The July 2013 elections gave Mugabe and his party Zanu-PF an extraordinary victory, ending the four-year coalition with Tsvangirai’s MDC (Movement for Democratic Change). According to observers, massive manipulation and fraud led to the overwhelming outcome. In February 2014, the EU further eased sanctions on Zimbabwe – to reward for political reforms made (under the previous coalition) and to open up business opportunities – 12 years after sanctions were imposed as a reaction against Mugabe’s human rights abuses. The EU will maintain direct sanctions against Mugabe and his wife and impose an arms embargo. UK and US sanctions are likely to remain in place at least until the 90-year old Mugabe passes away.

Impact on country risk

Ever since Mugabe’s re-election, economic recovery has been stalling notwithstanding the slight boost in diamond sales through Antwerp and Amsterdam on the backs of reduced EU sanctions. Limits on cash withdrawals led to large queues at banks end 2013, due to dollar shortage in an economy that replaced its ravaged currency by a multi-currency system based largely on US dollars. Low growth and a recent large drop in domestic demand might even hit Zimbabwe with deflation, while the hyperinflation period only ended 5 years ago. Most harmful to the Zimbabwean economy is Mugabe’s revitalised commitment to the ‘indigenisation’ policy, forcing all foreign- or white-owned businesses to surrender a 51% stake to black Zimbabweans, chasing away investors and foreign capital. Despite a slight increase in diamond exports to the EU, the current account deficit is still expected to reach about 18% of GDP in 2014, leading to a considerable financing gap on the external balance. Public finances are on shaky grounds as well, as low tax revenues and high obscure current spending create mounting domestic payment arrears. A deal with the IMF to reschedule Zimbabwe’s huge outstanding external debt remains distant while access to foreign borrowing is limited.
Consequently, a renewed fiscal crisis could lead to a return of the Zimbabwe dollar, should printing money be the only way for the government to find sufficient funds. Mugabe recently turned 90 and speculations about his health are growing. The post-Mugabe era could open doors to desperately needed reforms (relaxation of ‘indigenisation’), while foreign budget support and IMF-led debt rescheduling would become more probable. However, it is likely for political infighting over succession to counter actual progress, at least in the near term.

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com