An FSG On the Ground Insight: Anna Rosenberg, Head of Frontier Strategy Group’s Sub-Saharan Africa Research practice, recently on a research trip in Harare, finds that Zimbabwe holds large opportunities for business, despite the country’s dire economic and political crisis. Follow Anna on twitter @anna_rosenberg.
I don’t know what I was expecting when I arrived in Zimbabwe. It certainly wasn’t to land in the most developed country I had ever visited in Africa aside from South Africa (and I have been in quite a few countries throughout the continent). After years of hearing bad things about Zimbabwe, I was surprised not to find a more desolate and dangerous place.
(Above: Harare’s skyline)
The roads are better than in most African countries, although apparently they are in worse condition than they have ever been. Urban planning seems to have been well thought through in the capital Harare with wide avenues leaving ample space for motorists, pedestrians, and even cyclists, meaning traffic jams are less common than in other African cities.
The streets are not filled with the affordable and robust Toyota automobiles, which are well known for being able to handle potholes, the main characteristic of an African street. On the contrary, one sees Mercedes, Lexus, Opel, and Volkswagen cars, emphasizing Zimbabwe’s better road conditions and the historically higher purchasing power of its people.
Harare is relatively clean too; well-built houses with lush gardens are to be found in upper, lower, and middle-class neighborhoods, while in the slums dwellings are made out of solid stone and people live in apartments. But while they are run-down, they are still in much better condition than the slums of Nairobi and Lagos.
At first sight, Zimbabwe already defies expectations. In essence, the country seems a lot more attractive than the international media coverage would suggest.
A country held captive by its past
Zimbabwe’s apparent sophistication may be one of the reasons why it is still in a gridlock. Once one of Africa’s wealthiest nations, the country has suffered political and economic mismanagement that has prevented it from realizing its potential over the last several decades.
Despite this, even today many Africans outside of the country revere the country’s long-serving president Robert Mugabe. He liberated Zimbabwe from the colonial oppressor and created a place that, on the surface, is more developed than theirs. African leaders don’t understand why Zimbabweans are complaining. They live better lives and are more educated than most of their African peers. So why would they condemn him? On the contrary, Mugabe has recently been named chairman of the African Union, Africa’s largest political body, thereby encouraging, rather than condemning, his leadership style.
For Zimbabweans, Mugabe is both a hero and a villain. Herein lies the paradox that explains why Zimbabweans are paralyzed and have accepted the repeated destruction of the economy by the country’s political leaders. Even though Mugabe has limited their freedom and fostered toxic external relations that led to international sanctions, Zimbabweans cannot rebel against Mugabe and his Zanu-PF party. Mugabe liberated Zimbabweans, he gave them back the land that was rightfully theirs, and he educated them.
(Watch Anna’s video blogs from Harare on FSG’s YouTube channel, here.)
Politics – change lies in the air
While Zimbabweans are torn between adoration and rejection of the country’s current political leadership, change lies in the air. Everyone I spoke to is anxiously, though passively, awaiting the post-Mugabe era. Irrespective of who takes on power, “anyone will be better than Mugabe,” a local business leader told me.
As Mugabe just turned 91, local newspapers were filled with calls to make his birthday a national holiday. Billboards advertising the president’s ninetieth birthday still line the streets, carrying the slogan, “With age comes vision.”
However, Mugabe himself is preparing for the time of his eventual exit from politics. Surprising government reshuffles have marked the last few months. He expelled and publicly discredited the popular vice president, Joice Mujuru, long thought to be his chosen successor.
Not only is the ruling party marred by political infighting, but the opposition has also splintered as “everyone is trying to succeed Mugabe,” as Morgan Tsvangirai, Prime Minister in the Government of National Unity (2009-2013) and leader of one of the country’s main opposition parties, MCD-T, told me.
An economy in disarray
Amidst political rivalries, the economy has been neglected. The government’s 2015 budget is US$ 3.5 billion, but it has to shoulder a debt burden of about 8-9 US$ billion. About 90 percent of government expenditure is on wages. There is a liquidity crisis. Banks don’t lend money except on high-interest, short-term loans. Hundreds of businesses closed last year alone, further reducing the tax base.
GDP growth, which rose to double digits between 2009 and 2013, has plummeted to 1.8 percent in 2014. At the time of strong growth, the economy had just come out of hyperinflation, replaced the Zimbabwean dollar with the US dollar, and was growing fast from a low base. The strong U.S. dollar, while beneficial to the economy at that point in time, is now making everything in Zimbabwe expensive and exports uncompetitive.
Despite all the economic mismanagement and political squabbles, businesses continue to operate and find opportunities in the Zimbabwean market. After various conversations with business leaders, I noticed that no one talks about politics unless directly asked. Zimbabwe has been badly governed for too long for people to care anymore. They go on with their lives and do business as usual. Politics play out somewhere in the background.
While the formal economy is on the brink of collapse, business activity has moved underground. A parallel economy is emerging, taking over formal business structures. “The work that used to be done by big companies is now being done by small, semi-informal businesses at a cheaper price,” a real estate investor told me.
The FMCG sector in particular is benefiting from this move towards an informal economy in which more goods are purchased and sold on the streets. After seeing persistent growth in the last few years, the CEO of a consumer goods multinational company is planning to move some local manufacturing from South Africa to Zimbabwe.
“There are too many strikes in South Africa. Here we have a strong labor pool and excellent geographic position and we are confident that we will see much faster growth in the future,” she said. The market already accounts for the majority of sales for the company in the Southern Africa region.
Other businesses are also tapping into Zimbabwe’s strong talent pool and dollarized economy. “I would advise a multinational to come and hub in Harare, take advantage of the talent pool and manage the region from here,” the CEO of a local insurance company pointed out. In line with that, accounting firm Deloitte recently positioned its Central Africa practice in Harare.
Government interference in business – perception versus reality
Zimbabwe’s opportunities are real and plentiful, but many investors are still hesitant. Policies in the past have been detrimental to foreign investors, and businesses are afraid this could continue. Decades after the government’s redistribution of farm land owned by white Zimbabweans, the implementation of the indigenization policy, which requires 51 percent of firms in Zimbabwe to be locally owned, does not help shore up confidence.
However, the reality seems to be different. Several executives emphasized that, despite populist rhetoric, politicians don’t typically insist on implementing the indigenization policy. Generally, government interference in business seems to be relatively low. The perceived risk seems much higher than the actual risk.
According to the head of the country’s investment authority, “the indigenization policy is in reality much more flexible than assumed.” As of January, individual ministers responsible for certain areas of the economy have to decide on a deal by deal basis about the percentage of local ownership. As the country is in dire need of investment, this new regulation is in fact favoring foreign businesses, many of which remain majority foreign-owned.
High risk, high return
Without a doubt, it remains risky to do business in Zimbabwe as the government under Mugabe is unpredictable. However, Zimbabweans are hopeful that a post-Mugabe era can only be more prosperous.
“The next head of state will have to fix the economy to survive,” a local funds manager pointed out. The country’s new leader would not benefit from the “liberation credentials” that have given Mugabe a carte blanche.
“Whoever comes next won’t have more land to give. There are no longer any populist tools out there to use. If the economic environment doesn’t improve, people will go onto the streets” he reiterates.
It is impossible to predict if Mugabe will leave anytime soon, but foreign businesses are ignoring Zimbabwe at their own peril. As the economy is classified as high risk, assets are very cheaply priced, allowing companies to buy property and businesses that could easily be reestablished at a discount price just at a time when Zimbabwe is at the brink of major political change. Zimbabwe may very well be rising as Africa’s best-kept secret.