IMF raises red flag on Zimbabwe, global geopolitical tensions heightens

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What made headlines in the week

The IMF executive board last week concluded the article IV consultation of 2017 on Zimbabwe which by and large raised a red flag over Zimbabwe’s fiscal imbalances, exchange controls and inconsistent policies. In its findings, the IMF said the ensuing fiscal imbalances have become unsustainable and are being financed by rising domestic borrowings. This expansionary fiscal stance has in turn curtailed net capital flows, and declining investor confidence have resulted in cash shortages, the fund implored. There is therefore a danger of implosion if authorities do not measure up in terms of fiscal consolidation. In the absence of broad based economic reforms, the envisaged agriculture induced economic growth will only be a short-term bump which will reverse in the mid-term. The state media likewise calculatively came to the defense of the subsidy based command agriculture model saying the net loss on subsidy estimated at $150 million will be far much lower than gains on reduced imports at $300 million. In more abstract terms it shows that government is determined to pay a $150 million (local equivalence) premium on $300 million hard currency which is worse off compared to the prevailing black-market exchange rates. Effectively this implies paying a 50% premium on the USD against 10% to 15% parallel market obtaining rates. Debt levels will essentially go up, with liquidity levels further shrinking while fears over the manipulation of the RTGS system will escalate.

In the week, the central bank was reported to have said that in addition to South Africa, Mozambique and Zambia, bond notes are now being sold in Botswana. This phenomena defies odds after earlier assessment characterized the currency as non-tradable in outside jurisdictions. The economy is badly import unappeasable due to the inability to produce optimally and competitively thereby giving room for import infiltration. The 4 countries stated above are a hub for local cross border traders and naturally markets for the local currency will thrive starving local banks which estimates a low ratio of 1:10 in terms of bond notes deposits to withdrawals. Authorities therefore have to concentrate on external debt clearance, fiscal realignment and attraction of credit lines. Fidelity Printers said gold deliveries went up 3.3% on the comparable period last year to 10 tonnes in the first 6 months period of the year. Regularization of gold panning and incentivisation through the exports incentive scheme has largely driven deliveries up. Heavy rains in the first quarter of the year curtailed production as operations were disrupted and this is likely to result in a shortfall on the targeted 28 tonnes at full year.

In companies, Proplastics reported that the board has approved construction of a $5 million plant while peer listed sugar processor Star Africa announced a $10 million commitment to the secondary plant upgrade after completion of the primary plant upgrade. Star Africa recorded a sharp surge in turnover and operating performance driven by strong volumes growth in the just ended financial year. The company is however still under-utilizing the plant with utilisation standing at circa 30% although the company said it is satisfying market demand. Meikles announced that Alwardy of Dubai has withdrawn its bid to acquire the entire outstanding shares in Meikles group. Elsewhere the political tempo in the country ahead of next year’s election is rising and with it the stock market too. Political parties have resumed rallies and bookmakers to date have written off the opposition with odds staked in favour of the ruling party. With almost a year the political sands beneath may however shift in either pendulum. Globally at the ongoing G20 summit the US president Donald Trump in a highly anticipated meeting met Russian President Vladimir Putin where they discussed Syria, Ukraine and North Korea. A temporary cease fire on Syria was successfully agreed at the meeting. North Korea last week launched what was believed to be an intercontinental ballistic missile with potential to reach the US state of Alaska further worsening geo political tensions. Russia and China have however been reluctant in pardoning the North.

Stocks

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Commodities

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Currencies

The dollar rose against a basket of the other major currencies on Friday after data showing that the U.S. economy created jobs at a robust pace last month supported expectations for a third hike by the Federal Reserve this year. The U.S. economy added 222,000 jobs last month the Labor Department reported, more than the 179,000 new jobs expected by economists. Figures for April and May were also revised to show that 47,000 more jobs were created than previously reported. The unemployment rate ticked up to 4.4% from a 16-year low of 4.3% in May, as more people looked for work, a sign of confidence in the labor market. But wage growth continued to lag, with wage inflation growing by an annualized 2.5% in June, below forecasts for 2.6%. The dollar initially fell against the yen amid concerns over the inflation implications of the weak wage growth data, before rebounding amid optimism over the strong headline number. The rapid pace of jobs growth reassured investors that the economy is on a strong enough footing to justify the Fed’s plans to raise interest rates once more this year. The Fed hiked rates at its June meeting and stuck to its forecast for one more rate hike this year, but the subdued inflation outlook has raised doubts over whether officials will be able to stick to their planned tightening path.

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