Zimbabwe Macroeconomic Report 2013 Review and 2014 Outlook

8/13/2019 Zimbabwe Macroeconomic Report 2013 Review and 2014 Outlook

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EXECUTIVE SUMMARY

Recent results released by leading hoteliers point towardsimproving occupancies, RevPARs and ADRS locally. Weexpect this positive earnings outlook to continue, given the

positive outlook for the tourism sector. Our range ofscenarios for RevPAR growth is xx, given the limited supplygrowth until 2013.

With occupancies recovering towards peak levels we couldsee room supply coming at a premium. Prospects fordiscount business with corporate transient customers.

Tight supply environment an important tailwind for AfricanSun

An increase in local salaries should boost local consumerspent while investment interest in the country should boostforeign business visitors

An improvement in the global economy will also support thetourism industry.

Better earnings visibility for Cresta Hospitality and Meikles,because of their simpler more defensive business model.Business travel and tourism is less fickle than leisure travelso the groups profits are likely to show defensive qualities.

We also like African Sun because it has already expandedregionally, and is more diversified.

Operating cost inflation, and subdued consumer andcorporate profits.The lack of incremental costs on newmanagement contracts should buoy results for African Sun

Not cash generative because of capex projects.

Prospects for hotels have strong longer term drivers,

Economic growth and varied and unique tourist offering.

Macroeconomic Report 2013 Review and 2014 Outlook-From the zenith of hyperinflation to thenadir of deflation two worlds rolled into one: Zimbabwe

Analyst: Tonderai. J .Maneswa Addmore .T. ChakuriraEmail:[email protected] [email protected]: +263 4 700 000 +263 4 700 000

+263 772 895 024 +263 772 265 454
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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A sweet spot f or t he ZSE in 2013

After a largely indifferent year in 2012 the ZSE industrialindex reported a sterling performance in 2013 gaining a

sturdy 32.6% compared to 4.3% in 2012. This was on theback of a better economic environment in 2012 and early2013 when corporates reported improved profitability. Theoverall performance of the industrial index was so strongthat in June 2013, before the harmonised election, thereturn on the index was close to 50%. Speculation on thereintroduction of the Zimbabwe dollar immediately afterthe election and unclear economic policies then dampenedinvestor enthusiasm resulting in the market losingmomentum during the third quarter. Reassurances fromthe Ministry of Finance (MoF) and the Reserve Bank ofZimbabwe (RBZ) on the continuation of the multicurrencysystem instilled confidence back into the market by thebeginning of the fourth quarter. The Mining Index for athird straight year receded to close the year with anegative return of 29.7% compared to -35% y-o-y in 2012and a loss of 49.8% in 2011. The industrial indexs gainswere bolstered by respectable performances from the bluechips, Delta, Econet, BATZ, Old Mutual, TSL and Padenga,while the mining index suffered due to unexcitingperformances from all four listed counters namely Falgold,Bindura, Hwange and RioZim. The solid performance of theindustrial index was anchored on the back ofpredominantly foreign trades owing to the trickle downeffects of quantitative easing (QE) in developed

economies. Furthermore, investors were attracted to theZSE irrespective of the election due to the multiplecurrency regime which entails that foreign investors hadminimum exchange risk especially coming from a USDdenominated home country.

On market capitalisation, the bourse closed the year atUSD 5.6bn compared to USD 3.9bn in the prior year. Thiswas mainly on the back of the upward price movement inheavily capitalised stocks such as Delta which closed theyear at USD 1.7bn (2012: USD 1.3bn). Other heavy weightcompanies that recorded solid gains include Econet up33.3%, BATZ +228%, TSL +264%, Innscor +14.3%, Old Mutual

+66% and Seed Co +16.9%. Total turnover at USD 485.7mwas 8.4% higher than 2012 and foreign participationdominated across the board.

Going forward, we expect a largely mixed year ahead dueto the tapering in the US economy that was initiatedtowards the end of 2013. According to World Bankestimates close to USD 64bn was withdrawn fromdeveloping-country mutual funds between June and August2013. We expect the tapering to also negatively impactportfolio allocation in frontier markets as investors returnto traditional markets where portfolio alphas are lookingpositive. On the other hand an improvement in developed

economies will improve demand for commodities fromdeveloping countries but the outlook remain mixed overall.

Equity ResearchZimbabweJanuary 2014

Macroeconomic

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Indices performance since dollarisation

I ndustrial I ndex(LHS) Mining (RHS)

TOP TEN MOVERS 31-12-2012 31-12-2013 Move(Usc)%Change

TSL 11 40 29 264%

BATZ 365 1200 3 229%

AFRICAN SUN 0.9 2.7 217 200%

MASIMBA 2.93 6.5 0.7 122%

AFDIS 14 30 2.2 114%

FMHL 5.2 10 46 92%

FBCH 7.5 13.5 0.5 80%

LAFARGE 65 110 5 69%

PADENGA 4.75 8 17 68%

OLD MUTUAL 152 253 30 66%

BOTTOM TEN MOVERS 31-12-2012 31-12-2013 Move(Usc)%Change

FALGOLD 16.5 4.5 -12 -73%

HWANGE 19.5 7 -12.5 -64%

ZIMPLOW 6.5 3.5 -3 -46%

TA HOLDING 11 6 -5 -45%ARISTON 1.3 0.8 -0.5 -38%

CAFCA 45 28 -17 -38%

RIO ZIM 52 33 -19 -37%

AICO 9 6 -3 -33%

ART ZDR 0.45 0.3 -0.15 -33%

NTS 3 2 -1 -33%

Zimbabwe Review and Outlook 2014

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Consumer Price Index

CPI (LHS) M-o-M (RHS) y-oy Source: ZimStats So u r c e : I E S; R BZ ; M i n i s t r y o f F i n a n c e

Source: IES; RBZ; Mini str y of Finance

Macroeconomic environment overview

The possibility of Deflation looms large

In a classical case of a taste of two worlds the local economy

is currently undergoing a slow and painful period of

downward price adjustment. Having experiencedhyperinflation in the not so distant past the possibility of the

economy deflating looms large due to a consistent decline in

the prices of goods and services. As illustrated by the charts

on consumer price index and Y-o-Y Inflation and M3 growth

rates on the right, there has been a consistent decline in

money supply growth since September 2011 from above 30%

to below 5% indicating that liquidity in the local economy has

been gradually drying up. This reflects that some banks are

fully loaned out and there is no money in the system to loan

out to productive sectors. A high concentration of

nonperforming loans on the balance sheet of banks isworsening the liquidity problem. Furthermore, as a net

importer of manufactured goods the economy is utilising the

little hard currency to support consumption (see graph on

BOP on the bottom right), thus the growth in money supply

has progressively declined and turned negative in November

2013. The continued decline in inflation during the same

period indicates a combination of a decline in money supply

and the weakening of the South African rand. Although the

Minister of Finance Mr. Patrick Chinamasa imposed duty on

some imported products the scope for the rand to devalue

remains high. In our view, inflation is likely to continue on adownward spiral owing to the weakening of the ZAR against a

basket of hard currencies. The weakness on the ZAR as a

currency due to domestic and international concerns will put

downward strain on the ZAR against other hard currencies

and we do not expect a quick recovery on the ZAR. On the

other hand the weakening of the ZAR will make South Africa

a cost effective production centre compared to Zimbabwe

thus companies will have an incentive to continue producing

from South Africa than Zimbabwe making the country a net

importer of manufactured goods. The unbalanced trade

equation between the two countries will be difficult to

equalise as long as Zimbabwe is using a currency which is

stronger than South Africa where it imports most of its

consumables from and the Zimbabwean government does not

have the ability to print money to control its currency.

Estimates from the IMF indicate that the USD is 15%

overvalued in Zimbabwe. Furthermore, the continued

absence of foreign direct investment implies that the balance

of payment will remain negative at USD 4.0bn by close of

fiscal year 2013. Imported inflation remained very low after

the ZAR lost ground against major hard currencies, in

particular to the United States dollar. According to an Article

IV report on Zimbabwe by the IMF, the CPI inflation rate in

Strategy Note

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Balance of Payments Accounts

Ex po rt s i n U SD m I mp or ts in USD m Cur re nt Ac co un t B al an ce s (U SD m)

Source: IES; RBZ; Mini str y of Finance

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Zimbabwe is highly associated with both the CPI and PPI

inflation rates in South Africa with a lag of approximately

five months, mostly due to the high share of imports from

South Africa. Regression results indicate that a 1-

percenatge point increase in the CPI inflation rate in South

Africa leads to 0.6 percentage point increase in the CPI

inflation rate in Zimbabwe five months later.

Weak GDP growth forecast for 2014

The economy is estimated to have grown by 3.4% in 2013

from 10.6% realised in 2012 as reflected by the

macroeconomic framework table and the nominal GDP and

Real GDP growth rates graph. On the other hand the World

Bank estimate that the economy grew by 2.2% in 2013 and

its expected to grow at 3.3% in 2014. This estimate is

dwarfed by the MoF estimate which projects a GDP growth

of 6.1% anchored by a sturdy growth in agriculture (+9.0%)

and an improved performance in mining (+11.4%) and

construction (+11.0%) sectors. Our view is that the WorldBank estimates are achievable given the current operating

environment and the possibility of deflation. The 2014

Budget will be based on revenues of approximately USD

4.1bn which is about 29.3% of projected nominal GDP (USD

14.0bn). Tax revenues are expected to constitute USD

3.8bn while non-tax revenue will contribute USD 296.0m.

The major drive of growth in the agriculture subsector will

be tobacco which is expected to grow by 2.6% to 170,000

tonnes after a 15% growth in 2013 as reflected by the GDP

growth rates table. This growth is mainly on account of

increased planted area of about 90,000ha from the

88,600ha planted in 2013. The number of registered

growers increased from 70,904 in the 2012/13 season to

91,278 farmers and indications are that 1,024,000 grammes

of tobacco seedlings were sold compared to 802,000

grammes in the prior year. Maize production for the year

2013 stood at 0.8m tonnes versus a target of 1.1m tonnes

and the authorities are targeting an ambitious tonnage of

1.3m in 2014. Cotton is targeted to grow by 27.8% to close

the year at 178,900 tonnes from a revised output of

140,000 tonnes.

The mining sector is expected to grow by 11.4% up from

6.5% recorded in 2013 on the back of a very ambitious

beneficiation drive to process minerals locally. Metal prices

however are expected to remain stagnate at the current

levels. Gold production is projected to grow by 7.1% to

15,000 kgs while platinum is forecast to grow by 8% to

14,000 kgs in 2014. Diamonds production is expected to

increase from 11m carats to 12m carats in 2014 and other

metals that are expected to record growth include

palladium from 9,800kgs to 11,200kgs while Nickel is

forecast to grow to 15,020 tonnes in 2014.

Macro-economic framework

2009A 2 010 A 2011 A 2012 A 2013 Est. 2014 Prj. 2015 Prj.

Nominal GDP level in USDm 8,157.0 9,457.0 10,956.0 12,472.0 13,099.0 14 ,0 65 .0 1 5, 22 8. 0

Real GDP growth (%) 5.4 11.4 11.9 10.6 3.4 6.1 6.4

World Bank GDP at Mkt Prices(%pa) (5.9) 9.6 9.4 4.4 2.2 3.3 3.4

World Bank Current Acc Bal/GDP(%) (12.2) (10.3) (23.0) (19.7) (21.9) (17.6) (14.7)

Annual inflation (average %) (7.7) 3.0 3.5 3.8 1.7 1.5 2Revenue (Tax and non-tax) 933.6 2,198.2 2,770.4 3,451.8 3,722.2 4,120.0 4,340.5

Expenditure & Net Lending 966.0 2,228.0 3,102.0 3,746.0 4,057.0 4,120.0 4,340.0

Revenue as a% of GDP 11.4% 23.2% 25.3% 27.7% 28.4% 29.3% 28.5%

Expenditure as a % of GDP 11.8% 23.6% 28.3% 30.0% 31.0% 29.3% 28.5%

Balance of Payments Accounts

Exports in USD m 1,796.0 3,541.0 4,771.0 4,355.0 4,430.0 5,024.0 5,524.0

Imports in USD m 3,662.0 5,834.0 8,491.0 7,456.0 7,682.0 8,321.0 8,690.0Source: IES; RBZ; Ministry of Finance, World Bank

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Nominal GDP & Real GDP growth Rate

Nominal GDP level in USDm(RHS) Real GDP growth MoF(%pa) World Bank GDP at Mkt Prices(%pa)

So u r c e : I E S; R BZ ; M i n i s t r y o f F i n a n c e

GDP Growth Rates

2009 2010 2011 2012 2013 EST 2014 Proj 2015 Proj

Agric, Hunting and Fishing 38% 7.20% 1.40% 7.80% -1.30% 9.0% 5.1%

Mining and quarrying 18.90% 37.40% 24.40% 8.00% 6.50% 11.4% 9.2%

Manufacturing 17% 2.00% 13.80% 5 .30% 1 .50% 3.2% 6.5%

Electricity and water 1.90% 19.50% 6.40% 0.30% 4.30% 4.5% 7.0%

Construction 2.10% 14.10% 65.10% 23.50% 10.00% 11.0% 13.5%

Finance and insurance 4.50% 8.30% 8.30% 28.00% 2.60% 6.3% 6.2%

Real Estate 2.00% 4.90% 48.90% 59.00% 10.00% 11.0% 13.5%

Distr, hotels and Restaurants 6.50% 8.80% 4.30% 4.30% 3.40% 5.1% 5.0%

Transport and Comm 2.20% 4.70% 0.00% 6.70% 3.40% 4.0% 5.5%

GDP at mkt prices 5.40% 11.40% 11.90% 10.60% 3.40% 6.1% 6.4%

Source: IES; RBZ; Ministry of Finance

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Stock of External debt

2011 2012DebtIncTotalArrearsUSDm

TotalArrearsstockUSDm

DebtIncTotalArrearsUSDm

TotalArrearsstockUSDm

Paris Club 2,858 2,431 3,017 2,650

Non-Paris Club 491 92 572 102BilateralCreditors

3,349 2,523 3,591 2,751

AFDB 622 565 636 582

World Bank 1,335 905 1,348 937IMF 121 121 125 125

EIB 293 255 302 268Others 110 74 75 45

MultilateralCreditors

2,481 1,921 2,487 1,960

Nominal DebtIndicators (%)Debt/GDP 35 49Debt/Revenue 200 173

Debt/Exports 130 149Arrears/Export 93 10

Arrears/GDP 44 38

Source: IES; Minist ry of Finance

AFDB25%

World Bank54%

IMF5%

E.I.B12%

Others4%

Multilateral Creditors

Source: IES; Minist ry of Finance

The staff monitored programme by the IMF was

extended by another six months to June 2014 and this

remains the biggest hope of a complete and

comprehensive engagement with the international

community.

Manufacturing sector capacity utilisation remained

subdued at approximately 39.6% in 2013 from 44.9% in

2012 and a figure of 40% - 45% is expected in 2014. The

sector is projected to grow modestly at 3.2% in 2014

from 1.5% in 2012 driven by growth in foodstuffs,

tobacco, drinks and beverages. The manufacturing

sector capacity utilisation has stalled due to archaic

equipment and obsolete systems which continue to make

the subsector uncompetitive compared to imports. Thisis exacerbated by an acute shortage of long term funding

at competitive rates.

The proposed Macro-Economic and Budget Framework

faces a number of risks inter alia; a poor rainfall season,

budget pressures particularly from employment costs,

low Foreign Direct Investment due to slow investor

response, little progress on the debt resolution and the

re-engagement process, lack of clarity on key policies,

particularly the Indigenisation and Economic

Empowerment programme and slow progress on

implementation of key policies.

The debt overhang inhibiting borrowing capacity

The country has accumulated huge stocks of both

external and internal debt with international financial

institutions and bilateral creditors. Most of this debt is in

arrears and this has negatively impacted the

creditworthiness and the ability of the country to access

fresh capital. The government in 2010 approved the

Zimbabwe Accelerated Arrears Clearance Debt and

Development Strategy (ZAADDS) in order to pave the wayfor negotiating the clearance of arrears and debt relief

for the country. One of the key mandates of ZAADDS was

to undertake a validation and reconciliation exercise of

Zimbabwes public and publicly guaranteed external

debt with all creditors as shown in the Multilateral

Creditors pie chart on the right. Total external public

and publicly guaranteed debt (excluding Reserve Bank

and Private sector external debt) as at 31 December

2012, stood at USD 6.1bn (49% of GDP). Of that total

external debt, penalty charges accounted for USD 1.03bn

(17% of total external debt). As reflected in the table onthe Stock of external debt the Debt to GDP ratio is at

49% and Debt to Revenue is at 173% while Debt to

exports is at 149%. Although these ratios are high in

absolute terms compared with other countries they

indicate that the country is not over geared. The major

difference with other countries is on arrears where

Zimbabwe lags significantly and this is the area where

the sovereign credibility is weak. Engagement with both

multilateral and bilateral institutions remains paramount

to the complete clearance of this economic burden.

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Banking sector developments

A highly segmented banking sector

The banking sector exhibited a two-tiered scenario with

those banks that are well capitalised and prudent on

lending on the one side and those not well capitalised

and more cavalier on lending on the other side. This

was given further credence by the absence of a lenderof last resort as well as a nonexistent interbank market.

To some extent the absence of the lender of last resort

did help the banking industry to thrive in a very tight

liquidity environment as systemic risk was completely

eliminated amongst banks. If the interbank market was

active contagion could have easily spread from the

affected institutions to other healthier banks. The

fortuitous quarantine meant that for the three closed

banks exposure to other unrelated financial institutions

was virtually zero. Furthermore, the other struggling

banks remain in limbo and funding can only be providedby shareholders. The major reasons for these bank

failures are persistent vulnerabilities in the financial

sector steaming from low level of capital, insufficient

liquidity, poor asset quality and related-party

exposures, persistent losses and weak corporate

governance and internal control deficiencies. However,

the reserve bank successfully transferred non-core

assets and liabilities to a special purpose debt

resolution entity, managed by the Ministry of Finance,

in an effort to build capacity to perform its mandate of

monetary policy administration effectively.

Figures released by the RBZ in November 2013

indicated that banking deposits were estimated at USD

3.8bn an annual decline of 0.46% as shown in the

banking sector deposit graph. The nature of deposits

remains predominately short-term as reflected by the

pie chart: Banking Deposits in November. The report

indicated that on a m-o-m basis, broad money

declined by USD 144.6m (3.66%) to USD 3.8bn from

USD 4.0bn in October 2013. The decline was largely on

the back of panic withdrawals experienced in the

banking sector. After ZANU PF won the electionspeculation was rife that the Zim dollar would return

and that is why a run on the banks was experienced.

Unconfirmed sources speculate that there is a

considerable amount of money that left the system

during and immediately after the elections estimated

at approximately USD 800.0m. Outstanding credit to

the private sector amounted to USD 3.5bn, constituting

91% of total deposits as reflected in the credit to

private sector November 2013 pie chart.

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Banking Sector Deposits, Loans and Advances

D eposi ts(USD )(L HS) Tota l loans and a dva nces(U SD )(L HS) L oan to D eposit Ratio(L HS)

Source: IES; RBZ; Mi nistr y of Finance

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Banking Sectors Deposits November 2013(%)

Savings Long te rm Unde r 30-days De mand

Source: IES; RBZ; Mi nistr y of Finance

Source: IES; RBZ; Minist ry of Finance

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As of November 2013 the major recipients of the loans

were agriculture 17.7% (2012:21.7%), distribution 17.6%

(2012:20%), manufacturing 15.6% (2012:19.5%) and

households 16.1% (2012:13.2%). Although the mining

sector is expected to anchor the economy, lending to

that sector has remained very limited due to the short

term nature of deposits. Credit to the private sector

was mainly utilised for asset purchases (44.8%) as well

as inventory build-up (33.9%). Loans and advancesutilised for fixed investments activity have remained

low with the procurement of plant and equipment

accounting for 3.31% and pre and post shipment

financing at 1.61% of total loans and advances.

Level of nonperforming loans at 16%

The period under review saw a spike in the level of

nonperforming loans from 12.3% to above 16%.

According to the IMF the NPL problem is in the worst

case one of resolving troubled institutions, and in

others, one of addressing underlying weaknesses toallow viable banks to gradually reduce NPL ratios

through write-offs, work-outs and growth. Sorting out

the NPL situation would improve the capacity of the

banks to ensure sustainable growth in private sector

credit and enhance financial sector stability. Recent

reports from the Bankers Association of Zimbabwe

estimates that more than 16% of loans mainly

concentrated in six banks are not performing. Although

loan origination from weak banks has subsided most

banks continue to be haunted by the legacy of

imprudent lending at the onset of dollarisation.Indications from the banking sector are that NPLs are

actually higher than the reported figure of 16% and are

estimated at 20% which is miles ahead of the prudential

regional benchmark of 5%. The NPLs are extremely high

when compared to the prudential 3% promulgated in the

Basel III requirements. In our view, NPLS could rise

further given the tight liquidity environment and the

huge possibility that the economy can go into deflation.

With some banks engaged in the poor practice of

continuously rolling over poorly performing assets as a

way of hiding NPLs we believe vulnerabilities in thesector remain elevated. We continue to reiterate that

most of the lending decisions have been based on the

size of the collateral being offered and relationships

rather than cash flow. In the absence of credible

information compounded by the absence of the national

credit bureau, abuse by clients will remain high and

rampant. Furthermore, the value of the collateral,

which is real estate in most cases, tends to be

overstated and inevitably harder to realise if the need

arises. This has allowed the official NPLs numbers to be

low. In our view, many banks are sitting on a significant

unknown quantity of NPLs and they continue to be rolled

over. The planned re-introduction of the interbank market

as well as the recapitalisation of the Central Bank are

welcome developments as these are expected to ease the

liquidity constraints. Nonetheless, we are still to see the

modalities of the proposed USD 100.0m interbank market to

be guaranteed by Afreximbank. Our initial view is that an

injection of new money is unlikely under the programme in

which case the liquidity woes are unlikely to subside.Furthermore, the 5 year TBs at 5% p.a. to be issued for the

RBZ debt are expected to ease the liquidity crunch

depending on acceptance.

Government finances

According to the 2014 MoF budget, revenue was estimated

at USD 3.4bn in November and was expected to have

reached USD 3.72bn by December 2013, slightly below the

original budget estimate of UISD 3.86bn. The budget

experienced a number of shocks from unbudgeted but

inescapable programmes such as the referendum and theelection against very low revenue inflow especially in the

second half of the year. Unlike the previous year the

revenue target of USD 3.9bn was not revised significantly

indicating that the economy largely performed to

expectations. Tax and non-tax revenue were expected to

close the year at USD 3.6bn and USD 0.2m respectively. The

negative variance of 1% on the budget could have been

higher had it not been offset by the once-off unbudgeted

non-tax collections from the renewal of licence fees from

mobile telecommunication companies, whose business

licences generated USD 145.5m (Econet alone paid USD137m). Of the USD 61.0m target revenue from diamonds

nothing was received from this sector compared to USD

84.2m received in 2012. Tax revenues which are directly

linked to the performance of the economy performed

below the target for most of the period under review,

reflecting the overall economic slowdown. Tax revenue of

USD 3.01bn were collected against a target of USD 3.21bn.

For the period to November 2013, recurrent expenditure

was estimated at USD 2.43bn from an initial estimate of

USD 2.28bn representing 68.9% of the budget a slight

improvement on 2012s 70% and 80% in 2011. Theexpenditure composition remains skewed towards recurrent

expenditure at 69% contrary to best practice of allocating

30% of total revenue to recurrent expenditure. The overrun

in recurrent expenditure is a result of the planned cost of

living review affected in January 2013.

The cash budget continued to reflect a cash deficit during

the year which increased domestic arrears accumulation

and the position was worsened by an increase in employee

allowances and unbudgeted recruitment. Fiscal stress was

aggravated by underperforming diamond revenues during

the year.

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Unsustainable reserve levels of 0.3 months

In a hard currency economy, reserves are not only

insurance against external shocks, but also a key tool

for managing domestic financial instability. Thus an

import cover of only 0.3 months indicates that the

country is vulnerable to vacillations in import price

movements especially in the event of a currency

shortage. With low liquid assets of its own, the RBZ

can provide only limited short-term liquidity to banks,

and cannot be the ultimate guarantor of the stability

of the financial and payments systems in the event of

a systemic bank run.

Political Outlook in 2014

After a prolonged period of haggling the principles to

Zimbabwes Global Political Agreement (GPA)-ZANU

PF, MDC-T and MDC agreed on a new constitution on

17 January 2013. The final draft of the constitution

was tabled in Parliament on 6 February 2013. Aconstitutional referendum was subsequently held on

16 March, with an overwhelming majority of the votes

supporting adoption of the new constitution. After the

referendum the draft constitution went back to

Parliament as the Constitutional Bill and was passed by

the House of Assembly on 14 May and by the Senate on

15 May. This paved the way for the holding of

harmonised elections in July 2013. The cost of the

constitution was close to USD 53m, while the elections

cost USD 125.4m. The funding for the elections was

mainly from internal resources including an increase in

excise duty on fuel by USD 0.05/litre for a period of 10

months, USD 40.0m in one year treasury bills to

domestic non-bank financial institution as well as

revenue from mobile phone operating licence fees.

After a largely credible and peaceful harmonised

election in July 2013 ZANU PF won a clear mandate to

govern for the next five years. The party won clear

majorities in parliament and the senate with more

than two thirds majorities, giving the party the power

to effect legislation in the country. Furthermore, the

party also won the presidential race and its candidateRobert Mugabe was sworn-in in August 2013 for the

next five years with a possibility of re-election in 2018

in accordance with the new constitution. The message

from government has largely been positive and

courteous. The IMF staff monitored programme is

ongoing and avenues to engage with the international

community are being explored. Concerns however

remain on the political will to rein in fiscal

indiscipline, tolerance of dissenting voices, freedom of

expression and association as well as respect for

property rights.

2013 Contribution to revenue

VAT 39%

Companies 4%

Individualls 15%

Non-tax Revenue 6%Excise Duties 7%

Other Taxes 3%

CustomsDuty 26%

Source: IES; IMF Art icle IV


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350

400

2009 2010 2011 2012 2013 2014

International Reserves

Usable International reserves(USDm)(LHS) Months of imports (RHS)


0.3

4.7

4.8

15.9

0 5 10 15 20

Zimbabwe

South Africa

Lesotho

Botswana

International Resrves (months of prospective imports)

8


9/13

Equities market developments

The industrial index recorded a remarkable gain of 32.6%

during the 2013 period to close the year at 202.12 points.

This solid performance was anchored on significant foreign

trading as evidence by a total of USD 291m shares bought

and USD 195m shares sold. Total turnover for the entire

bourse came in at USD 486m for the year. Foreign

participation was solid because of two fundamentally

important issues, firstly the local bourse and the economyis hard currency denominated (USD mainly) and this

eliminated exchange losses associated with investing in

frontier markets and secondly quantitative easing (QE) in

the United States had a positive effect on frontier market

including the ZSE. The effect of QE can be substantiated

by the fact that all bourses in Africa, barring South Africa,

were positive in real terms during 2013 a clear indication

that a large chunk of the cash injected into these

developed economies found its way onto global equity

markets as portfolio investment.

Sectors that performed relatively better in 2013 include

the FMCG, food retail, Agro-Industrials, telecoms and

beverages. A total of 10 companies were delisted from the

bourse and two were suspended during 2013.

2014 Equity Outlook

Going forward we expect the bourse to be largely

defensive in 2013 owing to the ongoing tapering in the

USA. This will impact the Zimbabwean economy in two

ways. Firstly there is the inescapable fact that there will

be reduced portfolio inflows on the ZSE and secondly thereduction in QE will make the USD appreciate against any

other currency which will further erode our manufacturing

competitiveness. Assuming a deflationary environment in

2014 companies that are expected to do well are those

with strong cash generating capacity, low gearing and

most importantly a skilled management team. With

demand expected to weaken, liquidity to tighten,

currency to appreciate and international interest rates to

rise it will be heinous to invest in a highly leveraged

company because the prospect of financial distress are

high. Telecoms, brewers, agro-based manufactures andselected defensive FMCG will do admirably well in a

defensive strategy geared towards value preservation

compared to growth. We urge investors to stay clear of

the banks, manufacturing and mining counters due to high

capital demands in these sectors as well as deep rooted

concerns of technological obsolescence in the current

state of operations. Indications on the ground are pointing

towards a very difficult year from both the fiscal

performance and private sector participation.

Unfortunately we expect more companies to file for

judicial management and some will be liquidated as theinescapable effects of deflation bite.

2013 in Chartes

0

50

100

150

200

250

300

350

31-Dec-12 28-Feb-13 30-Apr-13 30-Jun-13 31-Aug-13 31-Oct-13 31-Dec-1

Millio

ns

ZSE 2013 Volume Traded

Sour ce: IES; ZSE

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

31-D ec-12 28-Fe b-13 30-Ap r-13 30-Ju n-13 31-Au g-13 31-Oct-13 31-D ec-

Millions($)

ZSE Value Traded USD

Sour ce: IES; ZSE

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

31-Dec-12

21-Jan-13

11-Feb-13

04-Mar-13

25-Mar-13

15-Apr-13

06-May-13

27-May-13

17-Jun-13

08-Jul-13

29-Jul-13

19-Aug-13

09-Sep-13

30-Sep-13

21-Oct-13

11-Nov-13

02-Dec-13

23-Dec-13

Millions

Net Foreign Value Traded USD

Sour ce: IES; ZSE

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Billions

ZSE Market Cap USD

Sour ce: IES; ZSE

9


10/13

2014 Picks

Buy Recommendations

Market Cap

(USDm)

Updated recommendation

Hist. +1 Hist. +1 31.12.13

Afdis 37.7 15.6 5.6 4.1 28.6 44.5 Dominant market share in the spirits mass

market which has high g rowth potential.

Increasing volumes and eff iciencies keeping

competitive pricing especially after rights issue

BATZ 47.3 16.0 43.8 13.8 247.6 309.0 Dominant market share. Strong cash

generation. Generous dividend policy.

Impressive RoaE and RoaA.

Delta 15.6 12.5 5.3 4.4 1,731.1 2,098.6 Pristine balance sheet, strong cashflows and

solid brands . Virtually a monopoly. Volume

traction likely to be maintained.

Econet 7.7 4.1 2.0 1.5 984.0 1,124.8 Undemanding ratings. Dominant market share

and significant growth potential in the sector.Head start over other players in terms of

penetration data. Nonetheless, governance

issues are a concern.

Innscor 11.1 10.6 2.9 2.4 433.3 547.0 Perenial perfomer. Defensive businesses with

attractive medium to long-term prospects .

Strong cash generation.

Mash Holdings 14.9 12.8 0.6 0.6 60.4 62.5 Divers ified property portfolio. Improv ing

average renta ls per square metre and renta l

yields.Trading at a discount to property value

and replacement cost.

National Foods 10.2 8.7 2.4 2.0 141.9 164.5FMCG company with dominant brands across

defensive food products like mealie meal and

flour. S trong manag ement and s trategic

partners from parent companies.

OK Zimbabwe 18.7 13.0 3.3 2.7 230.9 259.2 Defensive food business and extensive branch

network. Improving dis pos able incomes

expected to support earnings growth

Padenga 8.0 7.5 0.8 0.8 43.3 69.7 Renowned for large premium quality skins

production. Opportunities to ex tend into

production of alligators and saltwater

Seed Co 20.2 10.7 2.1 2.0 175.4 237.3 Dominant market share (80%) of the local

hybrid seed maize. Huge demand for seed in

the region. We are confident on future

performance and believe shareholders will be

richly rewarded.Exposure can be get through

AICO after the consummation of the impending

transctions

TSL 25.0 18.4 1.4 1.3 138.9 154.6 Strong balance sheet. Good asset play.

Volumes improving at Bak Logistics. Energetic

and skilled management

PER PBVIES Fair

Value (USDm)

10


11/13

Ones to watch

Market Cap

(USDm)

IES USD Fair

Value (USDm)


Hist. +1 Hist. +1 31.12.13

CBZH 2.4 2.0 0.6 0.5 102.7 123.1 Well capitalised. Largest banking group in

Zimbabwe by all metrices. Receding asset

quality pressures quality given the increasing

tenure.

Colcom 28.8 16.0 14.9 0.1 39.8 51.2 Strong brand equity that is supporterd by a

track record of product excellence. Product

reengineering and reposition was done in 2013.

Rolling out of new products underway

Dairibord 42.0 na 1.7 1.0 56.4 64.4 A victim of intense competition from the

region. Management has failed to retool the

company in time however there is basis for a

recovery given the right skills at the top.

FBCH 6.2 5.4 0.7 0.6 89.7 96.8 A well run financial instituation, very liquid andvery minimum NPLs. A highly conservative and

prudent management with vast experience in

the local banking industry.

Hippo 14.5 12.5 0.9 0.9 173.8 222.0 High cash generative abilities, sound

management. Technical support from Tongaat

Hulett.

Lafarge 14.9 12.5 2.6 2.1 88.0 93.6 Demand for cement remains strong. Improving

efficiencies to result in improved margins.

Meikles 15.6 12.7 3.0 2.7 45.8 65.9 Unbundling of retail operations and the

agricultural concern could unlock value for

shareholders. Supermarkets are recovering well

and hotels are profitable. Group has strong

defensive characteristics and solid market

position.

Truworths 13.6 11.0 2.3 2.0 16.1 19.8 Truworths entered into an agreement with

CABS whereby the bank wil buy recievables

from Truwothrs at discount. This has made

Truworths a very liquid reatiler and prospects

for growing retain sales is high. However the

company is very prudent on credit extension.

Turnall 350.2 18.9 1.4 0.8 25.9 35.2 Turnall dominates the local low cost housing

market holding 80% of the local roofing market

and processes 60% to 70% of Zimbabwesroofing and piping products

PER PBV

11


12/13

Sell /Take Profit Recommendations

PER PBV Market Cap

(USDm)


Hist +1 Hist +1 31.12.11

G/Beltings na na 0.0 0.0 0.4 na Weak financial position will adversely affectgroup future prospects.

Pelhams 0.0 0.0 0.3 0.2 1.0 na Low disposable incomes. Limited credit

facilities for high ticket goods.

TA Holdings 4.4 2.4 0.3 0.3 9.9 na Agro-chemicval investments continue to

haemorrage the group on oudated technology.

Substantial investment required for new

technology.

Zeco na na 0.0 0.0 0.1 na Undercapitalised businesses. Company unlikely

to see much growth with troughs outweighing

peaks.

IES USD Fair

Value (USDm)

12


13/13

NOTES

Imara CapitalSecuritiesBotswanaBlock 6, SecondFloor, MorojwaMews,Plot 74769

WesternCommercialRoad, New CBDGaboroneBotswana

Imara AfricaSecurities ( Adivision of ImaraSP Reid)Imara House,Block 3

257 Oxford RoadIllovoJohannesburg,2146South AfricaTel:+27 11 5506200Fax:+27 11 5506295

Imara SecuritiesAngolaSCVM LimitadaRua Rainha Ginga74, 13thFloor,Luanda, AngolaTel: +244 222 372029/36Fax: +244 222332 340

Imara EdwardsSecurities (Pvt.)Ltd.Tendeseka OfficePark1st Floor Block 2

Samora MachelAve.Harare, ZimbabweTel: +2634790590Fax:+2634791435

4 Fanum HouseCnr. LeopoldTakawira/JosiahTongogara StreetBulawayoTel: +263 9 74554Fax: +263 966024Members of t he

Zimbabwe Stock

Exchange

Imara S P Reid(Pty)LtdImara House257 Oxford RoadIllovo 2146

P.O. Box 969Johannesburg2000South AfricaTel: +27 11 5506200Fax: +27 11 5506295Member of t he

JSE Secur it ies

Exchange

Namibia EquityBrokers (Pty) Ltd1st Floor CityCentreBuilding, WestWing

Levinson ArcadeWindhoekNamibiaTel: +264 61246666Fax: +26461256789Member of t he

Namibia Stock

Exchange

StockbrokersMalawi LtdGround FloorNBM BusinessCentreCnr. Hanover

Avenue/Henderson StreetBlantyreMalawiTel: +2651822803Member of t he

Malawi Stock

Exchange

StockbrokersZambia Ltd2nd Floor (Wing),Stock ExchangeBuildingCentral Park

CornerChurch/CairoRoadsP O Box 38956LusakaZambiaTel: +260211232455Fax: +260211224055Member of t he

Zambia

St ock Exchange

This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report maynot be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara Edwards Securities (Pvt.) Ltd. (Imara)from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy orcompleteness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report onlyand are subject to change without notice. Neither Imara nor any other member of the Imara Group of companies including their respective associatedcompanies (together Group Companies), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this reportor its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independentinvestigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates,officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, andbuy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or brokingrelationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the informationcontained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of anycompany referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at thesame time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States,major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied,published or reproduced or redistributed (in whole or in part) by any recipient for any purpose.

Imara Edwards Securities 2014

13

Documents

Zimbabwe Macroeconomic Report 2013 Review and 2014 Outlook