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Investment Notes – July/August 2010 – “Lies, Damned Lies and Statistics!”
In recent weeks we have read reports from the IMF and heard the Mid-term review from Finance Minister Biti. In recent months we have also heard from companies operating on the ground in terms of their current sales and future intentions. We therefore find it hard to understand why both the IMF and Government are being as cautious as they are. That said we are pleased that they are not being overly optimistic as past Governments have tended to do. Nonetheless their views give a rather sobering view of the economy rather than an upbeat and exciting outlook for a country barely in its second year of reform that we would rather take.
The IMF believes that the Zim economy is just over $5 billion. We are not sure as to where they got their figures from but we assume it is based on CSO data and their own estimates. They do however point out that “Data have serious shortcomings that significantly hamper surveillance due to capacity constraints”. In past Investment Notes we have been skeptical about such a number. Zimbabwe’s $5 billion economy compares with $14 billion for Zambia, a country with a similar sized population. In the past, and before the “lost decade”, Zimbabwe’s economy was always around 50% larger than Zambia’s as our agriculture, tourism and manufacturing sectors were always much larger whilst Zambia’s copper mining industry was still recovering from years of neglect. Indeed, had Zimbabwe continued on its growth path that it began from the mid 1990s, its economy today could well be a $25 to $30 billion economy. But it didn’t and it’s not!
In this month’s Notes we will be looking at what is happening on the ground to assess whether the $5billion is reasonable or not. We start by looking at Zambia. Taking both major breweries in Zambia (owned also by SAB), in the year ending March 2010, they sold a combined $230 million worth of beverages (at higher prices than in Zim). This compares with Delta that sold $324 million in a year when they could not meet demand. That could imply that the Zambian breweries may not have such a tight control of their distribution thereby allowing in competition from imported product. Or it could mean that Zimbabweans simply drink more…or importantly can afford to drink more! At the same time, Zimbabweans are due to spend around $500 million using Econet’s mobile phone network in 2010. Zambians are spending only around $280m on their major network provider Zain (who no doubt charge less than Econet!). Innscor will soon be reporting their June 2010 numbers. We would not be surprised if the amount of spend that Innscor is receiving domestically from fast foods, Colcom, National Foods and Spar will take the combined spend for just these three companies alone to well over $1.1 billion in 2010. Whilst the latter company is also selling imported product, it does give an indication of the current spending power in Zimbabwe just one year after dollarization. According to the IMF and Government Zimbabwe’s GNP per capita (ie economy per head) is US$450 which compares with Zambia at US$1,200 per head. The spending patterns in both countries alluded to above would suggest the opposite!
If we look at Zimbabwe’s major exports being generated by the mining, tobacco and cotton sectors in 2010, we also see an upbeat picture. Gold production is estimated by the Chamber of Mines to be around 7.5 tonnes in 2010 compared with 5 tonnes in 2009 and 3.5 tonnes in 2008. That’s a 50% increase over the year when gold prices have reached new highs. The value of those exports should be roughly US$250m. Zimplats this year will produce around 180 million ounces of platinum plus 160 million ounces of rhodium and palladium. The value of those combined is roughly $500million. Then Anglo’s Unki mine starts to sell its concentrate in the last quarter of 2010 adding to these numbers whilst Mimosa should add around $200million. In addition Zimbabwe is exporting chrome and coal and may even see ‘official’ sales of diamonds from Marange in the second half of 2010, adding to the diamond exports from Rio’s Murowa mine and River Ranch. Murowa is due to sell $30m in 2010. In the first half of 2010, the Mid-term review suggests, the value of shipments from platinum, ferrochrome and gold alone was $550 million. For 2010 as a whole a number nearer $1.2billion could be achievable for these minerals although we would expect more.
In agriculture, the tobacco crop has been revised up on a number of occasions whilst the global price for our Virginia tobacco has been high due to global demand, especially Chinese. The export value of semi and processed tobacco could reach $500million in 2010, twice the amount of 2009. The cotton crop is up 18% whilst the cotton price is also higher than in 2009. The value of lint should be $200million in 2010, an increase of 60% on 2009. Thanks to the investment by Tongaat Hullet in Hippo Valley and Triangle over the past year, sugar output should jump by 24% in 2010 to 350,000 tonnes. Maize production in Zimbabwe has also increased in 2010 whilst the price has fallen sharply on World markets. The cost of importing maize should therefore be less than $100 million although the donors often fund a part of this and the cost to Zimbabwe could be lower still. Overall agricultural exports in 2010 could surpass $1 billion.
So excluding manufacturing and tourism, exports from agriculture and mining might top $2.3 billion or higher in 2010. That’s a bigger number than the IMF forecast that includes manufacturing exports. We have not analysed Zimbabwe’s manufacturing exports for these Notes but believe that longer term, Zimbabwe’s export growth will come from mining and agriculture rather than manufacturing production. That said there will always be a place for Zimbabwean manufacturers who produce niche products that can compete regionally and globally. Sadly, long gone have the days when we can or should try to compete with large scale production from China and India in mass market products.
In the construction sector, PPC Cement has capacity to produce 700,000 tonnes of cement, a level that can be increased with clinker imports from SA. Lafarge Zim produces 450,000 tonnes, plus 350,000 tonnes of clinker. Meanwhile Lafarge Zambia’s new plant produces 1.23 million tonnes a level that easily meets Zambian demand. Zimbabwe’s cement demand is set to rise strongly as demand for housing and infrastructure increases. Investment projects announced so far by the mining companies include those for Zimplats ($445m) and Rio Tinto for Murowa ($300m). AngloPlats are also investing heavily in Unki. Recent tenders published in the newspapers highlight the amount of works about to go into housing and infrastructure for such projects.
Meanwhile the financial sector has seen deposits rise from $700 million a year ago to $1.9 billion today, a growth of 167%. Year to date the growth is 40%. As a result liquidity and lending is slowly picking up. Just as we are seeing globally post the credit crunch, credit and bank loans are hard to come by. The banks themselves will admit that the cash in circulation and held by individuals could be substantial relative to the deposits in the banking system such is the mistrust in the banking system on the one hand and the size of the informal economy on the other. In some African countries the informal economy can be the same size as the recorded formal economy. Looking at Zambia again, bank deposits at the end of March totaled $1.6 billion in kwacha deposits plus another $1 billion of forex deposits, little higher than Zimbabwe today!
The Mid-term review also gave some upbeat data. Tax revenues in the first six months of the year were 12% above target with Vat receipts 9% above budget. PAYE was 22% above budget and 290% above that raised twelve months before. This also explains in part why consumption is strong year on year. Corporation tax is also 54% above target. Overall revenue earned was $931million whilst expenditure was $813million thereby following the Government’s cash targeting. Overall budgeted expenditure for 2010 is being held at around $2.25 billion which we believe might be nearly 50% above 2009. (the year of transition makes this comparison difficult). It would appear though that most of this revenue will be generated from local sources rather than by the “vote of credit” assumed in December’s budget.
Our sources are primarily those on the ground ie the operating companies, rather than the Government or the individual Ministries. We share both the Finance Minister’s views and that of the IMF that the data is poor hence the revamp for the Central Statistical Office that is soon to be implemented. We wonder for example whether the mobile phone industry that barely existed ten years ago is even recorded in the statistics, or for that matter platinum! An economist who relies on Government statistics will find analysis tough. The Mid-term review reduced Government’s economic growth forecast from 7% to 5.4%. The IMF revised it’s down to 2.2% as they are concerned about Zimbabwe’s exports falling far short of imports. Surely not! We remain totally unconvinced and further don’t believe that the underlying number used for the economy, being $5 billion, is correct. As we saw in last year’s December budget, the Government revised up the size of the economy from $3.5 billion to $5.1 billion but with barely a corresponding uplift in the growth rate! We would not be at all surprised to see a similar ‘re-rating’ occur in the future. Last year we suggested that the economy is more likely an $8billion to $10 billion one. We stand by this and suggest that it might in fact be much bigger once the informal economy is included. That makes the current stock market capitalization of $3.5 billion look very cheap especially given the broad sector coverage of the economy that the Zimbabwe Stock Exchange provides investors. The Zim economy is pumping !
John R Legat | Chief Executive
Imara Asset Management Zimbabwe (Pvt) Limited
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