zimbabwe monthly economic review sept · the price of platinum was on an upward trend throughout...

1. INTERNATIONALCOMMODITYPRICEDEVELOPMENTS

August 2012 was the best performing month for precious metals since January 2012. Gold closed the month at US$1,653.13 per ounce (Table 1). The performance of gold in the fi rst part of the month was largely affected by the slight depreciation of the US dollar against the Euro. The Euro/USD currency pair is usually strongly correlated with gold and silver prices. The increase in the prices of precious metals in the second half of August was largely a result of speculation that the European Central Bank would commence its bond purchase program and the pledge by the Federal Open Market Committee (FOMC) meeting to keep interest rates low until late 2014.

Table1.InternationalCommodityPricesinAugust2012

DateGold Platinum Copper Nickel Brent

CrudeOil

US$/oz US$/oz US$/tonne US$/barrel US$/barrel

3-Aug-2012 1,598.5 1,391.0 7,397.0 15,582.5 108.8

10-Aug-2012 1,606.1 1,400.0 7,404.5 15,460.0 113.4

17-Aug-2012 1,615.6 1,455.5 7,518.0 15,445.0 113.6

24-Aug-2012 1,666.8 1,536.5 7,651.5 16,500.0 114.8

31-Aug-2012 1,653.1 1,512.5 7,543.5 15,857.5 113.5

Source: Bloomberg and Reuters

The price of platinum was on an upward trend throughout the month, starting at US$1,391 per ounce to close the month at US$1,512.50 per ounce. On the other hand, nickel prices on average, increased during the month of August despite having declined during the week ending 10 August 2012.

Crude oil prices continued to reverse the downward trend seen in May and June, indicating the tightening oil market. Expectations that policy makers in the European Union, China and the United States would provide additional economic stimulus to counteract slowing growth have contributed to rising crude oil prices over the past two months. The crude oil price closed the month at US$113.49 per barrel.

ISSUENO.7.SEPTEMBER2012

ZIMBABWE MONTHLY ECONOMIC REVIEWZIMBABWE MONTHLY ECONOMIC REVIEW

TABLEOFCONTENTS

1. International Commodity Price Developments

2. Macroeconomic Developments

3. Stock Market Developments

4. Other Topical Issues

Apublicationproducedbythe

AfricanDevelopmentBank(AfDB)

ZimbabweFieldOffice

2 ZimbabweMonthlyEconomicReviewSeptember 2012

Table2.MaizeandWheatPrices(USA),FobandGulfinAugust2012

DateMaize(USA),Fob,Gulf WheatHRW(USA)Fob,Gulf

US$/tonne US$/tonne3-Aug-2012 358 332

10-Aug-2012 364 33217-Aug-2012 363 33624-Aug-2012 368 33431-Aug-2012 370 337

Source: International Grain Council

The prices of wheat and maize continued to rise during the month of August, closing the month at US$337 per tonne and US$370 per tonne, respectively (Table 2). Deteriorating crop prospects for maize in the United States and wheat in Russia were the major factors driving the prices of the two commodities.

2. MACROECONOMICDEVELOPMENTS

2.1 OverviewoftheEconomy

Zimbabwe convened a High Level Economic Forum in Victoria Falls at the end of August 2012. At the Forum, the Minister of Finance highlighted some of the key challenges hindering the economic growth process. These include low gross capital formation; huge external debt; lack of industrial competitiveness; weak regional integration; high levels of poverty; and, the absence of a unified vision for the country. The Minister also underscored the need for the country to leverage on its abundant human capital, natural resources, geographical location, demographic distribution, information and communication technologies, fairly decent infrastructure and globalization. The challenges are an indication that the economy is still constrained. Urgent solutions to the challenges are required if the current growth momentum is to be sustained.

2.2 AgricultureSectorDevelopments

2012TobaccoSellingseason

After the close of the tobacco selling season on 25 July, most farmers started preparing for the 2012/2013 tobacco season. This saw most of them rushing to meet the 1st of September planting date for irrigated tobacco. The country’s biggest

tobacco seed supplier, Kutsaga Research Station, has assured farmers that it has enough tobacco seed and seedlings to meet the requirements of the country.

WinterWheatProduction

Wheat production in the 2012 season has been marred by several challenges; the main ones being the prolonged power cuts and poor access to finance. Farmers needed between US$350 and US$400 to fund the production of one hectare of wheat (for inputs and labour, excluding power). On the cost build-up, the power utility, Zimbabwe Electricity Supply Authority (ZESA) is charging US$0.14 per kilowatt per hour for electricity. For water, Zimbabwe National Water Authority (ZINWA) charges US$12.68 per mega litre per year for commercial agriculture estates, US$12.19 per mega litre per year for commercial agriculture, US$7.80 per mega litre per year for farmers and US$5 per mega litre per year for both communal pumped and gravity water. Government had promised a US$20 million facility for the wheat planting season. The facility was, however, marred by reports that most farmers were not able to access vouchers from Commercial Bank of Zimbabwe (CBZ) with which to access the inputs from the Grain Marketing Board (GMB), which left many farmers unable to start their preparations.

2.3 DevelopmentsintheMiningSector

Energy: The Ministry of Energy and Power Development is expected to float a tender to determine the quantity of methane gas in the Lupane gas fields. The gas fields are estimated to hold 95 percent pure methane gas in reserves, which stretch from Hwange to Botswana. The exploitation of the gas fields is expected to increase the number of options the country will have to address its power challenges. Priority will be

September 2012 ZimbabweMonthlyEconomicReview 3

given to power generation and then later to other activities such as fertilizer manufacturing.

Diamonds: A report by Equity Communications has indicated that Zimbabwe is expected to be the second largest diamond producer by 2018. The consulting firm noted that rough production of diamonds reached 11.1 million carats in 2011 and projects production to reach 14.5 million carats by 2014, with a value of US$1.7 billion. According to the report, the Marange-based diamond mining firm (Anjin) is expected to produce 10 percent of global rough diamonds by 2018. However, the report concluded that financing requirements may prevent new mines from coming on board in the near future.

Gold: Total gold deliveries increased by 16.3 percent from 1,0322.2 kg in August 2011 to 1,199.9 kg in August 2012. Gold deliveries by primary producers increased by 6.8 percent, from 812 kg in August 2011 to 867.6 kg in August 2012. For small-scale producers, gold deliveries increased by 51 percent from 220.1 kg in August 2011 to 332.4 kg in August 2012. On a month-on-month basis, total gold deliveries declined by 10.3 percent from 1,338.1 kg in July 2012 to 1,199.9 kg in August 2012. For primary producers, gold deliveries declined by 17.8 percent from 1,055.1 kg in July 2012 to 867.6 kg in August 2012. For small-scale producers, gold deliveries increased by 17.5 percent from 283.0 kg to in July 2012 to 332.4 kg in August 2012.

Figure1.TotalGoldDeliveries(kgs)

Source: Reserve Bank of Zimbabwe

2.4 Inflation

Annual inflation increased marginally from 3.5 percent in August 2011 to 3.6 percent in August 2012. In August 2012 annual food and non-food inflation stood at 4.2 percent and 3.4 percent, respectively. The major factors underpinning the annual inflation outcome in August 2012 include Housing, Water, Electricity, Gas and Other Fuels. Within this category, the key inflation drivers are rent (37.8 percent) and rates (17.7 percent).

On a month-on-month basis, inflation declined from 0.2 percent in July 2012 to -0.2 percent in August 2012. Month-on-month food and non-food inflation stood at -0.1 percent and -0.2 percent, respectively. The main drivers of month-on-month inflation in August 2012 were Health (0.34 percent) and Housing, Water, Electricity, Gas and Other Fuels (0.31 percent).

In terms of inflation outlook, it is worth noting that in August 2012 the National Bakers’ Asso-ciation of Zimbabwe indicated that its members intended to increase the price of bread from US$1 per loaf to US$1.20 to absorb the rise in the cost of flour, which was making the baking industry unviable. The month of August also marked the period when the increase in customs duty on wheat flour from 5 percent to 20 percent, as announced in the 2012 Mid-Term Budget Review Statement, took effect.

Despite the low inflation, some inflationary pressures still persist in the economy. For example, high and increasing rental prices continue to exert inflationary pressures. Lack of activity in the construction industry has created excess demand for existing accommodation. Most people are unable to own accommodation due to low income and limited opportunities for mortgage facilities.


Figure2.InflationDevelopmentsinAugust2012

Source: ZIMSTAT

2.5 InterestRates

Commercial bank weighted average base lending rates softened from 9.2 percent in June 2012 to 8.6 percent in July 2012 (Table 3). Over the same period, merchant bank weighted average base lending rates also softened from 14.5 percent in June 2012 to 14.0 percent in July 2012. The softening in lending rates is commendable, given

the need for affordable credit by the real sector of the economy. To explain the prevailing lending rates and why these rates may not be easy to reduce further, banks have cited a number of challenges on their part. The challenges include high operating costs, high risk premium in accessing external lines of credit due to high country risk profile and high cost of borrowing from corporates by banks for on-lending to bank customers.

Table3.InterestRateLevels(AnnualPercentages)

Month

CommercialBank

AverageBaseLendingRate

CommercialBank

WeightedAverageBaseLendingRate

MerchantBank

AverageBaseLendingRate

MerchantBank

WeightedAverageBaseLendingRate

3-MonthDepositRate

SavingsDepositRate

AnnualInflation

RealSavingsRate

Jul-11 8.00-30.00 11.0 16.00-32.00 18.2 8.6 2.6 3.3 -0.7

Aug-11 8.00-30.00 12.1 16.00-32.00 18.9 8.6 2.6 3.5 -0.9

Sep-11 8.00-30.00 12.6 16.00-32.00 19.6 8.6 2.6 4.3 -1.7

Oct-11 8.00-30.00 13.2 15.00-32.00 19.6 8.6 2.6 4.2 -1.6

Nov-11 8.00-30.00 13.2 10.00-32.00 19.6 8.3 2.6 4.2 -1.6

Dec-11 8.00-30.00 13.2 10.00-32.00 19.6 9.1 2.6 4.9 -2.3

Jan-12 8.00-30.00 13.2 10.00-32.00 19.6 9.1 2.6 4.3 -1.7

Feb-12 8.00-30.00 14.0 10.00-32.00 20.1 9.1 2.6 4.3 -1.7

Mar-12 8.00-30.00 10.6 14.00-35.00 18.8 10.1 6.0 4 2

Apr-12 8.00-30.00 9.0 13.00-25.00 15.7 10.1 6.0 4.0 2.0

May-12 6.00-30.00 9.4 15.00-30.00 14.4 10.1 6.0 4 2.0

Jun-12 6.00-35.00 9.2 15.00-30.00 14.5 10.1 6.0 4.0 2.0

Jul-12 6.00-35.00 8.6 15.00-30.00 14 10.1 6.0 3.9 2.1

Average … 11.5 … 17.9 9.3 3.9 4.1 -0.2

Source: Reserve Bank of Zimbabwe Monthly Economic Review

Apart from rental on residential premises, shop space has become expensive. Owning such

premises for rental purposes has therefore emerged as a reliable business with minimal hassels.


While lending rates have been softening, 3-month deposit rates and average savings deposit rates have remained at their March 2012 levels of 10.1 and 6.0 percent, respectively. There is need for banks to heed the call for an increase in these rates in a bid to mobilize the much needed savings into the formal banking sector. While there has been growing concern about money circulating outside the formal banking sector, so far no exercise has been done to estimate the amount. Over time, an exercise of this nature would indicate whether the amount circulating outside the formal banking sector has been increasing or decreasing over time, which is important for monetary policy purposes.

2.6 BankingSectorandMonetaryDevelopments

Growth in annual broad money (M3), defined as total banking sector deposits (net of inter-bank deposits), increased from 23.8 percent in June 2012 to 27.2 percent in July 2012 (Figure 3). On a month-on-month basis, M3 growth also increased from 0.3 percent in June 2012 to 3.0 percent in July 2012. The increases in the growth rates are favourable in an environment with liquidity constraints. To sustain this increase, there is need to address challenges that militate against increased deposit mobilization. These challenges include weak depositor confidence, high bank charges and low deposit and savings rates.

Figure3.MonetaryDevelopments(M3)


Total banking sector deposits increased from US$3.59 billion in June 2012 to US$3.70 billion in July 2012 (Figure 4). The increase is largely

attributed to the increase in long-term deposits which increased from US$0.39 billion in June 2012 to US$0.57 billion in July 2012.

Figure4.Level&GrowthRateofTotalBankingSectorDeposits



Strategies focused on mobilizing deposits would help boost total bank deposits. Bank customers have also been urged to use cheaper methods of transacting such as Point of Sale (POS) which is relatively cheaper than automated teller machines (ATMs) withdrawals and banking hall withdrawals.

The term structure and composition of total bank deposits is not consistent with long-term investment requirements of the real economy (Table 4 and

As of July 2012, total bank deposits were dominated by demand deposits (which took up 53.7 percent) followed by savings and short-term deposits (30.9 percent) and long-term deposits (15.4 percent)

Figure 5). Total bank deposits of US$3.70 billion in July 2012 consist of US$0.57 billion in long-term deposits, US$1.99 billion in demand deposits and US$1.14 billion in saving and short-term deposits. This implies that the banking system is limited as a source for the much needed long-term funding. More strategies need to be identified to mobilize long-term funding. For example, enhancing the capacity of the Zimbabwe Stock Exchange (ZSE) could support raising long-term funding.

Table4.TotalBankingSectorDeposits(US$Billion)

TypeofDeposit May-12 Jun-12 Jul-12

MonthlyIncrease(Absolute)US$Billion

MonthlyIncrease(Percent)

Demand Deposits 1.89 1.95 1.99 0.03 1.74

Saving and Short-Term Deposits 1.17 1.25 1.14 -0.11 -8.64

Long-Term Deposits 0.52 0.39 0.57 0.18 46.69

TotalDeposits 3.58 3.59 3.7 0.11 2.99


(Figure 5). The figures suggest a need to further enhance long-term deposit mobilization in the economy.

Figure5.CompositionofTotalBankingSectorDeposits(PercentofTotalDeposits)inJuly2012


Weak depositor confidence in the banking system, low deposit rates, high bank charges, low average incomes and limited knowledge about benefits of long-term investment instruments offered by banks are among some of the factors that militate against the mobilisation of long-term deposits.

The loan-to-deposit ratio, calculated on the basis of total bank deposits, external and domestic sources of funding, increased from 86.2 percent in June 2012 to 87.5 percent in July 2012 (Figure 6).


Figure6.Loan-to-DepositRatio Figure7.Non-PerformingLoans


The loan-to-deposit ratio is considerably high, suggesting that banks have been loaning out a large proportion of the deposits mobilized. Increased lending is favourable for the revival of the productive sectors of the economy. However, in view of the prevailing non-performing loans, which stood at 12.3 percent of the loan book (Figure 7) as at June 2012, there is need for cautious lending on the part of banks. The 12.3 percent is against the 5 percent Basel II prudential guideline for non-performing loans.

As of July 2012, bank credit to the private sector mainly went to loans and advances (84.8 percent)

followed by mortgages (7.5 percent). The rest went to bills discounted (2.4 percent), bankers acceptances (1.7 percent) and other investments (3.6 percent) (Figure 8). Loans and advances account for the largest proportion of bank credit to the private sector. As earlier mentioned, mortgages have remained subdued because of low average incomes that cannot support the facility. Investments through bankers’ acceptances and bills discounted have remained low. This is because banks prefer to lend through loans and advances, which are largely salary-based for individual borrowers.

Figure8.DistributionofBankCredittothePrivateSector,July2012

Source: Reserve Bank of Zimbabwe

As of July 2012, the bulk of bank loans and advances to the private sector went to Agriculture (22.4 percent) followed by Distribution (19.8 percent), Manufacturing (18.7 percent), Individuals (13.4 percent), Services (10.9 percent), Mining (7.4 percent) and Other Sectors (7.4 percent). The

downside of this is that banks might experience an increase in non-performing loans from agriculture due to an anticipated drought in the next (2012/2013) agricultural season and the growth prospects of the sector that have been revised downwards.


Figure9.SectoralDistributionofBankingSectorLoansandAdvancesinJuly2012


Another concern is the proportion of bank credit channelled to individuals who largely engage in consumption borrowing at the expense of productive sectors. Most of the individual borrowers have used the bank loans and advances for recurrent expenditures, asset purchases, consumer durables and inventory build-up. Investment in plant and equipment has remained low. In view of this, there is need for banks to use preferential lending treatment in favour of productive sectors of the economy.

2.7 FinancialSectorDevelopments

On 07 August 2012 the Cabinet endorsed the new minimum capital requirements of US$100 million for commercial and merchant banks. However, Cabinet stressed the need for the revised minimum capital requirements not to stifle indigenisation efforts. Several banks, including AfrAsia Kingdom, BancABC, CBZ, Financial Services Group (FBC), Merchant Bank of Central Africa Limited (MBCA), Stanbic and Standard Chartered Bank have indicated that they have plans to comply with the new minimum capital requirements. Although the announcement was initially received with concerns from politicians, indications are that most banks are working on plans to comply.

According to Nicoz Diamond, the local insurance industry is one of the fastest growing industries in the world, with revenues for short-term insurance growing from about US$76.7 million in 2009 to about US$160 million in 2011. The industry is gaining its position in the top five largest insurance markets in Africa. The insurance penetration ratio is estimated at above 4 percent and has been

increasing over the past 5 years. The rebound of the insurance industry is underpinned by efforts to restore confidence and targeted regulations which have seen foreign investors participate in the local market. There has been growth in gross and net premiums in the industry attributed to several factors: stability in the economy; risk awareness; improved consumer confidence; rising demand for insurance products due to client’s realisation for the need for insurance to access favourable funding from lending institutions; shareholders’ need for value preservation; and, creation through effective risk management practices, among others.

2.8 FiscalPerformance

Government revenues for July 2012 declined from US$321.75 million in June 2012 to US$257.47 million. However, despite this decline, the July 2012 revenues were 7.1 percent higher than in July 2011. Cumulative revenues to July 2012 amounted to US$1.85 billion and were 16.49 percent higher than the cumulative revenues to July 2011 (Figure 10). The higher revenue collections to July 2012, though lower than the projected US$2.15 billion, can be attributed to increased revenue collections following the tightening of requirements regarding compliance with the VAT fiscalised recording of taxable transactions and possibly improved tax administration. This is evidenced by the cumulative increase in revenues from income tax and VAT by 24.9 percent and 14.6 percent, respectively, over the January-July 2011 revenues.


Figure10.FiscalPerformance

Source: Ministry of Finance, 2012

US$1.85 billion resulting is a deficit of US$7.79 million. Going forward, Government needs to guard against over-spending and work towards creating a fiscal buffer that could help smoothen spending in the event of a shock on major revenue heads.

Government expenditures for July 2012 amounted to US$287.80 million. Against low revenue performances in July 2012 (US$257.47 million against the target of US$314.93 million), Government incurred a deficit of US$30.33 million. Cumulative expenditures to July 2012 amounted to US$1.86 billion against cumulative revenues of

Figure11.ExportsandImports

Source: ZIMSTAT

2.9 ExternalSector

In July 2012, the value of Zimbabwe exports was US$398.55 million while imports stood at US$674.42 million, resulting in a trade deficit of US$275.87. The trade deficit increased from US$161.90 in May 2012 to US$226.71 million in

June 2012 before reaching a high of US$275.87 million in July 2012. The increase in the trade deficit over this period implies an increasing propensity to import by Zimbabwe. Imports have continued to grow, reflecting increased demand for equipment and raw materials for resuscitating industries as


well as finished products against domestic capacity constraints. In view of the widening trade gap, there is need for strategies to increase the value of exports and the high costs of production.

3. STOCKMARKETDEVELOPMENTS

August 2012 saw the ZSE stabilising, though at lower levels compared to August 2011. In August 2011 both indices averaged about 160, compared to 130 and 89 for the industrial and mining indices, respectively (Figure12). This suppressed performance is a mirror of the developments in the whole economy, which has seen a slowdown in

growth across all sectors emanating from various challenges facing the economy.

Overall, the ZSE performed poorly in August 2012 compared to August 2011 (Figure 12). On a positive note, however, there was a 42 percent and 60 percent decline in the volume of foreign sales of shares and the value of foreign sales, respectively. This development might be an indication of a slight improvement in confidence by foreign investors in the local economy after having been alarmed by the developments in the implementation of the indigenisation policy, which gathered momentum in 2011 and the talk of elections over the same period.

Figure12.ZSEIndustrialandMiningIndices

Source: Zimbabwe Stock Exchange

Table8.SummaryofZSEStatistics

Aug-11 Aug-12 PercentageChange

Turnover (US$) 42,389,819.3 23,000,604.7 -0.46

Turnover Volume 318,009,692.0 194,486,640.0 -0.39

ZSE Commission (US$) 84,779.6 46,001.2 -0.46

Foreign Bought (US$) 20,502,233.3 10,749,766.9 -0.48

Foreign Sold (US$) 22,921,504.6 9,264,700.1 -0.6

Foreign Number of Shares Bought 69,726,341.0 47,484,016.0 -0.32

Foreign Number of Shares Sold 87,055,469.0 50,807,113.0 -0.42

Market Capitalization (US$) 4,105,931,997.0 3,433,991,814.0 -0.16

Source: Zimbabwe Stock Exchange


4. OTHERTOPICALISSUES

ZESAEmbarkingonPrepaidMeteringSystem

The Zimbabwe Power Company has indicated that the country could be faced with three months of increased load-shedding as Hwange Power Station undergoes a mandatory maintenance exercise from 11 August to November. The maintenance exercise is carried out to ensure continued operational efficiency and availability of the generating unit. As a result, a total of 160 megawatts is expected to be lost. However, the power utility company has made alternative arrangements with other regional utilities to partially augment supplies. ZESA is now rolling out the prepaid meter project to improve revenue collection and assist the company to recoup the debt owed by its customers. The system will force those customers in debt to settle their outstanding balances since 20 percent of the money used to buy electricity will be applied towards the reduction of the debt until it is fully paid. The system will enhance ZESA’s ability to generate revenue and to ease the debt collection process.

Zimbabwe’sGlobalCompetitivenessIndex(GCI)Stable

Zimbabwe is ranked 132 out of 144 in the World Economic Forum’s GCI report 2012/13. Protection of property rights continues to receive a weak

assessment (ranked 137), and reduces the incentive for businesses to invest. The country’s poor credit rating (ranked 142) limits the capacity of the country to access offshore lines of credit. There is also need to upgrade overall infrastructure (ranked 123), in particular electricity supply (ranked 137), air transport infrastructure (ranked 122) and road network (ranked 95). The country should also continue to improve the health sector (ranked 133), and official markets that continue to function with difficulty, particularly with regard to goods and labour markets, ranked 133 and 139, respectively. Hiring and firing practices (ranked 140) are still considered to be rigid with no flexibility in wage determination (ranked 143). However, the country performed well on the quality of the education system (ranked 30), in particular the quality of mathematics and science education (ranked 50). There is also an active participation of women in the labour force (ranked 18). The country also continues to benefit from low inflation (ranked 46) and very few incidences of organised crime (ranked 36). Since 2005, the country’s score has increased marginally from 3.25 to 3.34, while the average for Sub-Saharan Africa rose from 3.4 to 3.7.

The highest score in the GCI 2012/13 report is for Switzerland while the lowest is Burundi, ranked 144. Neighbouring South Africa is ranked 52, remaining the highest-ranked country in sub-Saharan Africa. A comparison with other selected countries in the region shows that Mauritius (ranked 54), Botswana (79), Namibia (92), Zambia (102) and Malawi (129) performed better than Zimbabwe.

zimbabwe monthly economic review sept · the price of platinum was on an upward trend throughout...

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