In search of inflation – Zim’s New Deflated Order

Barely seven years since the hyperinflation frenzy; today we chant “inflation”!! In our recent outlook report, we identified the major economic and investment themes for 2016 shaped by macro policy and global trends.

New Deflated Order

We believe the economy has entered a secular period of low-flation to deflation. As factors behind this deflation are demonstrating a staying power, the secular period is expected to last 2-3years. For this horizon, the theme: the New Deflated Order applies. This new theme summarises the following trends for the next 2-3 years, with primary focus on 2016:-

  • Persistent deflation –in the absence of a radical shift in policy and re-engagement of international creditors, deflation will persist. Three contributing factors remain: (i) a weak Rand, which is likely to remain and has thus far led to an importation of deflation from South Africa; (ii) Monetary tightening by the FED (in a divergent world where other central banks are loosening) is expected to keep the dollar strong; and (iii) poor infrastructure and low productivity are depressing wages and weakening consumption – a key ingredient for deflation.
  • Depressed growth to mild recession – private consumption – the largest GDP contributor (80%) – has been slowing over the last two years. An improvement in trade-balance and spending by NGOs has helped avert a recession thus far. With a strong currency, we have limited power to stem imports and much less, stoke exports. Our GDP growth expectations for 2016 hover in the -1% to +1.5% range.
  • Weak productivity leading to loss in competitiveness – investment in technology and machinery by Zimbabwean companies lags that of her regional peers. The outcome has been a loss in labour productivity, as employees have little (in terms of technology) to work with, coupled with weak infrastructure (e.g. energy, logistics and water). There is a growing concern that the competitiveness of Zimbabwean companies will continue to weaken, thereby inciting imports and the associated depressing income.
  • Risk Aversion – as economic uncertainty extends into 2016, risk aversion will continue to influence investment decision-making. This investor pivot may once again provoke another wave of disinvestment in equities. Infrastructure (and perhaps property) are the most likely beneficiaries, as they are perceived as relatively ‘safe’ assets.
  • Improved fiscal prudence – a somewhat wishful thinking on our part is that we expect the economy to emerge out of the “New Deflated Order” with better fiscal governance. With a borrowed currency and to a large extent, limited monetary policy latitude and high indebtedness, we are seeing a Government that is amenable to fiscal reforms.