The Inflection Point

Austrian-born German politician Adolf Hitler once said, we quote, “The great masses of the people will more easily fall victims to a big lie than to a small one”.

Discussions about the Zimbabwean economy have indeed revolved around the shape of the economic recovery in 2021.

There have also been serious questions on whether this growth is sustainable or is just an indication of a low-base effect.

That said, several economic commentators are signalling an inflection point that could set Zimbabwe on a new growth trajectory.

In Mathematics, the inflection point is where the direction of a curve changes in response to some material event.

To qualify as an inflection point, the shift must be noticeable or decisive.

This principle can be applied to a variety of economic, business and financial information such as shifts in the gross domestic product (GDP).

This means that the inflection point is an event that results in a significant change in the progress of an economy or geopolitical situation and can be considered a turning point after which a dramatic change is expected to result.

The Government of Zimbabwe has also echoed some optimism about the economy while also warning that the Covid-19 pandemic had not yet been fully defeated. Meanwhile, the International Monetary Fund (IMF) is projecting the global economy to grow at 6.0% in 2021 after an estimated contraction of 3.3% in 2020.

The strength of the projected recovery varies across countries depending on (i) the severity of the health crisis, (ii) the extent of domestic disruptions (iii) exposure to cross-border spill-overs and (iv) the effectiveness of policy support.

Following the largest contraction ever in Sub Saharan Africa (–1.9% in 2020), growth in the region is expected to rebound to 3.4% in 2021, significantly lower than the trend anticipated before the pandemic. The 2021 revised IMF GDP growth projection for Zimbabwe is 3.1% (in line with the Morgan & Co Research projection of 3.4%).

While the 3.1% GDP growth projection by the IMF is well below the 7.4% being projected by the Ministry of Finance and Economic Development, an important area of concern relates to inflation expectations.

The IMF is projecting inflation to average 99.3% in 2021 and 24.7% in 2022 versus 557.2% in 2020. On the other hand, the Reserve Bank of Zimbabwe has set a target of 10% based on (i) continued stability of the exchange rate, (ii) prudent fiscal and monetary management and (iii) an improved agriculture season in 2021. The optimism has also been triggered by a number of possible outcomes in 2021 such as;

•An anticipated maize bumper harvest. The forecast record maize harvest of 2.8 million tonnes and significant output of other crops such as soyabean, cotton and traditional grains could save the country more than US$200m in terms of imports. At 2.8m tonnes, the envisaged grain output would be significantly more than domestic demand estimated at c2.0 million tonnes;

•An improved tobacco crop in 2021. According to the Tobacco Industry and Marketing Board, tobacco production is expected to reach 200 million kgs in 2021 versus 184 million kgs in 2020;

•Gold prices are expected to remain firm. On the global front, gold has been losing its spark as an alternative asset class as investors have been pumping into cryptos (including NFTs). However, gold prices are expected to remain firm throughout 2021. Citibank expects gold prices to average US$1,800 per ounce in 2021; and 

•Liquidity support through the IMF possible US$650bn SDR allocation could be a game changer for Zimbabwe

All in all, a “big” number in the mind of the ordinary citizen in Zimbabwe is the exchange rate. There are concerns that the official exchange rate continues to lag the parallel market rates as measured by the gap of c30%-40%. Another concern is around inflation pressures emanating from the volatility of oil prices.

It would appear that risks associated with value destruction continue to linger given the fragile state of the Zimbabwean economy.

In the middle of these difficulties also lies opportunity. On our market, we think the opportunity to preserve value is currently skewed towards traditional blue-chips such as Delta, Innscor, Econet Wireless, Cassava, National Foods and Simbisa Brands.

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