Zimbabwe_ a Growth Recession

8/14/2019 Zimbabwe_ a Growth Recession

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ZIMBABWEA growth recession?

There has been great debate about prospects of economic recovery in

Zimbabwe. The IMF projects GDP to increase by 3% this year and then

settle at 6% up-to 2014. The Ministry of Finance (MoF) expects a 6% GDP

growth rate this year and double-digit growth thereafter. Recent data

suggests that the Zimbabwe economy is recovering. In this report we:

investigate the risks to a speedy recovery of the Zimbabwe economy.

We pay particular attention to the banking sector. In our view, politicalhostility between the two main parties of the Government of National

Unity (GNU) is thawing. The recent meeting between the European

Union (EU) representatives and the Government of Zimbabwe (GoZ)

leadership is supportive of our view.

provide a performance analysis of the Zimbabwean equities. Our view

is that investors should remain defensive, but progressively gain

exposure to the mid-cap defensive shares.

A

frica

Peter Mushangwe

Zandisile Mabuya

+27 11 551 [email protected]

September 16, 2009

Fig 1: Zimbabwean equities recovered strongly in April

0.4

0.6

0.8

1

1.2

1.4

1.6

22-Feb-09

8-Mar-09

22-Mar-09

5-Apr-09

19-Apr-09

3-May-09

17-May-09

31-May-09

14-Jun-09

28-Jun-09

12-Jul-09

26-Jul-09

9-Aug-09

23-Aug-09

6-Sep-09

Nigeria

Kenya

RSA

Zimbabw e

MSCI Frontier


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1. Political Overview

Notwithstanding the improvements in relations with the EU,

Zimbabwean politics remain the most dangerous unknown in the

equation. We admit that the holding up of the GNU after the signing of the

Global Political Agreement (GPA) continues to confound the pessimists.

While we believe that liquidity is now more critical than politics for

Zimbabwes recovery, we do not downplay the political risks. Historically,

elections in Zimbabwe, except for the 1980, were largely of no importance.

Despite the improving relationship and possible re-engagement with EU, UK

and USA, political risks are heightened by:

the uncertainty of the tenor of the GNU. Some commentators allude to

impeding elections while others speak of the GNUs tenor as a

minimum of five years. A pronouncement to the tenor of the GNU has

not been made;

the GNUs responsibility to work on issues such as 1) the new

constitution 2) election guidelines 3) property rights and land reform

and 4) re-engagement with USA, UK and EU. We foresee substantial

disagreements and disharmony;

the internal fragmentations within both ZANU PF and the MDC.Factions in the two parties also remain the biggest threat to a smooth

operation of the GNU; and

the succession question that would astound both MDC and ZANU PF.

In ZANU PF, the divisions will probably widen as different possible

candidates try to place themselves in line for succession. In MDC, if

the President of the party, Mr Tsvangirai, resigns after the two terms, it

will be the first time a leader voluntarily gives up power in a major

party in Zimbabwe. Failure to resign would hurt the party and his

image as comparisons to ZANU PF and Mr Mugabe will obviously bepointed out.

In our opinion political risks have waned, but we also admit that it is difficult

to envisage how it can play out in the next year. We however believe that

recovery stories will dominate and overshadow politics. We do not expect

a material improvement in the discount rate of the Zimbabwean

equities nonetheless.


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2. A growth recession?

In our note, The Zimbabwe Dilemma: From Hyperinflation to Possible

Deflation, April 7 2009, we expounded our fears of possible deflation chiefly

due to 1) lack of tools to stimulate the economy, 2) previously high US$

inflation rate and 3) banks inability to expand credit; among other reasons.

With the exception of previous high US$ inflation rate which seem to have

frittered away somewhat, other factors remain fairly strong. The recent data

suggests that Zimbabwe economy has improved. Our discussions with

various company managers point to a fairly strong recovery in capacity

utilization. Capacity utilization have ascended from levels around 10%-20%

pre-dollarization to levels ranging between 30% and 45%. Volumes show a

strong bounce back, albeit due to the base effect.

In this note we pay particular attention to the banking sector. In our view,

Zimbabwe could go through a growth recession conventionally defined as

a situation where Gross Domestic Product (GDP) would grow at a rate lower

than the countrys potential output and have indifferent effect to employment

creation if the liquidity strain continues. Without reasonable inflows of

US$/rands in the economy the recovery of the economy could take a

protracted period. We highlight the following:

Poor growth in capital stock: investment in new plant and

equipment, which we believe is critical, will remain low in the short-

term. Then importation of capital goods has not rebounded since Jan

09. The current capital stock is beyond the steady state in our view,

negatively affecting industrial efficiency and output/supply in the short-

to medium-term

The low quantity and velocity of money: The broad money indicator

has rebounded (in US$ terms) when compared to CY08. However, the

quantity of money in circulation is still low in our view and the pick-upcould be exaggerated by the low base. The velocity is also negatively

affected by the lack of financial assets in the market.

Sluggish recovery of credit expansion as banks balance sheets

remain undersized and liquidity remains tight.

Poor internal demand due to lower income. The economys inability

to create employment on a noteworthy scale would weigh heavily on


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domestic demand. Anecdotal evidence shows continued lay-offs,

particularly in the service industry. Consumption in particular would be

expected to rise as recovery feeds to the poor rural population, but our

view is that this will take a prolonged period.

Export growth post GNU continue to disappoint. The export

statistics continue to fall when compared to last year. We, however,

expect exports to recover in 1H10 due to both improvements of the

global economy and the gradual integration of the Zimbabwe

economy as companies re-gain lost marketshares.

According to the IMF, Zimbabwes GDP is expected to grow at 3%

in CY2009 before doubling to 6% in CY2010 and up-to CY2014.

Inflation which has been negative from January to May this year, rose

to 1% in July and is expected to average 9.9% in CY2010 before

receding to 6.2% in CY2013. Nominal GDP growth rate of around

12% would not notably stand out against other SSA countries in

our assessment. However, the MoF is adamant that real GDP will

exceed 10% in the next 3 years.

While 1) supply constraints in some sectors, particularly agriculture, 2)

the reintroduction of duty on certain items and 3) importation of

inflation from South Africa (rand strength/US$ weakness) could

support upside risks on inflation, it should remain compressedgenerally as long as the economy lacks major liquidity in our view.


5/17


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Source: IMF, Legae Securities

Zimbabwes per capita income is expected to register a strong

recovery but remains one of the lowest in SSA. By 2014, per

capita income is expected to have more than doubled to around

US$500, but it would still be lagging per capita incomes for countries

like Malawi, Zambia and Uganda. In our opinion this puts a strong

strain on domestic demand.

The major constraint to local consumption is the low income

level. Wage levels will remain suppressed in our view, squeezing

internal demand. The dilemma is that wage increases that would

Fig 3: Internal demand is constrained by low income level and little room to improve it

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

E.Guniea

Chad

Guinea

Congo

Tanzania

Ethiopia

Nigeria

Togo

Cameroon

DRC

Rwanda

Gabon

Mali

Liberia

Burkina

Gambia

Uganda

Benin

Senegal

Coted

Mauritius

Sierra

Kenya

Malawi

Mozambi

Zambia

Zimbabwe

Angola

Ghana

SouthAfrica

Botswana

Swaziland

CapeVerde

Namibia

Lesotho

Seychelles

...yet as a percentage of GDP, public sector wage bill is high

% of GDP

Average

50

250

450

650

850

1,050

1,250

1,450

2

000

2

001

2

002

2

003

2

004

2

005

2

006

2

007

2

008

2

009

2

010

2

011

2

012

2

013

2

014

Incomelevelsarelow,(US$percapitaincome)...Malawi Ug an da Zambia Zimbabwe


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exceed levels justified by the economys productivity would not only

reverse the companies competitiveness, but will have a negative

impact on employment as well.

Even at this low level (in absolute terms) as a percentage of GDP,

Zimbabwes public sector wage bill is above the SSA average.

This situation puts the government in a quandary since wage level in

absolute terms is low, but on a relatively basis, and in light of GDP

and the economys production capacity, the level is high. Friction

between labour and government would be expected to continue in our

view, further putting a dent on recovery prospects.


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3. Banking Sector: Consolidate or Die

Zimbabwes banking sector could catalyse both capital investment and

consumption recovery, hence our emphasis on the analysis of the banking

sector in this report. In our point of view, Zimbabwes banking sector requires

significant capitalisation in order to be able to attract convincing external

lines of credit and catalyse the recovery of the economy. Currently the

banking system suffers from:

Poor capitalisation;

Poor liquidity; Low profitability; and

Higher credit and operational risks.

We believe the key theme for Zimbabwean banks will centre on

capitalisation, liquidity management and risk management for the next

year. The Reserve Bank of Zimbabwe (RBZ) set out banks to meet new

minimum capital requirements by March 2010. (Commercial banks =

US$12.5mn; Merchant Banks = US$10.0mn and Building Societies =

US$10.0mn) With low profitability in the industry, building up capital throughretention of profits would be a big ask although profitable banks could cut

dividends in order to accumulate capital. The fragmentation of the banking

industry does not bode well for industry profitability as well. There are 18

commercial banks, 4 merchant banks, 4 building societies and 1 finance

house. The GDP/bank ratio is excessively miniature. Hence, against a

challenging operating outlook, capital adequacy ratios (CAR) will remain low

(relative to new requirements). The dearth of stock issuance would make

capital raising much more difficult in our view. Banks with low loan-to-

deposits ratios may manage to keep higher CAR. Since dollarisation:

The industrys total deposits increased to an estimate of

US$800mn, (Sept 09) Deposits grew by a satisfying 48% from

US$475mn in April to US$706mn by June 09. Loans and advances

show a higher growth rate of 66% from US$158 to US$263 over the

same period of time, but remain fairly vain to the requirements of the

economy. Of concern is the virtual non-existence of consumptive

lending. Lending for purposes of purchasing items like cars, home


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property etc has not recovered since times of hyper inflation. Lending

is mainly for purposes of PPE renovations and trade finance.

Effective lending rates have remained relatively high. Lending

rates averaged 6% to-date. Merchant banks charge higher rates to as

high as 50%. With inflation projected to increase to around 6%, the

risks of further increases in lending rates are meaningful, again

negating endogenous-spurred recovery. The RBZ removed a 6%

above LIBOR interest rate cap and continue to use moral suasion to

encourage lending to the productive sectors at reasonable rates.

The loan-to-deposit ratios are high for some banks. This makes

loan book growth almost impossible for those banks except in

situation where they aggressively build up deposits. ABC,

Kingdom and NMB have high loans-to-deposit ratios Deposits are

also heavily fragmented among the banks, which again will result in

stiff competition on liability space. The structure of the industry small

and undiversified banks does not bode well for the challenge. The

comforting scenario, however, is that banks with higher market shares

in deposits (CBZ, Stanbic, Barclays, FBCH) have low loan/deposits

ratios and room to expand their loan books.

The ALM challenge increased. Deposits are mainly demand as is the

case in most markets, but there challenge is born out of 1) the inabilityof the RBZ to play the role of the lender of last resort and 2) the lack of

money market instruments that have quality credit profile and can be

used to raise funds and/or deposits.

Profitability on core business remains low. Net Interest Income

(NII) and Net interest Margins (NIM) are low. For instance, only CBZ

and NMB recorded NII of above US$1mn for the 1H09. Risk aversion

towards counterparty risk will lead capital to be invested mainly in

perceived lower risk assets and/or with banks that have higher credit

scores, thus produce lower yields. Credit risks as indicated by theprovision levels seem to be on the higher end when compared to

other African countries outside Nigeria. Forward-looking, we would

expect impairment charges to decline as the economy picks up, and

credit risks dissipate.

The raising RTGS activity indicates an improving situation in the

money markets. The increasing activity can strengthen confidence,


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and thus enabling banks to access liquidity. The local interbank credit

markets, however, remain disrupted. Inter-bank loans remain

insignificant at an average that is below US$1mn.

Consolidation is needed in order to replace the damaged banks

in our view. Weaker Zimbabwean banks should be merged to form

stronger banks that could offer size and scale of financial services.

There have been media reports of Nigerian and South African banks

interest to expand their presence into Zimbabwe. In our opinion, this

would be a positive thing for the industry, in spite of the intensification

of competition, specifically on the liability side. We are particularly

worried of banks with narrow shareholding structures and those that

would not stand to benefit from parent support. We should also

highlight that there is not much banks assets to purchase outside the

branch networks and human capital in our view.

Source: Reserve Bank of Zimbabwe, Legae Calculations

Fig 4: The liquidity (deposits levels) is low despite recent improvements

0.0%

4.0%

8.0%

12.0%

16.0%

0.0%

4.0%

8.0%

12.0%

16.0%

Barclays

StanChart

Stanbic

Kingdom

ZBBank

Agribank

NMB

CBZ

MBCA

ZABG

CFX

Metro

Effective lending rates

Effective lending rate

Spread

475

574

706

158

212

263

0

100

200

300

400

500

600

700

800

Apr-09 May-09 Jun-09

Deposits are growing

Deposits

Loans

0% 20% 40% 60% 80% 100% 120% 140% 160%

Barclays

Agribank

FBC

Stanbic

ZB Bank

ZABG

Stanchart

CBZ

Genesis

Premier

Metro

CFX

Renaissance

NMB

Kingdom

ABC

TN

Interfin

MBCA

Loan-to-deposit ratios

Loan/Deposit

0

5

10

15

20

25

30

35

40

45

0

200

400

600

800

1000

1200

1400

15

Apr09

22

Apr09

29

Apr09

6May

09

13

May

09

20

May

09

27

May

09

3Jun

09

10

Jun

09

17

Jun

09

24

Jun

09

1Jul09

RTGSactivityrising,US$mn

Cumulative

US$valueRHS


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Source: Reserve of Bank Zimbabwe, Legae Calculations

Source: Bloomberg, Members of the ZSE, Legae Calculations

Fig 5: The Banking Sector is not profitable, and consolidation would save it

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

20

40

60

80

100

120

140

160

180

200

Genesis

TN

Metropolitan

Renaissance

ZABG

Interfin

Premier

NMB

ABCH

ZBH

FBCH

Barclays

Stanbic

CBZ

Deposits are still low although growing

Deposits

loan/Deposit

ZBH

ReN

Interfin

Genesis

TN

Metro

ABCH

Stanbic FBCH

Barclays

ZABGNMB

CBZ

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-2 -1 0 1 2 3 4

ROE(%)

Profit US$mn

Profitability is low

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

ZBH

CBZ

FBCH

Interfin

TN

ReNaissan

ce

NMB

Stanbic

Premier

ABCH

Genesis

credit risk is high

Provision/Advances

average

0

0.5

1

1.5

2

2.5

3

3.5

10

15

20

25

30

35

40

Jan09 Feb09 Mar09 Apr09 May09 Jun09

interbankcreditmarketremainsinsignificant

Offshoreloans

InterbankloansRHS

Table 1: Salient Features of the Listed Banks, 1H09

ABC

Holdings

Barclays

Bank

CBZ

Holdings

FBC

Holdings NMB Bank ZB Holdings

Share in Issue (mn) 146 2152 684 361 1641 159

Market cap (US$mn) 17.5 215.2 112.9 10.8 11.5 19.1Price (USc) 12 9.5 16 3 0.7 11Total Assets (US$mn) 35.54 116.63 219.77 64.63 24.69 37.70

Total Deposits (US$mn) 18.1 74.0 184.2 37.7 13.8 22.1

Loan/Deposit (US$mn) 13.0% 2.2% 46.0% 27.0% 63.0% 3.2%

Cost/Income120.0% 88.0% 65.0% 85.0% 63.0% 267.0%

NIM 15.0% 8.0% 4.0% 10.0% 1.9% 2.1%

ROE 0.8% 0.6% 1.5% 0.9% 7.4% -4.0%


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4. Performance Analysis

After a significant drop post the dollarization, Zimbawean equities

rallied substantially with the index rising by 162.2% from its trough in

March. In fact the Zimbabwean equities caught up with performances of

major SSA markets and the MSCI Frontier index. We underscore the

following:

Defensiveness of company earnings is still very important. We

however advise investors to progressively seek exposure in the mid-

cap, defensive space. Our rationale is that the large caps have

probably reached full valuation. In our view the mid-caps have higher

upside risk in the wake of full economic recovery. In fact the top 5

companies by market cap make up 46.1% of the total market

capitalisation and about 47.1% of the country GDP estimate. The top

10 represent 66% of the ZSEs market capitalisation.

Most staple consumer companies performed exceptionally YTD.

The large cap consumer shares, Delta, Innscor, and Hippo have

appreciated by 100%, 87% and 123% respectively. Mid-cap stocks

like National Foods, OK, and CFI have appreciated by 733%, 600%

and 325% in that order. Econet, the only telecom company on theZSE went up by 223%.

In our opinion, the Zimbabwean equities will maintain a lacklustre

performance to 2Q10 due to 1) lack of liquidity and 2) low profit

visibility and 3) little room for improvement in the discount rate

due to political risks notwithstanding the improvements.

Companies that released 1H09 results show low levels of profitability

in absolute terms, although the consumer sector has shown resilience.

Market capitalisations remain tiny, but relative to the production

capacity of the economy valuations continue to remain justified inmost cases. On a market cap/GDP basis, Zimbabwean equities do not

provide much upside risk, but the catalyst is the recovery of GDP. Our

mid-cap universe is made up of companies whose market

capitalisations are between US$20mn and US$100mn.


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Source: Bloomberg, Legae Calculations

Fig 6 : After a significant drop, Zimbabwean equities recovered

0.4

0.6

0.8

1

1.2

1.4

1.6

23-Feb-09

9-Mar-09

23-Mar-09

6-Apr-09

20-Apr-09

4-May-09

18-May-09

1-Jun-09

15-Jun-09

29-Jun-09

13-Jul-09

27-Jul-09

10-Aug-09

24-Aug-09

7-Sep-09

Nigeria

Kenya

RSAZimbabwe

MSCI Frontier

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Nigeria Kenya Zimbabwe MSCIFrontier

Recentperformancenotreallyoutstanding

Jul09

Aug09


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Fig 7: YTD returns of the members of the ZSE as at 16.09.09

83%

76%

75%

70%

62%

58%

53%

50%

50%

47%

45%44%

40%

40% 33%

30%

28%

27%

25%

20%

17%

17%

16%

13%

10%

10%

10%

0%

0%

0%

11%

17%

20%

25%

30%

35%

38%

38%

46%

50%

67%

67%

70%

80%

87%

90%

100%

100%

100%

100%

100%

100%

115%

123%

130%

140%

167%

175%

180%

200%

200%

223%

233%

250%

250%

250%

260%

280%

300%

325%

372%

550%

600%

650%

700%733%

200% 100% 0% 100% 200% 300% 400% 500% 600% 700% 800%

Edgars

Trust

CFX

NTS

PearlProp

Willdale

Ariston

RedStar

Truworths

Falgold

Chemco

ZPI

Celsys

MashColcom

Phoenix

Pelhams

Radar

ABC

Pioneer

Art

Steelnet

FBC

Dawn

Bindura

Interfresh

MedTech

Apex

Zeco

Zimplow

Gulliver

PPC

TPH

Lafarge

NicozDiamond

TAHoldings

Hwange

AfricanSun

BAT

Afre

KMAL

Turnall

DZHL

Barclays

Innscor

Afdis

CAPS

Delta

Hunyani

NMB

Tedco

ZHL

RioZim

Hippo

RTG

FidelityLife

GBHoldings

Border

Astra

M&R

Powerspeed

Econet

Zimpapers

OldMutual

PGIndustries

Seedco

AICO

Cairns

TSL

CFI

StarAfrica

ZBFH

OKZimbabwe

Cafca

CBZNatfoods

Source: Members of the ZSE, Legae Calculations


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Page 15 of 17

Source: Members of the ZSE, Company reports, Legae Calculations

Fig 8 : Profit visibility is low, and add to the risks

20.0%

10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

6

4

2

0

2

4

6

8

10

12

14

TAHLD

RTG

BAT

Colcom

Nicoz

DZHL

M&R

Natfoods

RioZim

Innscor

Profitvisibilityislow

Profit(US$mn)

ProfitMargin(RHS)

10.00

30.00

50.00

70.00

90.00

110.00

PGI

Mash

Bindura

M&R

TSL

Colcom

Border

PearlProp

DZHL

CFI

RTG

Dawn

PPC

BAT

OKZim

StarAfrica

African

Hwange

Natfoods

RioZim

AICO

Marketcapsofour"midcap"sector(US$mn)


16/17

Page 16 of 17

Source: World Bank, Transparency International, Legae Calculations

Fig 9 : Zimbabwe still ranks poorly on Ease of Doing Business and corruption perception (2008)

0

20

40

60

80

100

120

140

160

180

200

Singapore

USA

Denmark

Australia

Saudi

Japan

Mauritius

Malaysia

Israel

France

South

Chile

Romania

Namibia

Rwanda

Turkey

China

Zambia

Ghana

SriLanka

Ethiopia

Uganda

Argentina

Indonesia

Nigeria

Brazil

Tanzania

Mozambi

Ukraine

Mali

Zimbabwe

Angola

Cameroon

Chad

DRC

Cent.Afr.

Zimbabwerankspoorlyoneaseofdoingbusinessat159/182

0

20

40

60

80

100

120

140

160

180

200

Denmark

Singapore

Finland

Canada

Barbados

Spain

South

Mauritius

South

Italy

Ghana

China

Burkina

Madagasc

India

Tanzania

Argentina

Malawi

Zambia

Indonesia

Mozambi

Liberia

Kenya

Burundi

Angola

Zimbabwe

Cambodia

Chad

Iraq

Somalia

CPI(2008).Zimbabwerankspoorlyaswell,166/180


17/17

Legae Securities (Pty) Ltd

Member of the JSE Limited

6-10 Riviera Road, Houghton, Johannesburg, South Africa

P.O Box 87277, Houghton 2041, Johannesburg, South Africa

Tel +27 11 715 3700, Fax +27 11 715 3701

Web: www.legae.co.za email:

[email protected]

Analyst Certification and DisclaimerI/we the author (s) hereby certify that the views as expressed in this document are

an accurate refection of my/our personal views on the stock or sector as covered

and reported on by my self/each of us herein. I/we furthermore certify that no part

of my/our compensation was, is or will be related, directly or indirectly, to the

specific recommendations or views as expressed in this document

This report has been issued by Legae Securities (Pty) Limited. It may not be

reproduced or further distributed or published, in whole or in part, for any

purposes. Legae Securities (Pty) Ltd has based this document on information

obtained from sources it believes to be reliable but which it has not

independently verified; Legae Securities Pty Limited makes no guarantee,

representation or warranty and accepts no responsibility or liability as to its

accuracy or completeness. Expressions of opinion herein are those of the author

only and are subject to change without notice. This document is not and should

not be construed as an offer or the solicitation of an offer to purchase or

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Zimbabwe_ a Growth Recession