2017 Economic Outlook
2016 review: The ZSE’s mainstream Industrials Index ended the year 2016 with a 25.84% gain to 144.53 spurred by fourth quarter gains. At the end of the third quarter, the Industrials had lost 13.83% to 98.96 as foreign investors sold off on the back of weak economic fundamentals. The Minings Index was up 146.67% to 58.51 points driven mainly by gains in Bindura and RioZim. The two counters closed the year with increases of 161.4% and 188.5% respectively. The performance by the main industrials index is better than the negative loss of 29% recorded prior year comparative. The market gains were, however, at odds with fundamentals on the ground with most listed stocks reporting declining revenues and profits.
Global Outlook – Subdued growth in uncertain times
Global growth in 2016 is estimated at a post-crisis low of 2.3 percent and is projected to rise to 2.7 percent in 2017. According to the World Bank’s Global Economic Prospects Flagship Report of 2017 titled “Weak Investment in Uncertain Times” growth in emerging market and developing economies (EMDEs) is expected to pick up in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. Weak investment and productivity growth are, however, weighing on medium-term prospects across many EMDEs. Downside risks to global growth include increasing policy uncertainty in major advanced economies and some emerging market and developing economies.
Commodity exporters likely to fare better
Growth in emerging market and developing economies is expected to pick up in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. According to the World Bank commodity prices have stabilized and are projected to increase moderately during 2017-19, providing support for commodity-exporting EMDEs. Risk to growth is that some commodity exporters might struggle to adjust to low commodity prices.
Zim economic outlook
The year 2017 is likely to continue with the major themes that typified the last year; delayed payment of foreign suppliers, depleted nostro accounts, low commodity prices, low capacity utilisation across sectors, high unemployment levels, domestic liquidity and cash challenges, unstable macro-economic environment, low business confidence and limited foreign and domestic investment. In short, the economy remains under stress. Zimbabwe will need to make tough decisions – there is need to contain government expenditures, particularly employment costs. Should the Government go ahead with reforming the civil service sector or leave things as they are on political grounds? 2018 is an election year and government would not want a protest vote. Would government hands off issuing treasury bills as this is crowding out the private sector? The short to medium term nature of the maturity profile of treasury bills entails frequent and high debt servicing costs, which essentially crowd out resources which could otherwise be channeled towards productive use. It is against this background we proceed into the year.
The 2017 national budget had the following theme “Pushing Production Frontiers Across All Sectors of the Economy.” The main intention of the budget is to give urgent attention to supply side interventions geared towards enhancing production across all sectors of the economy. This will need government to manage the fiscal deficit and reduce domestic borrowing. There is also need for government to forge ahead and pay international arrears to enable both the public and private sector to access cheaper credit facilities. The economy is, however, expected to record modest growth. According to the 2017 National Budget, the modest growth will be led by key sectors of mining and agriculture, benefiting from the anticipated normal to above normal rainfall. Overall GDP growth is projected at a moderate 1.7% in 2017. Agriculture is projected to grow by 12% driven by higher output from major crops such as maize, cotton and tobacco, as well as milk production. Mining is expected to grow by just 0.9% in 2017. Manufacturing, which continues to face such constraints as antiquated equipment, capital, low aggregate demand, liquidity, high costs of utilities, and unfair competition from imports, is projected to register modest growth of 0.3% in 2017.
Foreign Portfolio Inflows: Little hope for recovery
As expected, in 2016 foreign investor participation on the ZSE remained tepid, accounting for 33% of transactions (3-year average; 60%) amidst sustained liquidity constraints around the foreign exchange market. Whilst the RBZ took steps to address these concerns by introducing a foreign payments priority list, we remain cautiously optimistic for any recovery in foreign portfolio flows to the bourse for the following reasons. First, we note that currency concerns still persist among foreign investors amidst continued depletion of nostro accounts resulting in delayed repatriation of principal investments as well as dividends. Secondly, feedback from foreign brokers who have direct contact with the majority of foreign investors suggests that foreign investors remain skeptical about Zimbabwean assets struggling with a myriad of issues . Finally, our outlook is informed by the poor performance of most listed entities.
Zimbabwean equities: Much appeal, less value
Despite gaining by as much as 25.8% in 2016, the Zimbabwean equity market still appears cheaper than most frontier markets. The market currently trades at a trailing PE ratio of 9.45x compared to MSCI’s frontier markets and MSCI emerging market equivalent of 13.73x and 14.95x respectively. Whilst this should ordinarily attract flows back to Zimbabwean equities, we expect that the lingering forex and economic concerns among foreign investors would cap any significant recovery in portfolio flows.
Earnings to maintain back seat among market drivers
With the manufacturing sector still faced with a myriad of challenges, the financial services sector taking a cautious approach to lending and the FMCG sector grappling with the reality of weakened aggregate demand, earnings are expected to remain weak for the rest of 2017. Whilst the banking sector is set to report an excellent set of results, we see little impact on the market sentiment given the lack of confidence in the sector. Overall, we still expect earnings to play a negligible role in driving market sentiment in the coming months.