The Zimbabwe Consumer Sector - Easing the Squeeze - Equity Research - IH Securities

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 Sector Insight
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 6 August 2018

 The Zimbabwe
 Consumer Sector
 Easing the Squeeze

 0

The Zimbabwe Consumer Sector
 6 August 2018
Key Themes
The Zimbabwe Consumer Sector: Easing the Squeeze
 Improving macro fundamentals driving spend
 A significant growth in consumer spending is anticipated as the economy is forecasted to grow by 4.5% in 2018, premised on strong performances in agriculture
 and mining sectors which employ 68% of the country’s economically active population. The agriculture and mining sectors are projected to grow by 10.7% and
 6.1%, respectively, in 2018. Growth in agriculture is anticipated to emanate from increases in maize and tobacco output, with tobacco output for 2018 already
 surpassing the peak of 236mn kg in 2000 as 236mn kg of tobacco deliveries worth circa $700mn have been made thus far. Mining growth will be underpinned
 by higher international commodity prices and the availability of funding from the government to boost output. Thus, gold production for the first quarter of 2018
 increased 68% to 7.8 tonnes from 4.6 tonnes. The ushering in of new economic reforms is also expected support economic growth in 2018 due to an improved
 stance on the ease on doing business by the government across various sectors. The Indigenisation and Economic Empowerment Act has now been amended
 to be restrictively applicable to diamond and platinum extractive industries only. Resultantly, a renewal of investment interest has ignited an improvement in the
 tourism sector as the national average hotel occupancy rate has increased to 47% in the first quarter of 2018 from 38% in 1Q17. Sustained demand by
 consumers may also be justified by an expanding trade deficit which grew by 34% to $1.26bn between February and June 2018 from $937.81mn in the same
 period last year. The country imported $2.87bn against exports of $1.62bn in the period in review versus imports of $2.25bn and exports of $1.31bn in the prior
 comparable period, worsening the country’s foreign currency crisis.

 Largely informalized employment dynamics, however, liquidity remains strong despite lack of cash
 Zimbabwe faces high levels of unemployment dating back to 2009, the beginning of a period that saw a worsening economy characterized by company closures
 and persistent liquidity challenges. The remaining companies were operating at low capacities which did not accommodate the increasing work-force from the
 educational system. Despite that the economy has historically struggled to create new employment opportunities at an adequate pace to make meaningful
 inroads in reducing unemployment and poverty, there has been a renewal of investor-interest in the form of several memoranda of understand (MOUs) being
 signed including a $4.2bn platinum deal with Karo Resources of Cyprus which would create tens of thousands of jobs. The informal sector largely comprises of
 small-scale farmers and artisanal miners with 70% of maize and tobacco output being from small-scale farmers with no access to funding from financial
 institutions and 50% of gold deliveries to the Fidelity Refinery printers being from artisanal farmers. According to the IMF more than 60% of the Zimbabwean
 economy is informal, making it one of the biggest informal markets in the world. Nonetheless, there has been significant improvement in bottom-of-the-pyramid
 liquidity due to strong performances in the agriculture and mining sectors. Despite that the economy remains highly informalized, there has been a significant
 proportion of sales that migrated to the formal markets in the retail sector due to the economy becoming a cash-less society as consumers avert premiums in
 the informal sector. The has been an upsurge of fin-tech solutions as the market consistently evolves to become increasingly financially inclusive amid the
 liquidity crisis, with over 90% of retail transactions being electronic.

 Consumer sector earnings post strong recoveries in FY17
 We saw counters in the consumer sector including Axia (AXIA: ZH) and OK Zimbabwe (OKZ: ZH), posting record-high growth in earnings in FY17/18 year-ends
 which could be attributed to a significant migration of informal business to the formal sector, as the financial sector has become highly financially inclusive in the
 advent of cash shortages. The Statutory Instrument 64 (SI64) of 2016 which was gazetted to impede the importation of basic consumer goods such as
 vegetables, cooking oil and staple foods from neighbouring South Africa in favour of local manufacturing and businesses also contributed to the growth in
 earnings the sector recorded. Delta (DLTA: ZH) lager beer volumes recorded the highest growth over the period as they rose 27% as a result of consumers
 moving up the product chain, implying improved disposable incomes. The mix shifted towards premium beer as the contribution rose to 28% from 26% in FY17
 while mainstream and economy beers dropped to 58% (from 59%) and 14% (from 15%) respectively. Aggregate volumes, as a result were up to 6.97mn hl,
 from 6.10mn hl in FY17, a 14.3% increase. OK Zimbabwe’s strong performance, attributed to a substantial migration of transactions from the highly cash-
 dependent informal sector to the formal sector, bears testament to the significant shift towards ‘plastic money’ as point-of-sale (POS) transactions constituted
 82% of payments during FY18. Resultantly, revenue for the FY18 improved by 23.4% y/y to close the reporting period at $582.88mn, having increased from
 $472.40mn in the prior year FY17. Retailers indicated that their product mixes were being skewed towards lower profit margin products, indicating the highly
 liquid bottom-of-the-pyramid earners, which are highly dependent on the primary sectors.
 Investment thesis
 Activity in the retail operating environment is expected to remain relatively firm, with robust performance in primary sectors continuously aiding the group’s
 performance as disposable incomes and average spend expand. We also expect the government’s 15% salary rise for civil servants to give a rise to performance.
 Food retail is the most significant component of the consumer sector, with about 34% of total annual consumption expenditure, compared to South Africa, 19%
 or the UK, 10% being spent on food and groceries, with staples (particularly maize meal, bread and sugar) being the most popular food items. We expect food
 and groceries to be mainly sourced in the formal market, with growth in low-income segments, which is dominated by OK Zimbabwe (HOLD, TP: $0.26),
 commanding an estimated over 30% market share, as we anticipate the liquidity crisis to persist. We estimate that OK Zimbabwe trades at a PER (+1) and
 EV/EBITDA (+1) of 16.2x and 7.6x, respectively vs regional peers at a PER (+1) and EV/EBITDA (+1) of 21.2x and 10.8x, respectively. We expect firm demand
 in Simbisa (SIM: ZH) ahead of its secondary listing on AIM. We estimate Simbisa trades at a PER (+1) and EV/EBITDA (+1) of 23.0x and 11.2x (peers at 16.7x
 and 11.8x, respectively), thus estimating a TP of $0.50 and giving a HOLD recommendation. We hasten to add that a flight to assets as investors de-risk RTGS
 dollars has driven market valuations resulting in high face value multiples, on face value our Consumer universe trades on PER (+1) of 23.2x, however after
 applying on the Old Mutual Implied Rate discount, the universe trades on PER (+1) of 10.6x.

Research Team Contact Details
Lloyd Mlotshwa Joan Takaindisa Physical Address Tel: +263 (4) 745 133/139
lmlotshwa@ih-group.com jtakaindisa@ihsecurities.com 4 Fleetwood Road
 Alexander Park Email: research@ihsecurities.com
Michelle Mangwanya Emilia Chibanguza Harare
mmangwanya@ihsecurities.com echibanguza@ihsecurities.com Zimbabwe Website: www.ih-group.com

Equity Research
 The Zimbabwe Consumer Sector
 Sector Insight

Contents
 Executive Summary 3
 Consumer Universe Valuation Table 5
 The Evolution of the Zimbabwean Consumer 6
 Macroeconomic developments; cash crunch fundamentals 6
 Treasury Bills crowd out private sector lending 6
 Zimbabwean incomes continue to lag SSA peers 7
 Rebounding income levels 7
 Factors impacting household incomes and livelihoods 8
 Socio-economic landscape: Food security through the government 9
 Informalization of the economy 10
 Premiums and the purchasing power parity 10
 An adoption of the digital new world order 10
 Civil service salary increment signals a potential salary hike in private sector 10
 Improved FDI a potential catalyst for job creation 11
 Economic Scenario Analysis 12
 Liquidity Crunch Fundamentals: Burgeoning Money Supply 13
 Government borrowing eases the short-term squeeze 13
 Treasury Bills crowding out the private sector 13
 Decelerating trade deficit improving the external BOP 13
 Currency resolution now critical for ongoing development 14
 Dollarization straitjacket impeding Monetary Policy 14
 Final IH Recommendations: Long-term Solutions 15
 SWOT Analysis 16
 Market Analysis 17
 Company Charts 18
 Synopsis of opportunities in the Consumer Sector 21
 Company Notes 23

 2

The Zimbabwe Consumer Sector
 6 August 2018
Executive Summary
Robust consumer sector driven by enhanced production in primary sectors
The consumer sector has proved resilient as improved sentiment spread throughout the country from the political highlights of 3Q17. Consumption has been
significantly sustained by liquidity at the bottom of the pyramid due to robust performance in primary sectors including agriculture and mining, which contribute at
least 25% of the economy’s GDP. The agricultural sector contributes 12-15% of the country’s GDP and employs 68.5% of the working population, with tobacco
being the second highest foreign currency earning export after gold, where at least 70% of tobacco farmers (up 40% y/y) are small-scale farmers planting on A1
farms. The sector continually receives significant government support through various programs including the Presidential Input Support Scheme as well as the
Special Maize Program for Import Substitution (Command Agriculture) with the intent of providing farmers with additional household income. The agriculture sector
is expected to grow by 10.7%, supported by the successful implementation of the extended Command Agriculture Programme to include soya beans and livestock
production and expected good weather conditions, capturing a broader spectrum of farmers. Gold remained a dominant export mineral in Zimbabwe in 2017,
accounting for 40% of mineral exports. Gold production is expected to grow to 30k tonnes in 2018 from 22.8k tonnes last year, with production already up 38%
from 1H17 to 17k tonnes for the first half of 2018, generating $715mn in foreign currency. Artisanal mining for minerals including gold substantially contributes to
household incomes in mining towns with 6 people depending on every individual involved in artisanal small-scale mining (ASM), as illustrated below in Figure 2.
Artisanal miners produced 13.2k tonnes of gold output, accounting for 53% of all gold deliveries to Fidelity Printers and Refiners (FPR) in 2017.

Figure 1: Employment in Agriculture (% of total employed) Figure 2: Participation in artisanal gold mining

 70.00 9000
 8000
 60.00 7000
 6000
 50.00 5000

 (000)
 4000
 %

 40.00
 3000
 2000
 30.00
 1000
 20.00 0
 2012
 1997
 1998
 1999
 2000
 2001
 2002
 2003
 2004
 2005
 2006
 2007
 2008
 2009
 2010
 2011

 2013
 2014
 2015
 2016
 2017
 2018P

 Zimbabwe Sub-Saharan Africa World
 Directly working in ASM Estimated number of dependents
Source: World Bank Source: Hilson

Emerging from deflation
The onset of rising prices reverted the economy from a deflationary spiral with the year-on-year inflation to December 2017 coming in at 3.46%. Annual headline
inflation, at 2.91% as of June 2018, increased 0.05% m/m from 2.71%, despite a fall in non-food inflation to 1.88% due to dampened demand in non-food
consumables including furniture and household equipment; recreation and culture; and clothing and footwear subcategories. In our view this is surprising as we
observed increases in non-food prices largely induced by the parallel market premiums on foreign exchange. Contradictorily, annual food inflation increased from
0.40% m/m to 5.12% in June, emanating from meat and vegetables supply constrictions ushered by a change of season, while production costs were escalated
by sourcing foreign exchange on alternative markets. The late onset of rain in the 2017/18 agricultural season subdued cereal and grain production as 1.1-1.5mn
tonnes of maize output is projected this year (vs 2.2mn tonnes in 2017) against national consumption of 1.6mn tonnes. Nonetheless, in-store inflation for the
various supermarkets is expected to be higher than the headline 3%, with supermarket group OK reporting in-store inflation as high as 7.8% in December 2017.
Consumer Price Index (CPI) basket includes 495 classified products which are weighted, with food and non-alcoholic beverages assigned the highest weighting
of 33.5%. It is plausible for retail chains to report high in-store inflation as stocks include ‘non-basic’ imported goods outside the scope of the 15 basic consumer
goods (including bread, maize-meal, cooking oil, and salt), reflect foreign exchange premiums.

 Figure 3: Annual Inflation (April 2011 - 2018) Table 1: Grain Prices (2016/17 - 2017/18)
 8%
 6% Crop 2016/17 2017/18 Change
 4%
 Maize 390.00 390.00 0.00%
 2%
 Sorghum 390.00 390.00 0.00%
 0%
 Wheat 480.00 500.00 4.17%
 -2%
 Finger
 -4% 390.00 390.00 0.00%
 Millet
 -6% Tobacco 2.71 2.81 3.69%
 Aug-13
 Aug-11
 Dec-11

 Aug-12
 Dec-12

 Dec-13

 Aug-14
 Dec-14

 Aug-15
 Dec-15

 Aug-16
 Dec-16

 Aug-17
 Dec-17
 Apr-11

 Apr-12

 Apr-13

 Apr-14

 Apr-15

 Apr-16

 Apr-17

 Apr-18

 Soybean 610.00 780.00 27.87%
 Sugar
 1,250 1,200 -4.00%
 bean
 Annual Headline Inflation Annual Food Inflation
 Annual Non-Food Inflation Groundnut 1,200 1,300 8.33%

 Source: Zimstat Source: GMB

 3

The Zimbabwe Consumer Sector
 6 August 2018
Executive Summary

 An overcast shadow economy
 Saddled in acute foreign exchange shortages, confidence has been eroded, which led to a migration of critical functions of exchange bureaus and banks to
 the street, creating a shadow economy for almost every sector of economy. According to the IMF more than 60% of the Zimbabwean economy is informal,
 making it one of the biggest in the world after Georgia (64.9%) and Bolivia (62.3%). In terms of sustainable poverty levels, social justice and the labour
 market, the informal sector has indeed proved pivotal to the economy as it has been a considerable source of income and employment in a country where
 formal employment opportunities were limited. A limited formal market, heavy taxation and persisting red-tape restrictions on import policies are instrumental
 in the emergence of the informal sector as the overall manufacturing sector functions at minimal utilization to virtually no output. Informalized and unregulated
 bureaus exchanges activities surged following the introduction of bond notes in November 2016 coupled with acute shortages of hard currency, which
 created a parallel exchange market in which bond notes are traded at a significant premium, despite being officially at par with the US dollar.

 Fig 4: Working Status, Zimbabwe economically active population Fig 5: Official % of economically inactive population for 2018

 Retired
 2017 2016 14
 Informal employed
 12
 Communal farmer
 10
 Part-time formal employed

 Student 8

 %
 Full-time formal employment 6
 Housewife 4
 Self-employed 2
 Unemployed
 0
 Egypt Kenya Zimbabwe SSA Mauritius Nigeria Tanzania
 0 5 10 15 20 25
 %
 Unemployment rate
 Source: ZAMPS Source: World Bank

 A cashless solution for a crippling cash crisis
 In response to heightened shortages of physical cash, Zimbabwe has been forced to evolve from a predominantly cash culture to a growingly cash-less
 society. The year 2018 marked the insurgence of bottom-of-the-pyramid liquidity and improved financial inclusion through easily accessible and low cost
 financial services with mobile penetration in Zimbabwe hitting the 102.7% mark as infrastructure for electronic payments has been established. Recent
 indications from the Ministry of Finance suggest that approximately 96% of transactions in Zimbabwe are now electronic, with the RTGS constituting the
 largest contribution at more than 63% as shown below. Furthermore, the contribution of mobile-based payments processed through the national payment
 system (NPS) doubled from 10% in 2017 to over 20%, as shown below in Figure 7, in which Econet maintained its 98% market share through Ecocash. On
 a comparison basis aggregate electronic means of payments in terms of values and volumes grew significantly by 41% and 164%, respectively, in 2017.
 The large informal-sector is heavily reliant on cash transactions, creating a 3-tier pricing system with USD, bond notes and mobile-money, along an exertion
 of further strain on limited bond notes and pushing the premiums even higher, facilitating a migration of transactions from the informal sector to the formal
 sector. Financial inclusion still remains top priority as over 70% of the adult population still remains unbanked; however, mobile-money platforms have since
 bridged that gap with at least 80% of the unbanked in rural areas being able to purchase goods with mobile-money wallets. EcoCash, Zimbabwe’s leading
 mobile money transfer service, has made substantial inroads but more can be done to encourage the uptake of cashless solutions.

 Fig 6: Payments processed by the National Payment System (NPS) Fig 7: Mobile penetration in Zimbabwe vs Sub-Saharan Africa
 120 140%
 2018
 100 120%

 2017 100%
 80
 80%
 2016
 60
 60%
 2015 40
 40%

 2014 20 20%

 0% 20% 40% 60% 80% 100% 0 0%
 Total NPS transactions 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

 RTGS Mobile-money POS Cash Zimbabwe SSA Change in Zimbabwe mobile subscriptions

Source: RBZ Source: World Bank

 4

Valuation Table The Zimbabwe Consumer Sector
 6 August 2018

IH Consumer Universe Valuation Table 6-Aug-18

 Curre nt
 P/E EV / EBITDA P / BK Div Y ie ld
 Curre nt Ta rge t Upside /
Compa ny Ra ting P ric e Mkt Ca p ($ mn) pric e Downside 2 0 18 (/ E) 2 0 19 E 2 0 2 0 E 2 0 18 (/ E) 2 0 19 E 2 0 2 0 E 2 0 18 (/ E) 2 0 19 E 2020E 2 0 18 E
Consumer Sector
Axia HOLD 0.25 135.40 0.27 7.8% 14.5 13.1 12.2 4.9 4.1 3.5 1.8 1.5 1.2 2.5%
BAT Zimbabw e SELL 25.40 524.09 16.38 -35.5% 33.5 32.6 29.5 23.1 22.6 20.6 38.4 38.2 38.0 3.0%
Dairibord Zimbabw e BUY 0.14 50.12 0.22 55.6% 22.6 16.8 13.4 4.6 3.8 3.2 1.1 1.0 1.0 1.4%
Delta Corporation SELL 2.15 2,712.39 1.69 -21.5% 30.6 26.4 23.9 18.5 16.0 14.8 5.5 5.3 5.2 3.3%
Econet Wireless HOLD 1.23 3,188.74 1.21 -1.5% 22.6 15.7 12.9 8.5 6.7 5.6 4.2 3.3 2.9 1.9%
Innscor SELL 1.42 794.81 0.95 -33.2% 22.5 19.8 19.4 10.5 9.8 9.5 3.7 3.3 3.0 1.2%
National Foods SELL 5.61 383.68 3.29 -41.3% 18.3 19.4 19.6 13.9 14.5 14.4 3.9 3.5 3.2 2.6%
OK Zimbabw e HOLD 0.24 283.85 0.26 9.4% 17.1 16.2 15.7 8.4 7.6 7.3 2.9 2.7 2.5 3.0%
Simbisa HOLD 0.48 267.26 0.50 5.2% 23.0 15.3 13.7 11.2 9.9 8.9 12.4 8.1 5.9 1.5%
Weighted Averages/Totals 9,919.11 24.89 20.46 18.40 12.84 11.33 10.37 6.07 5.56 5.24 2.3%

Valuation Table @ 55% OMIR

IH Consumer Universe Valuation Table 6-Aug-18

 Curre nt
 P/E EV / EBITDA P / BK Div Y ie ld
 Curre nt Ta rge t Upside /
Compa ny Ra ting P ric e Mkt Ca p ($ mn) pric e Downside 2 0 18 (/ E) 2 0 19 E 2 0 2 0 E 2 0 18 (/ E) 2 0 19 E 2 0 2 0 E 2 0 18 (/ E) 2 0 19 E 2020E 2 0 18 E
Consumer Sector
Axia BUY 0.11 60.93 0.27 139.5% 6.5 5.9 5.5 2.2 1.5 1.1 0.8 0.7 0.6 5.5%
BAT Zimbabw e BUY 11.43 235.84 16.39 43.4% 15.1 14.6 13.3 10.5 10.2 9.3 17.3 17.2 17.1 6.6%
Dairibord Zimbabw e BUY 0.06 22.55 0.22 246.2% 10.2 7.5 6.0 2.1 1.6 1.1 0.5 0.5 0.4 3.2%
Delta Corporation BUY 0.97 1,220.58 1.69 74.4% 13.8 11.9 10.7 18.5 16.0 14.8 2.5 2.4 2.3 7.2%
Econet Wireless BUY 0.55 1,434.93 1.21 118.8% 10.2 7.1 5.8 3.4 2.5 1.9 1.9 1.5 1.3 4.3%
Innscor BUY 0.64 357.67 0.95 48.4% 10.1 8.9 8.7 5.0 4.7 4.4 1.7 1.5 1.3 2.6%
National Foods BUY 2.52 383.68 3.29 30.5% 18.3 19.4 8.8 6.4 6.5 6.4 3.9 3.5 1.5 5.7%
OK Zimbabw e BUY 0.11 127.73 0.26 143.2% 7.7 7.3 7.1 3.5 2.9 2.7 1.3 1.2 1.1 6.7%
Simbisa BUY 0.22 120.27 0.51 133.8% 10.3 6.9 6.2 5.3 4.7 4.2 5.6 3.7 2.6 3.4%
Weighted Averages/Totals 5,542.95 15.06 12.77 11.00 9.64 8.57 7.90 2.87 2.63 2.35 4.4%

 5

The Zimbabwe Consumer Sector
 6 August 2018

The evolution of the Zimbabwean Consumer
The changes shaping the consumer sector over the past years have been significant enough that companies are having to reexamine their business strategies in
order to align themselves with the country’s current economic position. Zimbabwe is home to over 16 million people whose consumption patterns have been
impacted by several drivers which intensified in the last year and these include weak economic fundamentals, historical reforms in the political sphere, technological
developments and an overall rise in complexity of decision making for consumers.

Macroeconomic developments: Cash crunch fundamentals
Zimbabwe’s economy recovered significantly in 2017 after growing by a marginal 0.6% in 2016 to a growth rate of 3.7% in 2017, outperforming government’s
initial target of 1.7%, on the back of a strong agricultural performance as well as the mining and service sectors, particularly tourism and communication which
also aided the economy’s growth while electricity generation maintained adequate supply for the productive sector. Resultantly, the country’s consumer spending
keeps surging as demand for basic and FMCG goods continues to grow along with a 56% increase in broad money supply over the last 2 years, concomitant
growth in GDP. As a net-importer, the shortage of foreign currency hampers efforts to boost economic growth as it impedes sectors which range from milk output
to manufacturing. Volatile foreign exchange premiums on the parallel market translate to operational inefficiencies in most businesses as they require forex to
purchase critical raw materials and RBZ, with a backlog of well over $500mn in foreign payment obligations, often fails to meet the currency needs of local
businesses. Sustained demand by consumers may also be justified by an expanding trade deficit which grew by 34% to $1.26bn between February and June
2018 from $937.81mn in the same period last year. The country imported $2.87bn against exports of $1.62bn in the period in review versus imports of $2.25bn
and exports of $1.31bn in the prior comparable period, worsening the country’s foreign currency crisis. The surge in consumer demand came on the back drop of
excessive budget deficits. The budget deficit was largely financed through domestic sources, particularly issuance of treasury bills; increasing Zimbabwe’s
domestic credit which was up 59% between February 2018 and 2017, from $3.9bn last year to $6.2bn, the country’s ever-widening deficit in the face of limited
external lines of credit. Banks now have a preference to TBs that earn steady interest, are deemed to be more secure and are easier to get as opposed to lending
out to the private sector, particularly during this time when the economic environment has not been favourable to most companies. Excess liquidity caused by
coupon payments and the maturities of TBs during 2017 also created a stock of RTGS dollars.

Fig 8: GDP Growth: Zim vs SSA vs Emerging & Developing Economies Fig 9: Exports, imports and trade balance 2009-2018P

 12% 50% 10
 Zim Agic, Mining and Manufacturing

 10% 40% 8
 Annual GDP Growth

 30% 6
 8%
 20% 4
 growth

 6%
 $bn

 10% 2
 4%
 0% 0
 2010 2011 2012 2013 2014 2015 2016 2017 2018
 2% -10% -2

 0% -20% -4
 2011 2012E 2013 2014E 2015 2016 2017E 2018P
 -6
 Zim Agriculture (RHS) Zim Mining (RHS)
 Exports Imports Trade Balance
 Zim Manufacturing (RHS) Emerging & developing economies
 Sub-Saharan Africa Zimbabwe

Source: World Bank, IMF, Ministry of Finance Source: World Bank, IMF, Ministry of Finance,

 Treasury Bills crowd out private sector lending
 There was a continued proliferation of TBs in 2017 (total stock estimated at $2.5bn in June 2017), with Government looking to fund programmes like Command
 Agriculture amongst other expenditure items. The marginal increase in bank loans from $3.69bn in 2016 to $3.80bn in 2017 versus an increase in TB stock
 of $1.75bn from the last recorded figures in 2017, in our view reflects a squeezing out of private sector credit. Banks now have a preference to TBs that earn
 steady interest, are deemed to be more secure and are easier to get as opposed to lending out to the private sector, particularly during this time when the
 economic environment has not been favourable to most companies. The rising exposure to Treasury Bills became less of a concern for most banks as
 government continued to honour coupon payments as well as maturity dates. The last figures given by the RBZ pointed to Treasury Bills stock of $2.5bn as
 at June 2017 which continues to grow, however various reports are pointing to TBs of up to $5.2bn as at the end of 2017, with nothing confirmed. Bank loans,
 though higher than in prior year, are growing at a slower pace ($3.980bn in 2017, up from $3.69bn). There is a clear strategic shift towards TBs within the
 banking sector given the tax-free interest spread and prescribed asset status conferred on the instruments; this seems exacerbated by the perceived lack of
 quality borrowers despite improved high-level macro indicators on the loan book side. Effectively this equates to a crowding out effect of private sector
 borrowers and we are already seeing SMEs sifting out of commercial bank loan books and being forced to borrow in the MFI space where interest rates will
 be higher and tenures shorter. Going forward most banks seem intent on lending specifically to export generating businesses which provide a hedge to the
 vagaries of the local economy but more importantly generate hard currencies to replenish struggling nostro accounts.

 6

The Zimbabwe Consumer Sector
 6 August 2018

 Fig 10: Private Sector Borrowings Fig 11: Split in M3

 180% 4500 9,000 90.0%
 160% 4000 8,000 80.0%
 140% 3500 7,000 70.0%
 120%
 3000 6,000 60.0%
 100%
 2500 5,000 50.0%
 80%
 2000 4,000 40.0%
 60%
 1500 3,000 30.0%
 40%
 20% 1000 2,000 20.0%
 0% 500 1,000 10.0%
 -20% 0 - 0.0%
 Jan-12

 Sep-12
 Jan-13

 Sep-13
 Jan-14

 Sep-14
 Jan-15

 Sep-15
 Jan-16

 Sep-16
 Jan-17

 Sep-17
 Jan-18
 May-13

 May-15

 May-17
 May-12

 May-14

 May-16

 2009 2010 2011 2012 2013 2014 2015 2016 2017

 M1 M2 M3 M1 as a % of M3
 Private Sector Credit Private Sector Credit Annual Growth
 Source: RBZ Source: RBZ

Zimbabwean incomes continue to lag SSA Peers
Rising consumer demand, aligned with annual growth of around 8%, is likely to add around $1.1tn to Africa’s aggregate GDP by 2019, with Ethiopia and, Uganda
among the fastest expanding markets, and large economies including South Africa, Nigeria, and Egypt continuing to perform strongly. Consumption still remains
relatively subdued in Zimbabwe despite recent growth as a result of a net income per capita which falls well below peer SSA countries, as reflected in Figure 8
below. Unsurprisingly, given low per capita income, consumption expenditure per capita too falls in the lower range of comparables. Zimbabwe ‘s consumption
per capita is however, closer in comparison to peers which is explainable by the low savings culture in Zimbabwe, where consumers spend most of their income
and save very little.

 Figure 12: Net income per capita, Zimbabwe vs Peer SSA Figure 13: Consumption Expenditure per Capita, Zimbabwe
 Countries; 2013 vs Peer SSA Countries, 2017

 10105 7000 6812
10000 6000
 7952
 8000 5000 4540
 6292 3506
 4000
 6000
 3000 2230
 3685
 4000 2000
 890 1065
 1790 646 568
 2000 1239 1118 1466 1000
 0
 0

 Source: World Bank Source: World Bank

Rebounding income levels
Zimbabwe’s GDP per capita remains well below peer SSA countries, despite rising from $1,004 to $1,112, as reflected in Figure 7 below. The country’s consumer
sector was however constrained dating back to dollarization which has slowly been worsening the liquidity position of the country, with 2017 facing the worst cash
crisis since the hyperinflation era. Faced with limited capacity to control the money supply, the central bank has struggled to balance out the impact of liquidity
shortages on the market. The 2017 year saw a spiraling of weak economic fundamentals characterized by huge imports versus low exports, subdued production
capacity, low foreign direct investments, low incomes and high unemployment, a rise in multi-tier pricing which translated to inflationary pressures, a weak banking
system which aided in currency premiums and a fiscal position reflecting unhealthy government spending. Nonetheless, the consumers in the economy are poised
for rising income levels which will see a rise in consumer spending in the near future. Consumer spending will largely be driven by consumption in rural areas with
agriculture projected to grow 10.7% in 2018. Furthermore, rising income levels in rural areas would trickle down to urban agri-value addition businesses, and thus
increasing the average customer spend in urban areas as well.

 7

The Zimbabwe Consumer Sector
 6 August 2018

 Fig 14: GDP per capita (current USD), 2008-2018P Fig 15: Net Official Development Assistance (ODA), 2008-2018P

 40%
3500.0
 80 40%
 30%
3000.0
 30%
2500.0 20% 60
 20%
2000.0 10% 10%
 40
1500.0 0%
 0%
1000.0 -10%
 20
 -10%
 500.0 -20%

 0.0 -20% 0 -30%
 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018P 2012 2013 2014 2015 2016 2017 2018P
 Zimbabwe
 Zimbabwe Sub-Saharan Africa Sub-Saharan Africa
 Least developed countries
 Change in GDP per capita Change in Net ODA received per capita
 Source: World Bank, IMF Source: World Bank, IMF

 Factors impacting household incomes and livelihoods
 The agriculture sector contributes about 12-15% to GDP, employing close to 30% of the country’s working population and is a major source of livelihood for more
 than 80% of Zimbabweans. Demand for casual labour opportunities remains below normal due to liquidity constraints and cash constraints affecting methods of
 payment (cash and in-kind). As such, the increasing cash shortages continue to negatively impact livelihoods across the country and is affecting the level of
 incomes that rural households usually earn from crop sales, remittances, and activities such as self-employment, brick molding, construction and petty trade
 during the projection period. Typical livelihood options available to communities in the cereal-surplus north and other areas include crop and vegetable sales as
 well as on-farm and off-farm casual labor mainly paid in-kind. In the south, remittances, labor opportunities, and livestock sales continue to be limited. Informal
 mining, especially gold panning, brick-molding and construction are common activities across most districts.

 Table 2: National and per capita consumption per commodity type Figure 16: Per capita consumption expenditure per commodity
 Type
 Annual
 National Per % of
 Annual Capita % of Total Annual
 Spend (mn Spend Consumption Average
 Commodity USD) (USD) Expenditure Income
 Bread 216.00 17.28 3.9% 3.0%
 Wheat flour
 for home- 21.48 1.72 0.4% 0.3%
 baking
 Cooking Oil 104.88 8.39 1.9% 1.5%
 Maize Meal 751.92 60.15 13.6% 10.6%
 Soybean
 63.14 5.05 1.1% 0.9%
 meal
 Rice 53.60 4.29 1.0% 0.8%
 Sugar 211.25 16.90 3.8% 3.0%
 Beer and
 740.20 56.94 12.9% 10.0% Bread Wheat flour for home-baking
 CSDs
 Liquid Milk 134.05 10.72 2.4% 1.9% Cooking Oil Maize Meal
 Cigarettes 369.18 28.40 6.4% 5.0% Soybean meal Rice
 Clothing
 Sugar Beer and CSDs
 Retail 86.40 6.65 1.5% 1.2%
 (formal) Liquid Milk Cigarettes

 Clothing Retail (formal) Other

 Source: RBZ; World Bank; USAID, IH estimates Source: RBZ; World Bank; US AID, IH estimates

 8

The Zimbabwe Consumer Sector
 6 August 2018

 Figure 17: Major economic shocks faced by Zimbabweans in 2015/16 Figure 18: Major Source of Income for Zimbabweans Agriculture

 30%
 Chronic Illnesses
 25%

 Marital and other social 20%

 Death of Breadwinner 15%

 10%
 Reduced Salary or pensions
 5%
 Sickness & Funeral related
 expenditures 0%

 Loss of Employmnet

 0% 20% 40% 60% 80% 100%

 Source: ZimVAC 2016 Source: ZimVAC 2016

Salaries and wages received regularly and irregularly were the highest sources of income in 2017 at 30% while income from other family members and own
business were at 28% each. The average monthly household income for August 2016 was estimated at $289.51 compared to average expenditure of $227.53
(about $63.58 is spent on food), this was below the poverty datum line of $477.12. It must however be noted that 80.6% of total households experienced loss of
employment or income source during the period. As a result, 51% of urban households were not confident that they would be able to meet their food and non-
food needs in the next 12 months. To assist with their requirements, about 30% of urban households have resorted to practicing urban agriculture. Other
households have resorted to selling household assets when faced with food challenges (10.8%). This comes at a time when food assistance from the government
was rather low, Bulawayo reported the highest as 4.2% of households received government assistance. NGO assistance was also subdued across all provinces
with the highest being in Matabeleland North (1.0%). At least 4.5% of households received cash assistance from relatives outside of Zimbabwe and 3.7% from
relatives within the urban areas. Fathers were reported as main contributors in 45% of the households while 34% reported the mothers as main contributors.
Fathers at 48% were contributing through salaries, wages and earnings while mothers at 26% contributed mainly through petty trade. At least 95% of households
had income above $40.14 while only 5% of the households had income above $1,000.

Socio-economic landscape: Food security through government
The issue of food security remains paramount for the nation of Zimbabwe, which is currently facing a number of challenges chief among them a huge debt
overhang, which together with the nation’s policy stance on issues regarding doing business in the country have made it difficult to attract the much-needed
funding for development. The government of Zimbabwe has also implemented a number of food assistance programs to assist the growing vulnerable households.
For instance, grain distribution through the Domestic and International Drought Disaster Appeal has benefitted 792,289 households, total monthly requirements
for these households (birth rural and urban) is 38,614MT. The delayed harvest during the 2016/17 season has also resulted in the extension of government
assistance to all 60 rural districts through May as well as support, including water, sanitation and hygiene (WASH), by external partners in prioritized districts, but
for a reduced number of beneficiaries. During the 2016/17 consumption year, about 71% of rural households received some support in at least one of the following
forms; food, cash, crop inputs, livestock inputs as well as water, sanitation and hygiene (WASH). All the rural provinces reported in the proportion of households
that received support except for Mashonaland West which had a slight drop from 70% in 2015/16 to 68% in 20/17. Fig 15 shows that most of the support in 2017
came in the form of food support which increased from 40% in 2015 to 59% in 2017 while cash support dropped from 31% in 2015 to 24% in 2017.

 Figure 19: Households which received support Figure 20: Sources of Support,

 90% 80%
 80%
 70%
 70%
 60% 60%
 50% 50%
 40%
 40%
 30%
 20% 30%
 10% 20%
 0%
 10%

 0%
 Food Cash Crop Livestock WASH
 Support Support Support Support Support

 2016 2017 2015 2016 2017

 Source: ZimVAC 2017 Rural Livelihoods Source: ZimVAC 2017 Rural Livelihoods

 9

The Zimbabwe Consumer Sector
 6 August 2018

Informalization of the economy
Among other economic challenges, Zimbabwe faces high levels of unemployment dating back to 2009, the beginning of a period that saw a worsening economy
characterized by company closures and persistent liquidity challenges. The remaining companies were operating at low capacities which did not accommodate
the increasing work-force from the educational system. The economy has been struggling to create new employment opportunities at an adequate pace to make
meaningful inroads in reducing unemployment and poverty. Thus, the informal sector largely comprises of small-scale farmers and artisanal miners. Since then,
Zimstat estimates an unemployment rate of 11% in 2017, this estimate has however been contested as it includes people who are into informal businesses.
According to the IMF more than 60% of the Zimbabwean economy is informal, making it one of the biggest in the world. In terms of sustainable poverty levels,
social policy and the labour market, the informal sector has indeed been important as it has managed to provide a considerable source of income and employment
in a country where formal employment opportunities were limited. Furthermore, the Zimbabwean formal market is rapidly shrinking due to red-tape restrictions
such as import policies and heavy taxations, hence the rise in the informal sector. The year 2017 saw an influx of vendors taking to the streets outside main
supermarkets and displaying products such as shoe polish, washing powder, bathing and washing soap at lower prices than what was being charged inside formal
shops.

Premiums and the purchasing power parity
Zimbabwe has been battling tight liquidity, for almost two years the system has been dominated by electronic balances with very little cash in circulation. Some
of the major impact of such a crisis include cost increase, reduced purchasing power, and unemployment. The country’s businesses and consumers have found
it increasingly difficult to access hard currency needed to buy goods and services, particularly those imported from abroad, weighing on the market’s decision-
making processes. The market can be significantly dictated by consumer behavior, primarily their preferences and choices. To this effect, the country has over
the years been considered a net importer of goods and services as local companies try and meet consumer expectations of quality and pricing. It is precisely for
this reason that both formal and informal retailers have had to stock up on products from South Africa, China and Dubai. Despite these developments, local
products have become more pronounced, with the government making commendable efforts to revive the industry and substitute local productivity.

An adoption of the digital new world order
With September 2017 being one of the key milestones of the Zimbabwean economic downturn, ordinary citizens had to once again face queues for fuel over and
above having to queue up long hours to access only a fraction of their cash balances. On this backdrop, there has been an ongoing drive by the government to
replace the use of banknotes with electronic platforms and reduce the economy’s dependence on cash. The use of digital modes of exchange have significantly
increased, with the past year representing a visible shift in the banking system. The shake in the banking industry has been characterized by declining use of
ATMs, over the counter transactions and adoption of e-payment systems. A large proportion of the population however relies on the informal sector who are
considered as the unbanked and depend heavily on cash transactions and this will remain a challenge on the full transition to paperless baking. The use of mobile
banking has also seen notable traction, with telecoms providers Econet (ECO: ZH), Netone, and Telecel developing mobile wallet platforms that represent
innovative integrations with retailers and banking firms. The consumer sector has had to embrace the adoption of digital banking, largely out of necessity to the
extent that electronic money now accounts for 96% of all payments in the country. Consumers are having to make choices on spending based on their liquidity
positions, limiting consumption to either a reduced basket or an adjustment to preferences as they remain liquidity constrained. Corporates have had to mitigate
by creating payment solutions that allow consumers to make non-cash payments indirectly increasing financial inclusion. Non-traditional banking in the form of
platforms including mobile-money has expanded; RBZ reports that mobile-money transactions grew from $5.8bn in 2016 to $18bn in 2017. As an added proxy,
POS machines in the market have grown from 20k in 2016 to 70k currently. With a number of factors driving cashless payment services growth, the consumer
sector has quickly adapted to the inevitable transition as both consumers and retailers constantly seek convenience in doing business. Despite the fast-paced
economic changes, the banking system has managed to meet demand for electronic platforms and to a larger extent provided efficient systems that have
contributed to most companies maintaining sales volumes and others experiencing an upsurge as a result of ease in transacting.

Figure 21: Zimbabwe market Mobile and Internet transactions January 2015 – January 2018

 3,500

 3,000

 2,500

 2,000
 $mn

 1,500

 1,000

 500

 0
 Jul-15

 Jul-16

 Jul-17
 Jan-15

 Jun-15

 Nov-15
 Dec-15
 Jan-16

 Jun-16

 Nov-16
 Dec-16
 Jan-17

 Jun-17

 Nov-17
 Dec-17
 Jan-18
 Apr-15

 Aug-15
 Sep-15
 Oct-15

 Apr-16

 Aug-16
 Sep-16
 Oct-16

 Apr-17

 Aug-17
 Sep-17
 Oct-17
 Feb-15
 Mar-15

 Feb-16
 Mar-16

 Feb-17
 Mar-17
 May-15

 May-16

 May-17

 Mobile Internet
Source: RBZ

Civil Service: Salary increment may signal potential salary hike demands in private sector
The government increased civil servants’ salaries by 15% following nation-wide strikes that brought state-hospitals and schools to a stand-still earlier this year. There
are approximately 250k workers, a representation of 35% of the formally employed working population, enrolled in the civil service. creating a substantial increase in
consumption. Although civil servants are least likely to be classified as low-income earners, the income gap is vast. In 2017, $3bn or 73% of the total government
budget was channeled towards the gross wage bill; this translates to an average per capita monthly wage of $1,000. However, there are great pay disparities between
the least paid civil servant (grade B1) alongside civil servants in grade D1 (mainly teachers) and the top management which includes deputy directors, in grade E1-5,
with grade B1 earning $296 and grade E5 workers earning a net $508. Nonetheless, the 15% rise is likely to significantly impact consumption with improved disposable
income increases the propensity to shift from staples like maize meal (illustrated below) to non-staples such as rice and pasta.

 10

The Zimbabwe Consumer Sector
 6 August 2018

 Figure 22: Zimbabwe Aggregate Public Service Wage Bill FY11-18E
 3.50 25%

 3.00
 20%

 2.50
 15%

 2.00
 10%
 1.50

 5%
 1.00

 0%
 0.50

 0.00 -5%
 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E

 Civil service wage bill GDP growth (%) Inflation (%)

 Source: Ministry of Finance

Traditionally the private sector has always taken a cue from the civil service when it comes to wage/salary negotiations and industrial action; we do believe that the
salary demands and capitulation of the government in awarding the 15% increment will trigger demands within the private sector as well. The Progressive Agriculture
and Allied Industries Workers’ Union of Zimbabwe (Paawuz) has been lobbying the government to increase the minimum wage of farm workers by 100% from $75 to
$150 per month following a salary increment of 4.2% or $3/day in 2017. Furthermore, earlier this year in May, the Zimbabwe Banks and Allied Union (ZIBAWU)
formally demanded a 60% salary increment from the Bank Employers Association of Zimbabwe (BEAZ) for banking sector employees; the employers have at this
point countered with an offer of around 3.4%. In the tourism sector, employees have been awarded a 5% salary increment announced by their National Employment
Council in May this year. Whilst these developments are positive for consumer spend and general demand; they do imply some inflationary pressure as well as forward
pressure on margins as corporates absorb potentially higher costs on labour.

Improved FDI a potential catalyst for job creation
We have observed a marked improvement in FDI commitments signaling greater investor comfort with the current government and its early approach to macro policy
and direction. The larger ticket commitments are understandably within the mining sector and in infrastructure mainly focused on power and roads. Already, current
infrastructure rehabilitation projects including the Emergency Road Rehabilitation Programme (ERRP) has seen the creation of 4,000 skilled and semi-skilled jobs,
feeding into both downstream and upstream industries, including the consumer sector. Naturally the election process will be watched closely by potential investors
and actual fund inflow will depend on the handling and outcomes of the process. We have however seen some early investors ahead of elections which include the
likes of Pepsi through Varun Beverages that have set up a bottling plant in Harare; we have also seen the capitalization and re-opening of previously closed businesses
like Eureka Mine in Guruve South, a potentially large producer of gold. As these projects come to fruition we anticipate that new jobs will be created which will in
essence begin the process of re-formalizing the Zimbabwean economy over time.

Table 3: FDI commitments reported in 2018
 Company Beneficiary Amount Description Progress
 Karo Resources - Cyprus Mining $4.2bn Development of a platinum mine expected to produce 1.4mn oz of pgm Deal signed
 MoU will enable investors to invest in the Tourism and Hospitality industry
 Touchroad International - China Tourism $1.2bn MoU signed
 local special economic zones, namely Victoria Falls
 Platinum
 Agriculture &
 Lovol Company - China $400mn Agriculture and mining Deal signed
 Princewood
 Enterprises
 Platinum
 Agriculture &
 Good Agro-Rising $40mn For the supply of chemicals for tobacco and other export-oriented crops Deal signed
 Princewood
 Enterprises
 Platinum Supply of irrigation equipment including centre pivots and drip irrigation
 China $80mn Deal signed
 Agriculture systems
 Power and Construction of a 400MW coal-bed methane-fired power plant and
 Sinosteel - China $1bn Deal signed
 Zimasco construction of 3 additional furnaces at Zimasco
 Nkosikhona Holdings Verify Engineering$5.2bn For the establishment for a coal to fuel plant Deal endorsed
 Leather and
 Comesa $2.6mn Will be used to bail out the leather and clothing sectors Grant
 clothing
 Hwange Power Expansion of the Hwange Power Station which was awarded October Commitment
 Sino Hydro $1.5bn
 Station 2014 but has been reaffirmed Affirmed
 Belarus Allied timbers $30mn Loan for equipment Deal sealed
 Zimbabwe
 Department of International Fund to enhance the capacities of vulnerable rural communities to
 Resilience £21.5mn Grant
 Development - UK withstand shocks and stresses
 Building Fund

 11

The Zimbabwe Consumer Sector
 6 August 2018

 Three-and-a-half-year facility expected to help small to medium private
 AfDB SME $25mn players more onto their working capital, address liquidity constraints, coverLoan extended
 the growing gap in forex needs
 Gwanda Solar
 CHiNT Electric $52mn Advance payment demand guarantee for 100MW Gwanda solar farm Unconfirmed
 plant
 MoU signed for a grant for the supply of additional machinery for SMEs
 India Indo-Zimbabwe $2.92mn MoU signed
 under the Indo-Zimbabwe project
 UK teaming up with Standard Chartered Bank to lend Zimbabwean
 CDC - United Kingdom Private sector $100mn Signed
 companies $100mn to the country's private sector

 Economic scenarios analysis
 While the MoF is forecasting economic growth of 4.5%, we highlight that there are significant downside and upside risks to the forecast, Table 1 presents the
 range of economic forecasts that we believe to be feasible for the country in 2017. The year 2017 saw the Zimbabwean economy making significant growth
 improvements largely on the back of a good agricultural season. The year 2018 is expected to continue on this positive trajectory, with the country’s GDP growth
 projection estimated at 4.5%. On this basis, total consumer spending is expected to increase as the government is working towards the development of local
 industries in order to lower the dependence on imports. The 2018 national budget indicated reforms in import tariffs and targeting special economic zones targeted
 at developing the manufacturing sector. In addition, the MoF announced an incentive framework promoting backward and forward linkages between the
 manufacturing sector and key value chain enabling sectors such as agriculture and mining. Already firms such as Axia are backward integrating into furniture
 through financing suppliers. The anticipated growth in manufacturing still faces headwind from currency shortages for inputs, it is however worth noting that
 investments in the sector have remained resilient with companies such as Trade kings investing $20mn and Unilever also putting in $8mn on plant improvements.
 During the last quarter of 2017, consumer facing businesses saw higher demand and recorded positive earnings due to economic uncertainties and speculation
 on currency. The country’s liquidity position is expected to be driven by growth in the Agricultural sector, Mining sector and tourism and therefore potentially
 translating into an increase in consumption.

Table 4: Economic Scenarios
 Bear Case Base Case Bull Case
 Agriculture
 5.5% 8.1% 10.7%
 Growth
 Agric should see some growth albeit
 Sector supported by the successful
 off a high base on government’s
 implementation of the extended command
 Command Agriculture programme.
 agriculture programme to include soya beans
 Downside risk to sector would be the
 and livestock production. Government will also
 insufficient rains. Additional downside
 focus on irrigation development and grain
 risk to maize forecast would be the No growth in maize production Cotton
 Underlying reserve strategies to enhance the sector
 prolonged dry spell that affected the production up 47%. Tobacco production
 Assumptions growth. Farmers are not able to use 99-year
 maize crop. We assume 50% decline up 7%.
 leases as collateral therefore will benefit from
 in maize production, 9% growth in
 loans from the banking sector, Assumes maize
 tobacco as we have seen more
 production up 2%, cotton production up 73%
 farmers registering for the crop and a
 and a 5% growth in the tobacco sector.
 20% increase in cotton production.

 Mining Growth 4.8% 5.5% 6.1%
 Sector growth weighed down by
 expected fall in gold, silver and iron
 Assumes strong performance in gold,
 ore prices. However, gold, diamond
 Assumes good performance in most diamonds, chrome and coal while platinum,
 and coal output are expected to come
 Underlying minerals and flat growth in platinum and palladium and nickel growth to remain flat.
 in higher y/y. Expect the scraping of
 Assumptions nickel. Diamond selling is expected to resume in 2018
 the indigenization act to bode well for
 following a successful consolidation of diamond
 sector beside diamond and platinum
 companies.
 still constrained to 49/51 law.

 Manufacturing
 1.5% 1.8% 2.1%
 Growth
 Growth based on improved agro processing
 Growth hinged on supportive policy value chains in foodstuffs, drinks and ginning,
 measures particularly in furniture, also aid supportive import management
 Growth expected from government’s
 dairy, and cement manufacturing. measures. Government also working on an
 Underlying protection however, downside risk from
 Sector to still be affected by liquidity incentive framework that strengthens the
 Assumptions forex challenges.
 challenges particularly as companies backward and forward linkages between
 continue to import raw materials. manufacturing and other sectors e.g.
 agriculture which should work in favour of
 manufacturing sector.

 Economic Growth 3.0% 3.8% 4.5%

 12

The Zimbabwe Consumer Sector
 6 August 2018

Liquidity Crunch Fundamentals: Burgeoning Money Supply
Government borrowing eases the short-term squeeze
Monetary conditions have generally remained accommodative and supportive of real economic activity. Of this growth, net credit to government rose by 70.45%
to $6.27bn, while credit to the private sector rose by 6.97% to $3.71bn. The increase in credit to the government continues to reflect increased reliance by the
government on the banking sector to finance its budget deficit, ahead of the general elections which have been set for the 30th of July this year. Broad money
supply stood at $8.11bn in December 2017, registering an annual growth of 43.77%, from $5.64bn in December 2016 whilst bond notes and coins in circulation
increased from $70.17mn in 2016, to $331.94mn in 2017. The increase in the RTGS position was largely driven by increased government financing through the
overdraft at the central bank and the issuance of treasury bills (TBs) and bonds, which increased from $3.2bn in 2016 to $5.2bn at the end of 2017. The increase
of around $2bn largely arose from securities issued for government projects which include the financing of grain producers as well as for financing the Command
Agriculture Programme. The government’s Command Agriculture programme, scheduled to extend to livestock, tobacco and horticulture in 2018/19, is intended
to boost output whilst increasing small-scale farmer income by buying grain for over the market value through grain merchant, GMB. Bank lending to local
economic agents recorded a 43.07% increase to $10.70mn in 2017. Credit to the private sector increased by 5.83% to $3.72bn in 2017, where household lending
constituted 23.40%, followed by agriculture at 18.44%. The substantial increase in money supply is therefore a reflection of the expansionary fiscal stance which
has continued to increase RTGS money from $954mn in 2016 to $1.73bn in 2017. Further, in line with the financial inclusion thrust, a number of banking and
microfinance institutions have up-scaled their financial support to some irrigation schemes which were rehabilitated by the government. Notable impact has been
recorded in Manicaland, Matabeleland, Midlands and Mashonaland provinces in respect of banana production, livestock production, mining and horticulture,
respectively.

Treasury Bills crowding out private sector
There was a continued proliferation of TBs in 2017 (total stock as at $2.5bn in June 2017), with Government looking to fund programmes like Command Agriculture
amongst other expenditure items. The marginal increase in bank loans from $3.69bn in 2016 to $3.80bn in 2017 versus an increase in TB stock of $1.75bn from
the last recorded figures in 2017, in our view reflects a squeezing out of private sector credit. Banks now have a preference to TBs that earn steady interest, are
deemed to be more secure and are easier to get as opposed to lending out to the private sector, particularly during this time when the economic environment has
not been favourable to most companies. Excess liquidity caused by coupon payments and the maturities of TBs during 2017 also created a stock of RTGS dollars
inadvertently chasing “safe haven” assets which included equities and naturally real currency which drove parallel rates upwards. After the transition in government
that occurred in November 2017, parallel rates started to decrease in anticipation of a change in the economy. However, liquidity problems have persisted, despite
the tobacco season having started as well as continued gold exports. RTGS dollars are still being created and the excess liquidity situation has not been averted.
This means that parallel rates have started going back up again, however at a slower rate than last year.

Figure 23: Tbs in the commercial banks

 80.0% 2500
 70.0%
 2000
 60.0%
 50.0% 1500
 40.0%
 30.0% 1000

 20.0%
 500
 10.0%
 0.0% 0
 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

 Treasury Bills TBs as a % of liquid assets TBs as a % of Total market deposits Liquid assets/ Total market deposits

Source: RBZ

Decelerating trade deficit improving the external BOP
According to R/BZ statistics, fuel accounted for about 22% of total imports in the first four months of 2018, with a total of $1.2bn spent in the commodity in 2017.
Fuel imports guzzled $474mn during the first four months of this year, significantly higher than the $383mn spent during the same period last year. Consequentially,
Zimbabwe’s trade deficit for the first four months of 2018 stood at $998.8mn which is far higher than the same period last year when it was $603.1mn, with the
country’s trade deficit in 2017 totaling $1.74bn. The BOP is one of the basic economic fundamentals indicating the country’s continued reliance on foreign goods
as local industry remains depressed and can only fuel a liquidity crisis for an economy relying on a multi-currency system. Agricultural produce and minerals form
the country’s exports while cereals and mineral fuels represent imports which have over the years continued to outstrip exports resulting in the widening of the
country’s trade deficit. The perennial nature of this deficit is of great concern as it represents a symptom of deeper structural weaknesses within an economy such
as high consumptive expenditure, low national savings, poor economic policies and heavy reliance on foreign borrowings. The decline in capacity utilisation within
the manufacturing sector has played a key role towards the unsound import levels, furthermore the growing informal sector has seen most of the unemployed
making a living from buying and selling products from abroad. Exports on the other hand recorded an improved position on the back of the 2016 Export Incentive
Scheme which encouraged different sectors to stimulate exports and thus enhance the country’s liquidity, the scheme is estimated to have secured $100mn which
is currently being utilized in the sustenance of small businesses and exporters with a view to growing the economy.

The new dispensation has brought about new hope for the country as reengagement has been the President’s mantra. The President has signed MOUs with
several countries, mainly China, for funding for various projects. The United Kingdom recently broke its lending drought for Zimbabwe as it availed a $100mn loan
facility to Zimbabwean companies as the country’s first direct commercial loan to the country’s private sector in more than 20 years. This was the biggest sign of

 13