Africa

ZIMBABWE
A “growth recession”?
September 16, 2009
There has been great debate about prospects of economic recovery in
Zimbabwe. The IMF projects GDP to increase by 3% this year and then
settle at 6% up-to 2014. The Ministry of Finance (MoF) expects a 6% GDP
growth rate this year and “double-digit growth” thereafter. Recent data
suggests that the Zimbabwe economy is recovering. In this report we:

• investigate the risks to a speedy recovery of the Zimbabwe economy.

We pay particular attention to the banking sector. In our view, political
hostility between the two main parties of the Government of National
Unity (GNU) is thawing. The recent meeting between the European
Union (EU) representatives and the Government of Zimbabwe (GoZ)
leadership is supportive of our view.
• provide a performance analysis of the Zimbabwean equities. Our view
is that investors should remain defensive, but progressively gain
exposure to the mid-cap defensive shares.

Fig 1: Zimbabwean equities recovered strongly in April

1.6

1.4

1.2

0.8
Nigeria
Kenya
0.6 RSA
Zimbabw e
MSCI Frontier
0.4
22-Feb-09

8-Mar-09

22-Mar-09

5-Apr-09

19-Apr-09

3-May-09

17-May-09

31-May-09

14-Jun-09

28-Jun-09

12-Jul-09

26-Jul-09

9-Aug-09

23-Aug-09

6-Sep-09

Peter Mushangwe
Zandisile Mabuya
+27 11 551 3675
peterm@legae.co.za
1. Political Overview

Notwithstanding the improvements in relations with the EU,

Zimbabwean politics remain the most dangerous unknown in the
equation. We admit that the holding up of the GNU after the signing of the
Global Political Agreement (GPA) continues to confound the pessimists.
While we believe that liquidity is now more critical than politics for
Zimbabwe’s recovery, we do not downplay the political risks. Historically,
elections in Zimbabwe, except for the 1980, were largely of no importance.
Despite the improving relationship and possible re-engagement with EU, UK
and USA, political risks are heightened by:

• the uncertainty of the tenor of the GNU. Some commentators allude to

impeding elections while others speak of the GNU’s tenor as a
minimum of five years. A pronouncement to the tenor of the GNU has
not been made;
• the GNU’s responsibility to work on issues such as 1) the new
constitution 2) election guidelines 3) property rights and land reform
and 4) re-engagement with USA, UK and EU. We foresee substantial
disagreements and disharmony;
• the internal fragmentations within both ZANU PF and the MDC.
Factions in the two parties also remain the biggest threat to a smooth
operation of the GNU; and
• the succession question that would astound both MDC and ZANU PF.
In ZANU PF, the divisions will probably widen as different possible
candidates try to place themselves in line for succession. In MDC, if
the President of the party, Mr Tsvangirai, resigns after the two terms, it
will be the first time a leader voluntarily gives up power in a major
party in Zimbabwe. Failure to resign would hurt the party and his
image as comparisons to ZANU PF and Mr Mugabe will obviously be
pointed out.
In our opinion political risks have waned, but we also admit that it is difficult
to envisage how it can play out in the next year. We however believe that
“recovery stories” will dominate and overshadow politics. We do not expect
a material improvement in the discount rate of the Zimbabwean
equities nonetheless.

Page 2 of 17
2. A growth recession?

In our note, The Zimbabwe Dilemma: From Hyperinflation to Possible

Deflation, April 7 2009, we expounded our fears of possible deflation chiefly
due to 1) lack of tools to stimulate the economy, 2) previously high US$
inflation rate and 3) banks’ inability to expand credit; among other reasons.
With the exception of ‘previous high US$ inflation rate’ which seem to have
frittered away somewhat, other factors remain fairly strong. The recent data
suggests that Zimbabwe economy has improved. Our discussions with
various company managers point to a fairly strong recovery in capacity
utilization. Capacity utilization have ascended from levels around 10%-20%
pre-dollarization to levels ranging between 30% and 45%. Volumes show a
strong bounce back, albeit due to the base effect.

In this note we pay particular attention to the banking sector. In our view,
Zimbabwe could go through a “growth recession” – conventionally defined as
a situation where Gross Domestic Product (GDP) would grow at a rate lower
than the country’s potential output and have indifferent effect to employment
creation – if the liquidity strain continues. Without reasonable inflows of
US$/rands in the economy the recovery of the economy could take a
protracted period. We highlight the following:

• Poor growth in capital stock: investment in new plant and

equipment, which we believe is critical, will remain low in the short-
term. Then importation of capital goods has not rebounded since Jan
’09. The current capital stock is beyond the “steady state” in our view,
negatively affecting industrial efficiency and output/supply in the short-
to medium-term
• The low quantity and velocity of money: The broad money indicator
has rebounded (in US$ terms) when compared to CY08. However, the
quantity of money in circulation is still low in our view and the pick-up
could be exaggerated by the low base. The velocity is also negatively
affected by the lack of financial assets in the market.
• Sluggish recovery of credit expansion as banks balance sheets
remain undersized and liquidity remains tight.
• Poor internal demand due to lower income. The economy’s inability
to create employment on a noteworthy scale would weigh heavily on

Page 3 of 17
 domestic demand. Anecdotal evidence shows continued lay-offs,
particularly in the service industry. Consumption in particular would be
expected to rise as recovery feeds to the poor rural population, but our
view is that this will take a prolonged period.
• Export growth post GNU continue to disappoint. The export
statistics continue to fall when compared to last year. We, however,
expect exports to recover in 1H10 due to both improvements of the
global economy and the gradual integration of the Zimbabwe
economy as companies re-gain lost marketshares.
• According to the IMF, Zimbabwe’s GDP is expected to grow at 3%
in CY2009 before doubling to 6% in CY2010 and up-to CY2014.
Inflation which has been negative from January to May this year, rose
to 1% in July and is expected to average 9.9% in CY2010 before
receding to 6.2% in CY2013. Nominal GDP growth rate of around
12% would not notably stand out against other SSA countries in
our assessment. However, the MoF is adamant that real GDP will
exceed 10% in the next 3 years.
• While 1) supply constraints in some sectors, particularly agriculture, 2)
the reintroduction of duty on certain items and 3) importation of
inflation from South Africa (rand strength/US$ weakness) could
support upside risks on inflation, it should remain compressed
generally as long as the economy lacks major liquidity in our view.

Page 4 of 17
Fig 2: GDP is expected to recover, but we are concerned with the liquidity strain on the economy

Net Foreign Assets US$mn GDP trend

100 7000 10%

0 6000
Nominal GDP US$mn)
2007 2008 2009 GDP growth rate RHS % 5%
-100
5000

-200
0%
4000
-300

3000
-400 -5%

-500 2000

-10%
-600 1000

-700
0 -15%
-800 2007 2008 2009 2010 2011 2012 2013

Broad money US$mn

Inflation rate
700 12.0%

600 10.0%

500 8.0%

400 6.0%

300
4.0%

2.0%
200

0.0%
100
April

June
March

2009

2010

2011

2012

2013
January

February

May

July
-2.0%
0
2007 2008 2009
-4.0%

Imports by category, US$mn
80
Total export shipments, US$mn
200
70 capital goods
raw materials
150
60 consumeables
services
100
50

50 40

30
0
Jan‐09 Feb‐09 Mar‐09 Apr‐09 May‐09 Jun‐09
20
‐50
10
‐100 2008
2009 0
Variance Jan‐09 Feb‐09 Mar‐09 Apr‐09 May‐09 Jun‐09
‐150

Source: IMF, Ministry of Finance, RBZ, Legae Calculations

Page 5 of 17
 Fig 3: Internal demand is constrained by low income level and little room to improve it

Income levels are low, (US$ per capita income)...
1,450 
Malawi Uganda Zambia Zimbabwe
1,250 

1,050 

850 

650 

450 

250 

50 
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
...yet as a percentage of GDP, public sector wage bill is high
18%
16%
14% % of GDP

12% Average

10%
8%
6%
4%
2%
0%
Togo
Cameroon

Burkina…
Gambia

Zambia

South Africa

Namibia
E.Guniea
Chad
Guinea
Congo

DRC

Gabon
Mali

Benin

Cote d…

Mozambi…

Zimbabwe
Angola
Ghana

Lesotho
Tanzania

Nigeria

Rwanda

Liberia

Uganda

Senegal

Mauritius
Sierra…

Botswana

Cape Verde
Ethiopia

Kenya
Malawi

Swaziland

Seychelles

Source: IMF, Legae Securities

• Zimbabwe’s per capita income is expected to register a strong

recovery but remains one of the lowest in SSA. By 2014, per
capita income is expected to have more than doubled to around
US$500, but it would still be lagging per capita incomes for countries
like Malawi, Zambia and Uganda. In our opinion this puts a strong
strain on domestic demand.
• The major constraint to local consumption is the low income
level. Wage levels will remain suppressed in our view, squeezing
internal demand. The dilemma is that wage increases that would

Page 6 of 17
 exceed levels justified by the economy’s productivity would not only
reverse the companies’ competitiveness, but will have a negative
impact on employment as well.
• Even at this low level (in absolute terms) as a percentage of GDP,
Zimbabwe’s public sector wage bill is above the SSA average.
This situation puts the government in a quandary since wage level in
absolute terms is low, but on a relatively basis, and in light of GDP
and the economy’s production capacity, the level is high. Friction
between labour and government would be expected to continue in our
view, further putting a dent on recovery prospects.

Page 7 of 17
3. Banking Sector: Consolidate or Die

Zimbabwe’s banking sector could catalyse both capital investment and

consumption recovery, hence our emphasis on the analysis of the banking
sector in this report. In our point of view, Zimbabwe’s banking sector requires
significant capitalisation in order to be able to attract convincing external
lines of credit and catalyse the recovery of the economy. Currently the
banking system suffers from:

• Poor capitalisation;
• Poor liquidity;
• Low profitability; and
• Higher credit and operational risks.

We believe the key theme for Zimbabwean banks will centre on

capitalisation, liquidity management and risk management for the next
year. The Reserve Bank of Zimbabwe (RBZ) set out banks to meet new
minimum capital requirements by March 2010. (Commercial banks =
US$12.5mn; Merchant Banks = US$10.0mn and Building Societies =
US$10.0mn) With low profitability in the industry, building up capital through
retention of profits would be a big ask although profitable banks could cut
dividends in order to accumulate capital. The fragmentation of the banking
industry does not bode well for industry profitability as well. There are 18
commercial banks, 4 merchant banks, 4 building societies and 1 finance
house. The GDP/bank ratio is excessively miniature. Hence, against a
challenging operating outlook, capital adequacy ratios (CAR) will remain low
(relative to new requirements). The dearth of stock issuance would make
capital raising much more difficult in our view. Banks with low loan-to-
deposits ratios may manage to keep higher CAR. Since dollarisation:
• The industry’s total deposits increased to an estimate of
US$800mn, (Sept ’09) Deposits grew by a satisfying 48% from
US$475mn in April to US$706mn by June ’09. Loans and advances
show a higher growth rate of 66% from US$158 to US$263 over the
same period of time, but remain fairly vain to the requirements of the
economy. Of concern is the virtual non-existence of consumptive
lending. Lending for purposes of purchasing items like cars, home

Page 8 of 17
 property etc has not recovered since times of hyper inflation. Lending
is mainly for purposes of PPE renovations and trade finance.
• Effective lending rates have remained relatively high. Lending
rates averaged 6% to-date. Merchant banks charge higher rates to as
high as 50%. With inflation projected to increase to around 6%, the
risks of further increases in lending rates are meaningful, again
negating endogenous-spurred recovery. The RBZ removed a “6%
above LIBOR” interest rate cap and continue to use moral suasion to
encourage lending to the productive sectors at reasonable rates.
• The loan-to-deposit ratios are high for some banks. This makes
loan book growth almost impossible for those banks except in
situation where they aggressively build up deposits. ABC,
Kingdom and NMB have high loans-to-deposit ratios Deposits are
also heavily fragmented among the banks, which again will result in
stiff competition on liability space. The structure of the industry – small
and undiversified banks – does not bode well for the challenge. The
comforting scenario, however, is that banks with higher market shares
in deposits (CBZ, Stanbic, Barclays, FBCH) have low loan/deposits
ratios and room to expand their loan books.
• The ALM challenge increased. Deposits are mainly demand as is the
case in most markets, but there challenge is born out of 1) the inability
of the RBZ to play the role of the lender of last resort and 2) the lack of
money market instruments that have quality credit profile and can be
used to raise funds and/or deposits.
• Profitability on core business remains low. Net Interest Income
(NII) and Net interest Margins (NIM) are low. For instance, only CBZ
and NMB recorded NII of above US$1mn for the 1H09. Risk aversion
towards counterparty risk will lead capital to be invested mainly in
perceived lower risk assets and/or with banks that have higher credit
scores, thus produce lower yields. Credit risks as indicated by the
provision levels seem to be on the higher end when compared to
other African countries outside Nigeria. Forward-looking, we would
expect impairment charges to decline as the economy picks up, and
credit risks dissipate.
• The raising RTGS activity indicates an improving situation in the
money markets. The increasing activity can strengthen confidence,

Page 9 of 17
 and thus enabling banks to access liquidity. The local interbank credit
markets, however, remain disrupted. Inter-bank loans remain
insignificant at an average that is below US$1mn.
• Consolidation is needed in order to replace the damaged banks
in our view. Weaker Zimbabwean banks should be merged to form
stronger banks that could offer size and scale of financial services.
There have been media reports of Nigerian and South African banks
interest to expand their presence into Zimbabwe. In our opinion, this
would be a positive thing for the industry, in spite of the intensification
of competition, specifically on the liability side. We are particularly
worried of banks with narrow shareholding structures and those that
would not stand to benefit from parent support. We should also
highlight that there is not much banks assets to purchase outside the
branch networks and human capital in our view.

Fig 4: The liquidity (deposits levels) is low despite recent improvements

Deposits are growing Effective lending rates

800
16.0% 16.0%
Deposits 706
700 Loans
Effective lending rate
12.0% Spread
12.0%
600 574

500 475
8.0% 8.0%

400

4.0% 4.0%
300 263
212
200 158 0.0% 0.0%
ZB Bank

CFX
StanChart

Stanbic

Kingdom

Agribank

NMB

CBZ

MBCA

ZABG

Metro
Barclays

100

0
Apr-09 May-09 Jun-09
Loan-to-deposit ratios
RTGS activity  rising, US$mn MBCA
1400 45 Interfin
TN
40
1200 ABC
Cumulative
35 Kingdom
US$ value RHS
1000 NMB
30 Renaissance

800 CFX
25
Metro

20 Premier
600
Genesis
15 CBZ Loan/Deposit
400
Stanchart
10
ZABG
200 ZB Bank
5
Stanbic
0 0 FBC
6‐May‐09

3‐Jun‐09

10‐Jun‐09

17‐Jun‐09

24‐Jun‐09
15‐Apr‐09

22‐Apr‐09

29‐Apr‐09

13‐May‐09

20‐May‐09

27‐May‐09

1‐Jul‐09

Agribank
Barclays

0% 20% 40% 60% 80% 100% 120% 140% 160%

Source: Reserve Bank of Zimbabwe, Legae Calculations

Page 10 of 17
Fig 5: The Banking Sector is not profitable, and consolidation would save it

Deposits are still low although growing interbank credit market remains insignificant

200 90% 40 3.5
180 80%
160 3
70% 35
140
60% 2.5
120 30
50%
100 2
40%
80 25
30% 1.5
60
Deposits Offshore loans
40 20% 20
loan/Deposit Interbank loans RHS 1
20 10%

0 0% 15
0.5
Genesis

TN

Premier

ZBH

CBZ
Metropolitan

Renaissance

ZABG

Interfin

NMB

ABCH

FBCH

Stanbic
Barclays

10 0
Jan‐09 Feb‐09 Mar‐09 Apr‐09 May‐09 Jun‐09

Profitability is low credit risk is high

30% 10%
ZABG 9%
NMB Provision/Advances
20%
8% average
CBZ
10% 7%
Stanbic FBCH
ABCH
Barclays
6%
0% Metro
Interfin 5%
-2 -1 0 1 2 3 4
TN
ROE (%)

-10% 4%

3%
ReN -20%
Genesis 2%

-30% 1%

ZBH 0%
-40%
TN
ZBH

CBZ

FBCH

Interfin

NMB

Premier

Genesis
ReNaissan

Stanbic

ABCH
ce
-50%
Profit US$mn

Source: Reserve of Bank Zimbabwe, Legae Calculations

Table 1: Salient Features of the Listed Banks, 1H09

ABC Barclays CBZ FBC
Holdings Bank Holdings Holdings NMB Bank ZB Holdings
Share in Issue (mn) 146 2152 684 361 1641 159
Market cap (US$mn) 17.5 215.2 112.9 10.8 11.5 19.1
Price (USc) 12 9.5 16 3 0.7 11
Total Assets (US$mn) 35.54 116.63 219.77 64.63 24.69 37.70
Total Deposits (US$mn) 18.1 74.0 184.2 37.7 13.8 22.1
Loan/Deposit (US$mn) 13.0% 2.2% 46.0% 27.0% 63.0% 3.2%
Cost/Income 120.0% 88.0% 65.0% 85.0% 63.0% 267.0%
NIM 15.0% 8.0% 4.0% 10.0% 1.9% 2.1%
ROE 0.8% 0.6% 1.5% 0.9% 7.4% -4.0%

Source: Bloomberg, Members of the ZSE, Legae Calculations

Page 11 of 17
4. Performance Analysis

After a significant drop post the dollarization, Zimbawean equities

rallied substantially with the index rising by 162.2% from its trough in
March. In fact the Zimbabwean equities caught up with performances of
major SSA markets and the MSCI Frontier index. We underscore the
following:

• Defensiveness of company earnings is still very important. We

however advise investors to progressively seek exposure in the mid-
cap, defensive space. Our rationale is that the large caps have
probably reached full valuation. In our view the mid-caps have higher
upside risk in the wake of full economic recovery. In fact the top 5
companies by market cap make up 46.1% of the total market
capitalisation and about 47.1% of the country GDP estimate. The top
10 represent 66% of the ZSE’s market capitalisation.
• Most staple consumer companies performed exceptionally YTD.
The large cap consumer shares, Delta, Innscor, and Hippo have
appreciated by 100%, 87% and 123% respectively. Mid-cap stocks
like National Foods, OK, and CFI have appreciated by 733%, 600%
and 325% in that order. Econet, the only telecom company on the
ZSE went up by 223%.
• In our opinion, the Zimbabwean equities will maintain a lacklustre
performance to 2Q10 due to 1) lack of liquidity and 2) low profit
visibility and 3) little room for improvement in the discount rate
due to political risks notwithstanding the improvements.
Companies that released 1H09 results show low levels of profitability
in absolute terms, although the consumer sector has shown resilience.
• Market capitalisations remain tiny, but relative to the production
capacity of the economy valuations continue to remain justified in
most cases. On a market cap/GDP basis, Zimbabwean equities do not
provide much upside risk, but the catalyst is the recovery of GDP. Our
mid-cap universe is made up of companies whose market
capitalisations are between US$20mn and US$100mn.

Page 12 of 17
 Fig 6 : After a significant drop, Zimbabwean equities recovered

1.6

1.4

1.2

0.8
Nigeria
Kenya
0.6 RSA
Zimbabwe
MSCI Frontier
0.4

13-Jul-09

27-Jul-09
23-Feb-09

6-Apr-09

20-Apr-09

1-Jun-09

15-Jun-09

29-Jun-09

10-Aug-09

24-Aug-09

7-Sep-09
9-Mar-09

23-Mar-09

18-May-09
4-May-09

8.0%
Recent performance not really outstanding

6.0%
Jul‐09

4.0% Aug‐09

2.0%

0.0%
Nigeria Kenya Zimbabwe MSCI Frontier
‐2.0%

‐4.0%

‐6.0%

‐8.0%

‐10.0%

Source: Bloomberg, Legae Calculations

Page 13 of 17
Fig 7: YTD returns of the members of the ZSE as at 16.09.09

Natfoods 733%
CBZ 700%
Cafca 650%
OK Zimbabwe 600%
ZBFH 550%
Star Africa 372%
CFI 325%
TSL 300%
Cairns 280%
AICO 260%
Seedco 250%
PG Industries 250%
Old Mutual 250%
Zimpapers 233%
Econet 223%
Powerspeed 200%
M&R 200%
Astra 180%
Border 175%
GB Holdings 167%
Fidelity Life 140%
RTG 130%
Hippo 123%
RioZim 115%
ZHL 100%
Tedco 100%
NMB 100%
Hunyani 100%
Delta 100%
CAPS 100%
Afdis 90%
Innscor 87%
Barclays 80%
DZHL 70%
Turnall 67%
KMAL 67%
Afre 50%
BAT 46%
African Sun 38%
Hwange 38%
TA Holdings 35%
NicozDiamond 30%
Lafarge 25%
TPH 20%
PPC 17%
Gulliver 11%
Zimplow 0%
Zeco 0%
Apex 0%
MedTech‐10%
Interfresh
‐10%
Bindura
‐10%
Dawn ‐13%
FBC
‐16%
Steelnet
‐17%
Art ‐17%
Pioneer ‐20%
‐25% ABC
Radar
‐27%
Pelhams
‐28%
Phoenix
‐30%
Colcom ‐33%
‐40% Mash
‐40%Celsys
ZPI ‐44%
Chemco
‐45%
Falgold ‐47%
Truworths
‐50%
Red Star
‐50%
‐53% Ariston
Willdale ‐58%
Pearl Prop ‐62%
‐70% NTS
‐75% CFX
‐76% Trust
‐83% Edgars

‐200% ‐100% 0% 100% 200% 300% 400% 500% 600% 700% 800%

Source: Members of the ZSE, Legae Calculations Page 14 of 17

 Fig 8 : Profit visibility is low, and add to the risks

Profit visibility is low
14 50.0%

12
Profit (US$mn) 40.0%
10
Profit Margin (RHS)
8 30.0%

6
20.0%
4
10.0%
2

0 0.0%
Colcom

M&R

Natfoods
BAT

Nicoz 
RTG
TA HLD

DZHL

Rio Zim

Innscor
‐2
‐10.0%
‐4

‐6 ‐20.0%

110.00 
Market caps of our "mid cap" sector (US$mn)

90.00 

70.00 

50.00 

30.00 

10.00 
African …
PPC

Natfoods
PGI

RioZim
Dawn

BAT

AICO
Bindura
M&R

Colcom
Border

DZHL

RTG

OK Zim
Pearl Prop

CFI

Hwange
Mash

TSL

Star Africa

Source: Members of the ZSE, Company reports, Legae Calculations

Page 15 of 17
 Fig 9 : Zimbabwe still ranks poorly on Ease of Doing Business and corruption perception (2008)

Zimbabwe ranks poorly on ease of doing business at 159/182
200

180

160

140

120

100

80

60

40

20

0
Saudi …

Mozambi…

Cent. Afr. …
South …
France
Mauritius

Ethiopia
Japan

Namibia

Nigeria
Brazil

Ukraine
Mali
Singapore

Rwanda
USA

Australia

Malaysia

Chile

China
Zambia
Ghana
Sri Lanka

Uganda

Indonesia

Tanzania

Zimbabwe
Angola

Chad
DRC
Denmark

Turkey
Israel

Romania

Argentina

Cameroon
CPI (2008). Zimbabwe ranks poorly as well, 166/180
200

180

160

140

120

100

80

60

40

20

0
Spain
South …

South …

China
Burkina …
Madagasc…

Indonesia
Mozambi…
Liberia

Burundi

Cambodia
Denmark
Singapore
Finland
Canada
Barbados

Mauritius

Italy
Ghana

India
Tanzania
Argentina
Malawi
Zambia

Kenya

Angola

Chad
Iraq
Somalia
Zimbabwe

Source: World Bank, Transparency International, Legae Calculations

Page 16 of 17
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