By Addmore Chakurira
The year has not been easy for exporters at large on the back of a barrage of constraints such as an overvalued local currency, spiraling local costs and an unrealistic official exchange
Many exporting companies have complained bitterly about the uncompetitive exchange rate especially with relation to the government surrender value of $824 to US$1 with many viewing it as a tax on exports.
Are things really that bad for exporters? The local currency remains overvalued having appreciated by about 30% at the inception of the foreign currency auction system. From then to-date, the Zimbabwe dollar has only depreciated by about 34%.
Although the inflation rate is decelerating, we still remain in a hyper inflationary environment. Due to the unrealistic blend rate, most exports have become less competitive.
Local costs have continued to skyrocket with no meaningful re-rating in the exchange rate. Export margins have come down although it is generally agreed that businesses should be run on volume growth as opposed to margin expansion. However, the margins being enjoyed by most exporters – below 10% – are not sustainable and there is a great risk that margins will continue to shrink as the Zimbabwe dollar remains overvalued and punitive local costs continue to wreck havoc on many business models.
While there have been initiatives to boost exports, it is generally difficult for most Zimbabwean companies to access prepayments considering the perceived country risk and that the export markets are quite competitive. That said, ongoing efforts to pull the economy out of the woods should be commended although there is still need for more to achieve a turnaround.
If the situation does not change, exports of manufactured products could come under severe pressure.
There has been an upsurge in international commodity prices which generally applies across the board, encompassing base metals, minor metals, precious metals and “soft” commodities. Unfortunately, Zimbabwe is not benefiting much from the current commodities boom mainly as a result of capacity underutilisation.
The continued rise in the dollar prices of many commodities have been more than counter-balanced by the overvalued local currency. It is generally agreed that the overvalued Zimbabwe dollar is preventing the external windfall from generating an upswing in the economy. There are fears that the commodity boom might recede due to the rising world oil prices.
Zimbabwe will suffer as export receipts will decline in dollar terms because the country’s exports are mainly commodity-based with agriculture being the backbone of the economy. The inherent instability of commodity prices could have an even bigger impact on fluctuations in export earnings.
In the medium-term it appears as if the commodity price boom is rolling on unabated and, indeed, seems to be accelerating. Rising export receipts from commodities will boost the position on the current account of the balance of payments and there might be an increase in foreign direct investment flows relating to new mining ventures.
Is the oil price surge a threat to commodity boom? Over the past two years world oil prices have been rising, underpinned by the strong world growth and attendant rapid oil demand growth, limited spare capacity and ongoing geopolitical tensions.
There are fears that any further increases in international oil prices would bite the world economy by reducing the purchasing power of consumers and raising business costs, slowing down global economic growth rates. This would dampen the recent buoyancy in international commodity prices, however, it is not guaranteed that the prices of metals and minerals would stop rising, given the huge expansions taking place in China.
Slower global growth would negatively affect Zimbabwean exports, which are still struggling to recover.
Having said that, all hope is not lost for Zimbabwe as there are investment opportunities, which might arise. There is a possibility that a natural gas-fuel refinery could be built as such potential investments become more attractive with sustained high global oil prices.
For instance, in South Africa, Sasol plans to build a plant which would convert 400 000 tonnes of soyabeans a year into 80 000 tonnes of diesel fuel. There are possibilities of opening a natural gas pipeline with gas deposits in the Lupane area. If the gas deposits were large enough such an investment would become more attractive with high oil prices. A sustained rise in international oil prices would, therefore, potentially furnish Zimbabwe with new opportunities to increase its self-sufficiency in respect of oil supplies.
This could strengthen its balance of payments position and reduce its vulnerability to increases in international oil prices. More reliance on alternative energy sources could also benefit the coal mining industry. What is more, upward pressure on oil prices could furnish added incentives for the government to introduce tax incentives for bio-fuels production to attract investment and expand the renewable energy sector in Zimbabwe.
*Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from the use of this article or its contents.