Nov. 28, 2010 -
PRLog -- Political Shackles Unmoved Little has happened since our last quarterly update to make us consider altering our view on the Zimbabwean economy. Indeed, the political climate remains unstable and has, therefore, continued to preclude much needed foreign investment entering the economy. This being the case, our real GDP growth forecast remains unchanged at 5.4% in 2010. Furthermore, we believe that growth will slow to 4.9% in 2011 as we have factored the negative impact elections could have on investor confidence. As we discuss in the political outlook in this report, the biggest single deterrent to foreign investors is a set of indigenisation regulations that limit the amount of equity a 'non-Zimbabwean' may own in a company. Sections of the coalition government are aware of the effect that these regulations are having on investment into the economy and moved to amend the laws in a bid to assuage investors' concerns. However, the amendments have done little more than to add further uncertainty to the business environment as it remains unclear how the legislation will ultimately be implemented. The lack of investment resulting from this uncertainty is affecting all facets of the economy, not least the country's external accounts. Indeed, we believe that the current account shortfall will reach US $1.1bn (20.4%
of GDP) in 2010 from an estimated US $918mn in 2009, and rise to US $1.5bn (23.6% of GDP) in 2011. In order to prevent a balance of payments crisis from derailing the economic progress made since the beginning of 2009, political and business environment reforms are sorely needed. Chief among these is the need to bring some clarity to security of tenure and how much foreigners will be allowed to own in the country. This will not only ensure foreign direct investment to bridge some of the current account gap, but will also help to reduce the structural deficit as investment in local capacity will boost the export sector and lower the reliance on imports. In addition to a shortage of foreign capital, the economy is also being constrained by a lack of domestic credit. Indeed, a loan-to-deposit ratio of about 55% is an indication of banks' unwillingness to lend. Where lending does take place, it is short term and very expensive. There are several reasons for this. For one thing, deposits are largely short-term demand deposits, meaning that the scope for long-term lending is limited. Secondly, given the absence of a lender of last resort (the Reserve Bank of Zimbabwe is bankrupt), banks have to be more prudent in their lending practices than they would otherwise be. Thirdly, a scarcity of acceptable collateral means that banks are unable to lend to large swathes of the economy.
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