As January comes to a close, many businesses are still reeling from the year that was 2017. For some companies in Zambia, it was a mixed bag of fortune and misfortune. Many CEOs have since returned to the helm of their companies and are upbeat about the prospects of 2018. They will be sitting down with their management teams and looking ahead and digesting what lays in front of them in 2018.
For astute leadership, the primary source of information on the business environment that their companies are likely to face are economic reports. If the company’s budget allows, some CEOs will insist that their business development teams prepare economic reports that source information from various market research reports that discuss among other things the business environment of the year ahead. Less risk averse CEOs will opt to follow what is in the local news (through newspapers, local radio and TV stations). However, it is not so much about how the information about the macro environment is gathered, but how accurate and useful that information is in shaping the execution of a firm’s strategy over the course of the year. That’s what really matters.
For example, at Financial Insight, we look to reports from the IMF and World Bank for economic guidance and combine that with locally gathered information from sources such as Central Statistics. We have learned that the global economy is showing signs of recovery due to improvements in the trade, services and manufacturing sectors. For example in 2017 and 2018, global projected growth had been revised to 3.5% and 3.6%, respectively from 3.2% in the 2016.
Conversely, when we take on a company and analyze it, we look at the geographical presence of the company. For example, what we know is that the Sub-Saharan regional outlook remains challenging. Therefore, for any company that may be domicile in Zambia, but has business interests outside our boarders (or even prospects), regional markets may be challenging. Picking up the paper and following the recent happenings in Zimbabwe and Congo would signal instability in the medium term as the new regime settles down for the former and a clear road-map for elections is established for the latter.
However, CEOs must also draw lessons from the economic environment of the previous year. For example, although growth was projected to rise in 2017, it will barely return to positive territory in per capita terms in 2018 for the region as a whole and would remain negative for about a third of the countries in the region. In short, a CEO and his management team will be dusting their previous year’s financials and doing an evaluation of what they can do better in order to outsmart the flat macro environment.
For CEOs that have businesses only operating in Zambia, the domestic front is showing signs of improvement. However challenges to growth remain. Conversely, inflation forecasts indicate that it will remain at current levels for the reminder of the year and trend towards the lower band of the 6-8%, target range over the medium term. What this means is that, price elasticity for goods and services should remain in the same region over the medium term. However, the only threat to that is policies that introduce new surcharges in the value chain which threaten value. Therefore, it would be prudent for the CEO to query his Chief Financial Officer on what are the 2018 budget implications.
Finally, the CEO and their management will probably want to have a discussion around the gross domestic product (GDP). Over the medium-term, economic growth prospects are expected to improve, with the GDP growth for 2017 and 2018 revised upward to 4.3% and 5.1% from 3.9 and 4.6 respectively. The GDP conversation is necessary as it invites grandiose ideas of scaling up especially the ones whose value comes from economies of scale. Northward movement in GDP is indicative of an environment that can readily support scaling up of businesses albeit industry dependent. However, this has to be in tandem with liquidity being affordable and available. For this, the CEO looks to the Central Bank which has been acting to ease liquidity by reducing the monetary policy rate to 11% following consecutively reductions at each quarterly Monetary Policy Committee (MPC) brief.
Financial Insight anticipates further easing of liquidity over the medium term which will be good news for companies that have scaling up objectives in 2018. However, the crowding out of private sector in “game of thrones over money” remains a threat to access to liquidity. All eyes will be on what the IMF’s next move will be as this will have an impact when it comes to options for stakeholders.