by Csilla Lakatos, Maryla Maliszewska, Israel Osorio-Rhodate and Delfin Go titled, “China’s Slowdown and Rebalancing: Impacts on Sub-Saharan Africa”, states that by 2030, an average 1 percent annual slowdown of China’s GDP is expected to result in 1.1 percent GDP decline in Sub-Saharan Africa and a 0.6 percent global slowdown relative to past trends. However, if China’s transformation also entails substantial rebalancing, the negative income effects of the economic slowdown could be offset through higher overall imports by China and positive terms-of-trade effects for its trading partners.
China’s transformation is also estimated to reduce poverty, but the extent depends on country in the Sub-Saharan Africa. In conclusion, the Zimbabwean economy is expected to grow by 5.5% in 2022.
Our recommendation to investors is to seek exposure in defensive sectors such as consumer and financial services. Innscor Africa, Simbisa Brands, NMBZ Holdings and Old Mutual Zimbabwe Limited are at the top of our 2022 buy list.
Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
