What investors need to know about Zimbabwe

Wednesday January 10 2018

ZANU-PF supporters move into farmland owned by

ZANU-PF supporters move into farmland owned by whites in Zimbabwe after the government introduced the controversial land reforms in early 2000s. The economy’s backbone is commercial agriculture, which is still recovering from the effects of the takeover. FILE PHOTO | AFP 

By WILLIAM ATTWELL
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After being denounced for years for its dictatorship and destructive economic policies, Zimbabwe entered a new chapter in November 2017, following the military’s removal of former president Robert Mugabe, who ruled the country for 37 years.

Mr Mugabe’s ouster and replacement with his deputy, Emmerson Mnangagwa, was the most significant development in the southern African nation since it gained Independence from Britain in 1980.

President Mnangagwa is clear that he wants to rebuild the economy and start fresh with foreign businesses. This is promising for a market formerly dubbed the “breadbasket of Africa.”

In this environment, multinationals that are willing to accept some risk and invest in the country could benefit from first-mover advantages — but only if the new administration follows through with much-needed economic reforms.

Zimbabwe’s new leadership faces a challenging task. The economy’s backbone is commercial agriculture, which is still recovering from a land-reform programme in the early 2000s that enabled the government to confiscate large white-owned farms and resulted in a crash in the output of foreign exchange-earning crops like tobacco and cotton.

Populist policies

Amid worsening food and foreign-exchange shortages, Mr Mugabe ramped up populist policies to please his supporters.

One was an “indigenisation” programme requiring companies such as Nestle, British American Tobacco, Anglo American Platinum and Barclays to hand majority stakes to black Zimbabweans.

The move scared away foreign investors, starving Zimbabwe of much-needed capital — a trend that was exacerbated by US and EU sanctions in response to the government’s mounting human rights abuses.

Corruption

Corruption only increased after Mr Mugabe claimed victory in a disputed election in 2013.

The strengthening US dollar — Zimbabwe’s de facto currency — decimated the country’s remaining industrial base by making Zimbabwean manufactured goods too expensive and uncompetitive.

Preident Mnangagwa’s first actions in office underscore how important he views economic recovery. Even before announcing his new Cabinet, he installed a key reformist, Patrick Chinamasa, as acting finance minister.

Mr Chinamasa is tasked with tackling corruption and re-engaging with international institutions to unlock funds to ease liquidity shortages.

The president also announced that the Indigenisation Ministry will be disbanded and the programme scaled back. He has proposed reforms, such as tax breaks for mining firms and commercial farmers, aiming to assist export-oriented businesses and earn Zimbabwe much-need hard currency.

Challenge

Revitalising Zimbabwe’s economy will not be an easy task. The most significant challenge to resolve is the lack of cash, which makes it difficult for consumers to transact and for businesses to import goods.

Without its own currency, Zimbabwe relies on US dollars for over 90 per cent of transactions, but the collapse in exports means that money is in short supply.

Moreover, having regularly defaulted on its debts, few international institutions are willing to lend to the government, forcing it to rely on poorly capitalised local banks. This has left little credit for the country’s private sector.

Progress on resolving these issues will be slow and incremental. Accelerating growth will require President Mnangagwa to convince institutions like the African Development Bank and the World Bank that the government is now a reliable borrower.

Opportunities

As President Mnangagwa’s reforms slowly begin to stabilise the economy, significant opportunities will emerge across an array of sectors for companies hoping to expand in this relatively underserved, but high-potential market.

Zimbabwe still contains an attractive class of relatively wealthy consumers who have benefited from the Mugabe regime.

On a recent research trip to Harare, Zimbabwe’s capital, we were struck by the business opportunities that still exist in the economy despite the difficulties the country has faced in recent years.

Any company that enters the market offering lifestyle and consumer goods could benefit from a demand that has been unmet for years. If the middle class benefits from improving economic conditions and better access to cash, that demand is likely to increase.

An influx of capital could also result in a revival in the formal retail sector over the next several years since the infrastructure does not need to be built from scratch.

Technology

Providers of mobile banking and cash transfer solutions are doing particularly well in the economy due to the country’s multicurrency exchange regime and low availability of US dollars.

Technology solutions that help to accelerate improvements in Zimbabwe’s decaying infrastructure will also be in high demand.

Zimbabwe has one of Africa’s strongest education systems, and consequently boasts an abundance of high-calibre talent.

This means that it is relatively easy for companies to find locals to run their operations. However, in recent years many high-skilled Zimbabweans have emigrated to neighbouring South Africa.

Given South Africa’s stagnating economy, skilled and experienced Zimbabweans may return home as the political environment stabilises and employment opportunities expand with an improving economy.

Agriculture sector

A mainstay of the economy, the agriculture sector will be a top priority given its importance as an export sector that brings in foreign currency.

Recently introduced reforms to give agricultural firms better access to finance aim to help farmers buy and import equipment to increase their output — and this could be a boon to global manufacturers

Health system

Looking to the longer term, Mnangagwa’s administration will look to upgrade areas such as the country’s degraded infrastructure and poorly equipped public health system, both of which have suffered due to a lack of funds.

When this occurs, it will drive considerable opportunities for health care and construction firms. However, the government’s immediate priorities are paying down its debts and providing basic services.

If Zimbabwe’s economy improves, if its operating environment becomes less risky and if trust in the government is reinstalled, investors are likely to re-enter the market given the ample opportunities they will find there.

For companies willing to take on some risks, now is the time to buy local assets, which, though priced in US dollars, are still fairly cheap because of the associated risk.

However, companies should stay clear of sectors with high levels of political interference, such as mining.

It is not yet clear which direction the new government will take. Though more pragmatic than Mr Mugabe, President Mnangagwa has nevertheless worked with Mugabe for years and is operating within a largely similar political system.

Most importantly, executives have to follow developments closely. They have to monitor changes in the market on an ongoing basis and adjust their strategies when developments demand change.

Anna Rosenberg is the director of sub-Saharan Africa research at Frontier Strategy Group. William Attwell is a senior analyst for sub-Saharan Africa at FSG.