Batanai Matsika
The Zimbabwe Revenue Authority (ZIMRA) has released its 1Q 2019 revenue report indicating an 83.82% surge in net collected revenues to $1.94bn. The positive performance is attributed to the significant contributions from Intermediate Money Transfer Tax (IMTT), Corporate Income Tax and Excise Duty. IMTT realised $282.84m against a target of $150m and grew by 5333.99%. Further, Excise Duty was the biggest tax head contributor at 29% to net collections. The performance comes after government hiked the price of fuel in mid-January to reflect the significant increase in the excise duty rate.
While these revenue numbers come as good news to National Treasury which is now operating in a surplus, we see a state of pareto optimality in the broader economy. Pareto optimality is an economic state where resources cannot be reallocated to make an economic agent better off without making at least one economic agent worse off. It implies that it is almost impossible to effect a change in economic policy, without making at least one economic agent worse off. The increase in fuel prices and the introduction of the 2.0% tax has made the general populace worse off given the contraction in consumer purchasing power. We contend that there has been a transfer of wealth from the general populace to the government. For companies, the implication has been an increase in the cost of production. The net effect is a general increase in prices as businesses has pushed the costs to final consumers.
Overall, the current-tax regime does not assist companies to boost productivity while it has also constrained consumer demand. That said, the winners on the Zimbabwe Stock Exchange (ZSE) will be those companies that are linked to government spending activity (agriculture-related funding programmes) such as SeedCo and Zimplow. Further, construction materials stocks are set to benefit since the expectation is that an improvement in revenue collection will create more room for government to invest in critical infrastructure projects such as transport (roads, rail and air), water (dams and piping) and electricity generation.
We have analysed the historical relationship between Capital Expenditure and Gross Domestic Product (GDP) for Zimbabwe as illustrated below;
We highlight that Zimbabwe’s Gross Fixed Capital Formation (GFCF) is below most countries in the world as well as in Sub Saharan Africa (SSA). For example, Rwanda and South Africa have a GFCF above 20%. Zimbabwe will have to play catch up by increasing infrastructure spending. The huge infrastructure backlog as well as the housing deficit estimated
as c1.5m units presents opportunities for companies such as Proplastics, Turnall and Masimba Holdings. Of interest is Turnall Holdings which has returned to profitability and is trading on a PER (Hist.) of 8.5x (Proplastics 15.8x).
Author – Batanai Matsika Head of Research – Morgan & Co +263 78 358 4745batanai@morganzim.com