Zimbabwe economy: Be afraid, be very afraid!

"BE AFRAID. Be very afraid!" is probably an apt warning for ordinary Zimbabweans as the economy continues to falter. All economic indicators are pointing at a troubled situation in months ahead unless there will be a major intervention.

Earnings reports are showing a largely gloomy outlook with more and more companies slipping into liquidation, throwing thousands out of the job market and invariably pushing the unemployment rate close to 90%.

The Consumer price index, a measure for inflation, is also not showing good signs amid fears the numbers could deflate judging by the trend, weak industrial production and resultant low gross domestic product, negative money supply growth and a worsening balance of payments position are all pointing to economic decline.

According to figures from ZimStats, annual inflation for October shed 0,28 percentage points to 0,59% from 0,86% in September as prices remained static compared to last year owing to weak aggregate demand and the continuous weakening of the South African rand against the United States dollar.

Deflation is a general decline in prices often caused by a reduction in the supply of money or credit, decrease in government, personal or investment spending. This has the effect of throwing people out of employment given the lower level of demand in the economy, which can lead to an economic depression.

Central banks tend to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum. But Zimbabwe finds itself in a tricky spot given that the Reserve Bank of Zimbabwe (RBZ) is crippled when it comes to monetary policy intervention.

For instance, central bank cannot do simple things expected when signs of a recession appear such as coming up with a stimulus plan to kick-start the economy. The US Federal Reserve and other central banks tend to intervene through quantitative easing, an economic euphemism for printing money, bond and treasury bill issues. This type of monetary policy interventions increase the money supply and typically raises the risk of inflation.

Economists and analysts do not see a silver lining to the economic cloud currently hanging over Zimbabwe unless the country gets huge outside funding. Even bankers, who tend to be generally guarded, are secretly conceding in the corporate corridors that a crisis is brewing in the economic horizon.

First to give the market a glimpse of the problems that lie ahead was Delta Corporation FD Matts Valela at the group's interim results to September presentation. While the numbers looked good and mostly a barometer to gauge other companies' performance, lager beer volumes fell 10% in the period under review as guzzlers pursued value and what he felt was a self-correction of the green back value.

Valela said the period under review had been challenging, characterised by soft consumer spending. Although he didn't say the economy was in trouble - he didn't have to; lager beer is generally believed to be one of those products that fall into the category of goods that have inelastic demand.

Inelastic demand is an economic term used to describe a situation in which supply and demand for a good or service is not affected when the price of that good or service changes. Demand inelasticity means that when the price goes up, consumers' buying habits stay about the same, and when the price goes down, consumers' buying habits also remain unchanged.

And it's not the booze only. It seemed curious after cigarette manufacturer British American Tobacco Zimbabwe (BAT) reported a 16% slump in domestic cigarette consumption in the first half of 2013 as the country suffered from a myriad of economic challenges. Analysts queried the figures, given that the group's customers are creatures of habit and will pay whatever price the manufacturer quotes to support such lifestyles. Now it seems the company could have been on the money. This means that there is serious strain on consumer spending, a key indicator to economic activity, an analyst said.

Another retailer, OK Zimbabwe also painted a gloomy outlook of the economy in the short-term, with CEO Willard Zireva warning of tougher times ahead.

"October was flat, largely the same as last year. November is too early to assess as there is a lot that can still happen. The economy is stagnating at the moment," he said.

"Our view is that the economy will continue to go down until we get some meaningful cash injection in the form of Foreign Direct Investment, loans or grants. Once you get cash, this will kick start the economy. Currently consumer demand is not what it used to be."

On profitability, Zireva said his company expected numbers to be within range of last year.
"We have set ourselves a target to achieve what we achieved last year," he said.

"It will be difficult but we will give it our best." He said OK Zimbabwe would focus on market share growth and getting the lion's share of market spend.

Earlier in the briefing, Zireva had summed it all up rather perfectly. "We don't see the liquidity problem being resolved in the short-term. We should brace ourselves for a pretty difficult time," he said.

However, on a positive note, Zireva pointed out that business was extremely encouraged by the ongoing consultations between government, adding it was in everybody's interest that people worked together for the good of our country. "We are in this together," he said.

Bankers secretly admit to the plethora of problems besetting the economy such as liquidity, low capacity utilisation and resultant low exports, a huge import bill and negative investor sentiment.

For starters, the sharp decline in the level of economic activity in the country that has seen a marked slowdown in GDP growth rate in the last year has meant that there is naturally reducing growth in demand for banking services to support this growth. Zimbabwean banks also face low levels of domestic savings coupled with a ballooning external sector deficit.

Banks say growth in exports remained low, averaging less than 1% on a monthly basis over the past year against a background of rising imports and low domestic industry production. An expansion in imports against static exports means that the current account continues to widen and the economy is haemorrhaging.

Lines of credit remain limited and high priced due to the risk premium attached to the current external debt and arrears. Zimbabwe has an estimated external debt of US$10,7 billion . The high risk premium on the external debt has become an albatross on the economy, experts said.

Apart from liquidity challenges, the short-term nature of deposits has also become a headache for the sector, banks revealed in a presentation to government recently. According to Bankers Association of Zimbabwe (Baz), 83% of total deposits are transitory. Transitory deposits are funds held in bank accounts from which they can be withdrawn at any time without any advance notice to the banking institution. These can be "demanded" by an account holder at any time.