A punt on Zimbabwe represents an enormous risk

The Zimbabwean government – shut out of international financial markets, and relying on Afreximbank and Chinese lenders for support – has shown appetite for getting back on side with creditors to improve the economy and make good on its promise to compensate white farmers for expropriated land.

Finance minister Mthuli Ncube says a $100 million dollar bond issue is to be listed on the fledgling Victoria Falls Stock Exchange before the end of this year, although analysts regard it as more of a desperate measure than an indication of strength.

Emerging from the Mugabe era with a sclerotic economy, devalued currency and painful debts, Emmerson Mnangagwa’s presidency has been marred by its own difficulties.

Cyclone Idai, a damaging drought and, of course, the pandemic have hardly helped, pushing real GDP down by 6% in 2019 and 4% in 2020.

A quarter of the adult population has now received the recommended two doses of China’s Sinopharm or Sinovac vaccines. Cases peaked in July, and declined, but are rising again in September.

Given also the country’s political machinations, fomenting distrust among investors, it is no wonder Zimbabwe remains one of the lowest-scoring countries in Euromoney’s universe of 174 countries, scraping the barrel in 172nd place, with its score worsening earlier in the year.

The country’s macroeconomic fortunes finally appear to be turning around.

A bumper maize crop due to better rainfall, surging metals prices, and improving construction and manufacturing activities are expected to deliver GDP growth of 7.8% this year, albeit according to the government’s own forecast.

Implementation of the new foreign-exchange auction system last year, along with measures to clamp down on speculation to stabilize the currency – notably among mobile money firms – have played important roles in combatting inflation.

After rising by more than 800% on an annual basis at its peak last year, consumer price rises have slowed in successive months to 50% this August, according to official statistics.

Exporters are punished through the 40% forced conversion of foreign earnings into the local currency at the over-valued auction rate 

 - Tony Hawkins, University of Zimbabwe

Fiscal policy management has helped. The budget deficit was an estimated 0.5% of GDP last year, with a public and publicly guaranteed debt burden estimated at just under 80% of GDP.

The government is predicting a deficit of 1.3% of GDP for 2021, a debt burden of 64.5% of GDP, and a current-account surplus of 3.1% of GDP, according to the budget for 2021, with international reserves increasing to around two months’ worth of imports coverage and reaching three months by 2022.

The government has even begun repaying token amounts to its creditors, confirming its first repayments to the Paris Club and multilateral lenders.

Important as these payments are, though, the context is everything.

The country owes a whopping $11 billion, of which around $6.5 billion is in arrears, including $3.5 billion owed to a group of multilateral creditors that includes the African Development Bank, Afreximbank, European Investment Bank and World Bank.

Token repayments cannot hide the fact that Zimbabwe has not serviced its foreign debts since 2000, which explains why it is one of the worst investor risks globally and is within the lowest of Euromoney’s five broad categories of risk.

One of Euromoney’s survey contributors is Tony Hawkins, an economics professor who founded the University of Zimbabwe Graduate School of Management. He says it is difficult to know reliably the scale of Zimbabwe’s debts due to unpublished borrowing from China.

“In addition, there is the contingency of a $3.5 billion compensation package for white farmers, whose land was expropriated in the early 2000s,” he says. “Half of this was due to be paid in July. Its inclusion pushes arrears above $10 billion and the total debt to $15 billion, or 85% of GDP.”

Hawkins is cautious over Zimbabwe’s future, not least because there are elections due again by mid-2023 and Mnangagwa has boasted that his ruling party, the Zimbabwe African National Union-Patriotic Front (Zanu-PF), will rule forever.

Hawkins is critical of the government’s “open-for-business” mantra. He says state intervention is everywhere and increasing, notably in agriculture and mining.

He also notes the foreign-exchange auction is “opaque” and “manipulated”, with the Reserve Bank of Zimbabwe, the central bank, in effect the sole seller.

“Exporters are punished through the 40% forced conversion of foreign earnings into the local currency at the over-valued auction rate,” says Hawkins.

[Zanu-PF, in essence,] operates as an organized criminal syndicate 

 - Steve Hanke, Johns Hopkins University

Another of Euromoney’s country risk experts is Steve Hanke, a professor of applied economics at the Johns Hopkins University.

Hanke is an expert on various countries and even calculates his own daily inflation measures (see Hanke’s Inflation Satellite). He adds that he was the only one accurately measuring Zimbabwe’s “fantastic hyperinflation of 2008, when prices were doubling every 24.7 hours”.

On his calculations, the inflation rate has come down from a peak of more than 1,000% in 2020 to 68.4% currently. As such, Zimbabwe has the fifth worst inflation rate, behind Venezuela, Lebanon, Sudan and Syria.

Hanke focuses on the institutions and corruption that are part and parcel of the Zimbabwean political framework – which all score lowly in Euromoney’s survey – as crucial elements of the country’s high risks.

“The country is in the firm grip of the political apparatus that was put in place long ago by Robert Mugabe,” he says, and he is not about to upgrade the country, noting that Zimbabwean investors must have a big appetite for the risks.

“Since the arrival of Mnangagwa in 2017, nothing has changed. Politics begins and ends with the Zanu-PF, which tightly controls the economy and everything else that goes on in Zimbabwe.”

Hanke says that Zanu-PF, in essence, “operates as an organized criminal syndicate”.

“The bribes that flow as a form of tribute, protection money or informal taxes are a necessary part of conducting any business in Zimbabwe and with few exceptions, the regular police and judiciary don’t stop or tamp down what is, in effect, illegal economic activity,” he says.