The mid-term fiscal policy review read in the week brought about a number of changes, but one fact remains the same, and that relates to the sick economy. Zimbabwe remains the sick man of southern Africa, and although modest growth of 5.4% is expected in 2010, the key economic fundamentals remain fragile, and indeed, as the Minister said, of course without practicing it, business cannot be run on the same old mentality. There is no expectation that significant new jobs will be created, and considering the dismal performance of the vote of credit, the little hope of meaningful employment creation may have been shattered. The budget deficit of 22% at $500million (9% of GDP) points to many programs that would need to be suspended, an unfortunate sign that many creditors will likely struggle to get paid for goods and services rendered to the central government in this current year.
Equally, the wage levels, in particular government wages, will remain anchored below $300 per month as the government cannot create the fiscal space to improve remuneration, and indeed, for fear of being unpopular, the Minister adopted the business as usual approach by not proposing civil service reform targets in line with practical government revenues. At a time wages take a disturbingly disproportionate share of government revenue, and with the obvious expectation that as the government revenue increases, the wage levels will follow suit, failure to take stern measures towards civil service reform is counter-progressive. Without doubt the government will remain in this fiscal fix of being largely consumptive and, unpopular as it sounds today, a civil service reform is what will set the right foundation in unlocking fiscal resources towards areas that will generate growth for the wider economy. The Canadian experience on this will teach us vital lessons. Are we settling on the Mozambican stabilization experience of having low inflation, steady growth, high unemployment and significant donor aid?
At a time the central government is in a big fix, the private sector should expect the road ahead to remain lonesome and at times dangerous. The central government is technically bankrupt, planning to spend beyond its means and therefore the private sector’s hope for a fiscal stimulus, if ever it existed, is impossible. In the past there have been very genuine concerns that strangled private sector growth relating to foreign currency shortages, price controls and a host of other non-progressive administrative interventions. Foreign currency is now abundant whilst the government has taken a back seat in interfering with day-to-day operations of private sector as in the past. With the price controls non-existent, the private sector has to re-look at its business model and understand why it is failing to take-off at the desirable speed.
It’s not a secret that most corporate balance sheets have become septic with debt as most companies plunged into debt with the blind assumption that they would improve production and get more profitable with dollarisation. Unbeknown private sector then, the balance sheets which had been made to look easy by hyperinflation, are rigid and there are other more important aspects that affect competitiveness other than just the availability of foreign currency and absence of price controls. The economy is now navigating an important learning curve, and hopefully many will be able to navigate the curve successfully without plunging into death. The government too has learnt its lessons the hard way. After having placed so much faith on donors to chip in with $810 million to fill the budget gaps, almost nothing came and indeed the shortcoming of its planning and forecasting have come to haunt it.
The private sector, unfortunately, may not have many chances to correct itself and realign balance sheets after making initial grave mistakes. Unlike the government that can decide to ignore its debt overhang of about $7 billion, the private sector would have to meet the expensive debt obligations at the banks and pay creditors without much recourse to softer options.
Although the fiscal policy review has spelt the difficult times ahead, the private sector, interestingly, has to take advantage of the prevailing fragile status of government finances and reshape its balance sheet for a more difficult future. The central government has created a precedent of poor wages and this has shaped expectations to the benefit of the private sector as wages have remained low across the board. Equally, the dollarisation has brought about a very stable exchange rate regime, and indeed the added benefits of relaxed foreign exchange regulations. These two aspects are very important in determining the competitiveness of the private sector during this globalised environment and the private sector has to take advantage of these whilst they still exist because expecting anything more will be placing too much hope on a dying Christmas tree.
On another note, the investment markets will be least expected to react positively. The stock market will most likely remain depressed as the liquidity crunch and poor domestic demand will dominate the last half of the year, issues that will impact negatively on earnings across most of the listed companies. Unlike in the past where all listed companies where blindly labeled “blue chip” and would generally not struggle to get credit, the banks are learning from one mistake after another and more difficult times lie ahead of some of the listed companies in accessing credit. Slowly some of the shares of the listed companies are no longer acceptable as collateral against loans and, worse still, a number of these listed companies do not have readily marketable assets that can be used as collateral. The difficulty in accessing credit will therefore remain pronounced for most of the listed companies, impacting negatively on the ability to raise both short and long-term debt to bolster working capital and refurbish physical capital needs of their balance sheets. Equally, the fact that the government has not raised wages implies that disposable incomes remain weak and this translates to depressed demand for goods and services. Listed banks will not be able to expand their product offerings
Notwithstanding the desire by many homeless Zimbabweans to own properties, the property market will remain depressed as capable buyers remain few on the market. The returns on the property market, a function of liquidity and pace of economic growth, will continue to suffer from the poor performance of the economy. Isn’t it a joke that, of the 235000 civil servants, not even a single one is eligible to qualify for the current mortgage facilities in the market to buy a house in Mbare when one considers their legitimate incomes below $300 per month? This reveals deep seated problems in the structure of the economy, and importantly, the wage restraint calls, to some extent, are misguided when all they will achieve is creating a nation of poor workers without homes of their own. The private sector wages, indexed to some extent on the civil service levels, are not sufficient to ignite meaningful demand in the property market. Resultantly, the short-term returns on the property market, from both the rental yields and capital gains perspectives, will remain depressed for investors looking at cashing in from this investment asset.
The money market is likely to remain attractive for the greater part of the second half of the year. Having been used to hyper-inflation miraculous money-market interest rate levels above 2000% p.a, many investors in Zimbabwe cannot stomach 10% per annum on the money market, and will dismiss it as ‘nothing’. The truth of the matter remains however that these returns, which are currently obtainable on the market, are very attractive considering that these are American dollars. For the blame that the banks are getting for the high cost of credit, part of it should equally go to the big investors on the money markets who are dictating the interest rates. A close look at the banks’ net interest margins reveal that the big money market investors are raking in more returns than the banks, a sign that the money market is very attractive for those with sizeable excess cash. And it is likely to remain so for the greater part of the year as little is anticipated in terms of capital injections unless the much-talked-about diamond sales live to their expectations.
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