2018 Monetary Policy Review

Published: 09 February 2018

The RBZ Governor presented the 2018 Monetary Policy statement on Wednesday, 07 February 2018.

Key themes were centred on improving the foreign currency market; enhancing export incentives in order to increase exports; boosting FDI through encouraging Diaspora investments and guaranteeing safety of foreign investments; as well as strengthening the liquidity management system to mop up excess liquidity in the economy. As was with the Fiscal Policy Review, there were no major economic policies to underpin the intended economic turnaround. Although the two policies seem to be in gear in as far as stimulating production in the productive sectors of the economy and attracting foreign investment inflows, they are largely expansionary.

In our opinion, the sectors likely to benefit from the policy pronouncements (although not necessarily in real terms) include: exporters, retailers/consumers and financials. Sales volumes for retailers/consumers (particularly those that sale durable goods) could spike in the medium term driven by the need to preserve value through accumulation of real assets. We predict a higher and more volatile inflation rate for 2018 fuelled by increased quasi-fiscal expenditure and financing of the fiscal deficit. Financials are likely to benefit from increased transactions though we note that asset quality pressures will remain elevated.

In our view, the statement is unlikely to improve current market sentiment at least in the short term, due to the absence of tangible solutions that deal with the crippling liquidity crisis and foreign currency shortages. The stringent exchange control environment will continue to sustain parallel market rates. However, the long term outlook looks promising, in light of the inflation forecast. In our view, the stock market will find favour as long as inflationary pressures and forex shortages persist despite the weak economic fundamentals. Even after the 2017 rally, we believe investors can earn decent returns on the ZSE (if they adopt a selective approach), given the limited investment options. We believe that equities remain the asset class of choice for long-term portfolio performance.

For our top picks, we are not sector specific and recommend investors adopt a bottom-up strategy. On this basis, blue chip stocks will offer defensive qualities that can limit the downward risk of equity portfolios. Our picks tend to be monopolistic, lowly geared, well managed businesses with strong cash generation abilities and solid balance sheets. These include companies such as Afdis, BATZ, Delta, Econet, Hippo, Innscor, Old Mutual Plc, Padenga, PPC and Seed Co. Those companies that produce Zimbabwe’s scarcest resource (foreign exchange) and or have operations outside the country will remain in favour, especially Old Mutual Plc, Padenga and PPC. In our view, OMIR remains attractive for those who need to bring money in Zimbabwe through the normal banking channels - at a 60% premium before charges.

- Imara