Batanai Matsika 
THE Zimbabwean economy has experienced recessions in 2019 and 2020, with GDP estimated to have contracted by 6 percent and 4,1 percent, respectively (ministry of Finance estimates). The economic contraction has been a result of output losses in key sectors such as agriculture, mining, manufacturing and tourism. 
The recession has largely been a result of shocks such as (i) prolonged drought episodes, (ii) Cyclone Idai and (iii) the Covid-19 pandemic. As part of its National Development Strategy 1 (NDS1), the government of Zimbabwe estimates that the economy will rebound by 7,4 percent in 2021 on the back of recovery in agriculture.
That said, the big question is whether the 7,4 percent growth estimate is realistic and if we should expect a V-shaped economic recovery this year. While Covid-19 vaccination programmes are ramping up across the globe and the great prize on offer is the chance of bringing the pandemic under control, there are still several risks. This year could be another one of unusual uncertainty.
For example, there is likely going to be fractious geopolitics, global tourism may continue shrinking, fights within and between countries over vaccines could emerge, while we see mixed economic recovery across the globe.
The fact is that Covid-19 has not just been killing humans — it has literally put some businesses to death. For companies operating in Zimbabwe, the task in 2021 is on how to improve odds and navigate the risks and opportunities ahead.
As Morgan & Co Research, we have analysed internal and external factors that could kill Zimbabwean companies. Of course, there are a lot of dynamics at play here.
For example, a big scandal or crisis can destroy a business. Mismanagement by leadership and the accumulation of small, bad decisions can be a likely cause.
The sin of omission or “failing to take advantage of new opportunities”, new technology, economic turbulence, environmental issues and competition are other big threats.
In this article, we single out the “lack of demand” as the most likely cause of the death of businesses in 2021.
This is because the Covid-19 related social distancing restrictions have been intensified. The endgame is a strain on household incomes and slump in disposable incomes.
In fact, what appears to be playing out is an increase in poverty levels and explosion of the informal sector activity.
In a country like Zimbabwe that has (i) limited social-safety nets, (ii) a commodity-driven economy and (iii) limited financial reserves, the impact of Covid-19 restrictions could be severe on household incomes.
This is because limited economic activity and low productivity levels associated with the restrictions create new risks such as company closures, increased levels of formal unemployment and shrinkages in the value of exports receipts.
Another important point is that the continued rise in the cost of living in Zimbabwe has come against low wages and salaries especially at a time companies continue to battle for survival. All these developments are contributing to an increase in poverty levels, particularly in urban areas. This is also evidenced by an increase in slums across major cities in Zimbabwe.
Another problem is inequality. While the government is focusing on achieving an average economic growth rate of five percent from 2021 to 2025, the arithmetic of economic growth does not necessarily imply any reduction in economic inequality.
If the incomes of the rich and the poor grow at the same rates, the proportionate difference between them stays the same, and the absolute difference — in dollars per year — increases.
As demonstrated by the original Kuznets curve hypothesis, when growth or industrialisation increases, income inequality first increases and then decreases at a later stage.
Inequality is only expected to decrease when a certain level of average income is reached and the processes of industrialisation — democratisation and the rise of the welfare state — allow for the benefits from rapid growth and increase the per-capita income. Aggregate demand is also likely to remain constrained because of the following;
- Firstly, salaries and wages of most workers within the private and public sectors are in Zimbabwean dollars (ZWL). A deteriorating exchange rate implies that the real values of incomes is declining on a monthly, if not daily. This situation presents serious risks for companies given the pressure to continuously review salaries. Certain sectors such as real estate (rentals and property purchases) are still pricing in US$ and this implies further pressures on disposable incomes. Wages and salaries of those that are formally employed have also not moved in line with inflation. Most households are living below the poverty datum line. We estimate that the average Zimbabwean survives on less than US$50 per month;
- Secondly, the limited avenues for companies to generate forex implies that production levels have dwindled (capacity utilisation estimated at 27 percent for 2020). The low productivity has led to downsizing thereby contributing to unemployment. Other factors such as power shortages have also affected productivity levels across industries in Zimbabwe;
- Thirdly, taxes in Zimbabwe remain high. It is worth noting that Zimbabwe has one of the highest personal income tax rates in the world. This is because the government is cash-strapped and revenues from the Personal Income Tax Rate are an important source of income.
The Intermediated Money Transfer Tax (IMTT) has also negatively impacted household incomes and constrained consumer demand. The two percent tax has made the general populace worse off given the contraction in consumer purchasing power and the inability of households to build personal assets; and - *Finally, access to capital for small and medium sized businesses remains limited. Policy makers need to boost employment and aggregate demand by providing financing solutions for micro-enterprises.
Overall, poverty and vulnerability continues to be major hurdles confronting Zimbabwe. We opine that the deteriorating disposable incomes and increased poverty levels will translate to limited aggregate demand in 2021. Companies that focus on luxury or non-essential goods will be the victims.
Tourism and hospitality will remain in the doldrums while consumer-facing companies offering defensive and mass-market oriented goods could be able to surf the tide.
On the stock market, we would recommend exposure in companies that have defensive business models, cash-generative, export-oriented and not depended on local economics. Investors should seek exposure in SeedCo International, Padenga Holdings and Hippo Valley. - ● Matsika is head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
