Zimbabwe’s Tentative Recovery Will Face Destabilising Headwinds


Wednesday, August 30, 2017 9:05AM / BMI Research

BMI View: Economic activity return to positive growth in Zimbabwe in 2017 as improving weather conditions facilitate stronger harvests in the agriculture sector. However, growth will remain low on the back of constrained monetary and fiscal policy.

Real GDP growth will post a modest improvement in Zimbabwe over 2017 and 2018 as harvests begin to improve in the agriculture sector following a damaging drought in 2016. Furthermore, although the full consequences of the government's bond note programme have yet to materialise, early signs suggest that it has contributed to a much-needed increase in the M1 money supply, with inflation moving back into positive territory in February for the first time since 2014. As a result, we expect growth to reach 0.6% in 2017, after posting an estimated 1.8% recession in 2017.

Although we believe this trend of recovering growth will continue into 2018, with growth accelerating to 1.2%, we add that risks are heavily skewed to the downside. Not only could the threat of pestilence soon derail any improvement in the agriculture sector, but the government's expansion of its bond note programme could also lead to a notable increase in inflation, dimming prospects for any economic recovery in 2017.

Even discounting these substantial risks, real GDP growth will remain constrained by the government's weak fiscal position and elevated political risk, limiting the prospect of meaningful investment into the economy.

Key Headwinds Will Improve Over 2017

While we do not hold a constructive outlook for the Zimbabwean economy, we believe that some of the key headwinds to growth in 2016 will improve over the coming months. Agriculture has traditionally been a key sector, although damaging land reforms and poor harvests have seen its role decline over recent years. Scope for any reversal of the land reforms made under the current administration is slim while President Robert Mugabe remains in power, but better growing conditions will likely offer a boost to harvests over 2017.

For instance, our Agribusiness team forecasts corn production to increase by 50.0% in 2017, having contracted by 46.2% and 28.6% in 2015 and 2016 respectively. Similarly, tobacco (a key cash crop in Zimbabwe) is set for something of a recovery after drought saw output decline by 10.1% in 2016.

In addition to an improving outlook for the agriculture sector, the government's efforts to expand the supply of cash circulating the economy will also offer a boost to real GDP growth. After the economy was dollarised in 2009, businesses have struggled with an increasing shortage of cash, constraining their ability to carry out normal operations.

The government's bond note programme has sought to rectify this and early signs would suggest that it is having some success. Prices slowly began to increase in Q117 and although partly indicative of increasing food and energy prices, growing M1 money supply will have played a role as well. With more cash in circulation, businesses will find it easier to operate over the coming quarters, reflected in a modest uptick in real GDP growth.

Ongoing Headwinds Will Limit Recovery

re long-standing headwinds will limit the extent of any increase in economic growth during this period. Most notably, much-needed investment into the economy will remain low on the back of the government's constrained fiscal position and elevated levels of political risk in the approach to the 2018 election.

Having fallen into arrears with international creditors in 2001, the country has been largely shutout of debt markets, meaning the government has struggled to offer the economy any kind of meaningful fiscal stimulus.

Any increase in government revenues that follow from the slight recovery we expect in 2017 and 2018 will likely be focused on maintaining the support of the country's military and police during what we believe will be a period of heightened unrest in the approach to the 2018 general election, rather than on more productive ventures (see 'Social Stability Will Remain Key Spending Priority', April 13).

The private sector is unlikely to prove any better, instead opting for a wait-and-see policy regarding the inevitable succession of the ailing President Mugabe.

Downside Risks Keep Outlook Far From Positive

In addition to these headwinds, key risks remain a threat to any prospects for even a  small increase in economic growth. Harvests could be hurt by the impact of an army worm outbreak in seven out of eight maize producing regions and the volatility of the regional climate means future output will be far from stable (see 'Army Worms And Adverse Weather Will Pose Upside Risks To Inflation', February 16).

Other risks are posed by the possible over-expansion of the government's bond note programme. Inflation remains at manageable levels at current rates of bond note issuance, but with no apparent checks on the printing of the notes and rumours that the government has already broken its self-imposed USD200.0mn limit, there are risks that prices could begin to grow at a more rapid pace.

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