/ 25 January 2018

The case for investment in Zimbabwe’s economic rebirth

So far around 250 compensation settlements have been reached
So far around 250 compensation settlements have been reached

News analysis

Legend has it that the Zambezi river god, Nyaminyami, was angered by the construction of the Kariba dam. If so, he must have been enraged by the 30 years of ruinous economic policies in Zimbabwe, which reduced a once thriving nation to a stuttering state.

But the country is at a promising inflection point. The winds of change have gathered, and early signs suggest that new president Emmerson Mnangagwa is guiding Zimbabwe in the right direction – at least as far as the economy is concerned. Ostensibly pro-business, his declared intent of liberalising the economy and incentivising investment augurs well.

Positive outlook

Good optics and pleasing soundbites signal new opportunities, but it is crucial that he moves quickly to re-institute macroeconomic fundamentals and stabilise fiscal and monetary policies. Only ashes remain of the Zimbabwe dollar, and the country’s hyperinflation decade – a staggering 79.6-billion% at its worst in November 2008 – still percolates through the national psyche. Zimbabwe also missed not only the commodities boom, but the African economic awakening – which McKinsey dubbed ‘lions on the move’ – at the start of the decade.

But the country itself is not fire and ashes. Green shoots were appearing even before Mnangagwa’s ascendancy. The 2018 agriculture harvest is predicted to be rich, new power projects are scheduled for imminent completion, and mining output is increasing.

Encouraged by the positive sentiment of recent weeks, the Reserve Bank of Zimbabwe now predicts 4% GDP growth in 2018. But some analysts believe mining and manufacturing exports can be massively stimulated through a rapid corralling of international financing injections. And, with land grabs consigned to history, agricultural productivity will be further boosted in light of Mnangagwa’s promise to incentivise new farmers and equitably compensate those who lost their land. Together, these could propel GDP growth significantly above this level.

If this is achieved – even at a few points less than recent African economic success stories such as Rwanda, Tanzania and Ethiopia – Zimbabwe’s economy will almost double in the decade ahead.

The emerging market context

The broader context is the rebalancing of the world’s economies. Consumer expenditure in developing countries has grown faster than established economies for two decades, and emerging nations now generate the majority of worldwide GDP. The trend will quicken, as the world’s expanding population – a 52% increase of over three billion people in the half-century to 2050 – is mapped predominantly in the developing world. Urbanisation, lower female fertility rates, and rising incomes will contribute to improving living standards, in turn driving the demand for packaged consumer goods, housing materials and home furnishings, and pharmaceuticals.

In this emerging market context, Zimbabwe – irrespective of the political landscape, which may or may not translate into an economic accelerant – is ready for reassessment. The key foundations – the legal frameworks, civil society, business regulations, communications, and banking – are in place. Infrastructure is functional, although in need of refurbishment and expansion. Crime is notably low, and education standards high. And 60% of its 16 million citizens are aged 24 or younger, so the country is poised to reap a demographic dividend.

Immediate actions

In its generally impressive 2018 budget, the new government has strategised fiscal rebalancing, committed to a sustainable debt strategy, the restructuring of state-owned companies, active regeneration of domestic investment, and re-engagement with the international community. The latter is intended to chase foreign direct investment; Mnangagwa will attend the January 2018 World Economic Forum gathering at Davos, Switzerland.

International pledges of support

Major world powers have also promised support. Quickest on the scene, China’s Assistant Foreign Affairs Minister Chen Xiaodong called on Mnangagwa, pledging to “enhance development strategy alignment…to inject more impetus for economic development.” UK Foreign Secretary Boris Johnson has expressed his belief, too, that Zimbabwe will regenerate: “This can now be a turning point, a moment of hope for this beautiful country, full of potential. For as long as the President acts on his words, then Britain is willing to work alongside him and offer all the support we can.”

Playing into this sentiment, Mnangagwa has promised elections, soon: “the people’s voices would be heard”, he said in his inauguration speech, witnessed by 70 000 at Harare’s sports stadium.

Reasons not to wait

Investors should consider that now might be a good time to do more than sit on hands and observe. The United States stock market is at a record peak, but when the bulls run in Zimbabwe, they charge like elephants. To September 2017 the Zimbabwean stock exchange was the world’s best-performing bourse. A share such as General Beltings, a conveyor belt and chemicals manufacturer, soared nearly 600% from January. Underlying conditions and fragilities aside, the trend towards emerging economies is irrefutable: 2017 emerging market MSCI share price indices were markedly higher than EUI, US, UK or Japan, in both local currency and US dollar terms.

Stimulus needed

Zimbabwe’s heart has kept beating; its pulse needs the quickening of fresh investment. Zimbabwe can be part of an impressive African renaissance, in which the resurgent economies of Rwanda, Ethiopia and Tanzania are leading the charge. Within the mining sector, for example, the lack of investment capital over the past decade has created a nascent buyer’s market for Zimbabwe’s mineral wealth including diamonds, gold, chrome, nickel, coal – and especially platinum, of which Zimbabwe has the third largest global reserves.

Despite its turbulent recent legacy, Zimbabwe remains the second most diversified economy in the sub-Saharan region, after South Africa. Tourism is thriving, and there is definitive potential in retail as it migrates from the informal sector. The Industrial Index of the Zimbabwe Stock Exchange has a market capitalisation of US$9-billion, and corporate governance, accounting and reporting standards are on par with the best in the region. Post-Mnangagwa, the ZSE industrial index has narrowed in pricing differential between Harare and London listings (the Old Mutual Implied Rate), which is a positive reflection of boosted confidence and the anticipation of fresh foreign capital inflows.

The government also seems committed to the removal or alleviation of investment barriers such as unclear indigenisation or economic empowerment laws, and unequivocal property rights protection.

Zimbabwe’s new horizon switches the nation’s dial on investment radars. The country’s motto is simple: ‘Unity. Freedom. Work’. For the first time in a generation, some Zimbabweans see a path to exactly these essences, and opportunities abound to capitalise on a renewed drive for progress and economic growth.

Martin Ganda (@MartinGanda) is a investor and advisor focused on Africa.