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Zimbabwe Recovery Huge Boon for Foreign Banks, Credit Markets – If Regulators Can Pull Off Reforms

With Zimbabwe’s infamous revolutionary-turned-dictator Robert Mugabe out and one of his main rivals left to pick up the pieces of an economy in tatters, the country’s prospects are anything but clear. Analysts are optimistic that policymakers can find a path to normalisation – creating significant opportunities for international and regional lenders, and the country’s credit markets, in the process. Tough decisions will need to be made.

Jan 30, 2018 // 9:27AM

In a region where the peaceful transition of power is a rarity, Mugabe’s removal was “spectacularly uneventful,” as one Harare-based observer put it to Bonds & Loans.

After the sacking of his Vice President and former head of the country’s intelligence apparatus, Emmerson Mnangagwa, in early November, Mugabe fuelled speculation that he would install his wife Grace in Mnangagwa’s place, in a bid to ensure her ascendency to the presidency thereafter; the army responded by placing him under house arrest. Three weeks later, after initially refusing to step down, Mugabe resigned, ending his 37-year reign that saw the nation’s impressive rise – and tragic fall.

A victim of endemic cronyism and gross mismanagement, Zimbabwe’s economy has tumbled for the better part of the decade. GDP growth tumbled from just under 14% in 2012 to less than 1% in 2017, while consumption declined sharply over the same period, stoked largely by excessive public spending and its twin consequences – hyperinflation, prompting its overweight reliance on the US dollar; offshoring; and the persistent unavailability of imported goods.

With unemployment in the formal sectors hovering at around 80-85% and GDP per capita at USD600, the third lowest globally, it is difficult to paint a clear picture of the true state of the overall economy. Some analysts put capacity utilisation – a crude measure of the extent to which productive capacity in an economy is utilised – at between 20% and 30%, which is extremely low and economically damaging given the strength of the US dollar, its quasi-official currency since the collapse of the Zim Dollar in 2009.

Many of the country’s flagship industries – in agriculture, mining and minerals – are heavily controlled by the state. By the end of 2017, public-sector spending accounted for just over half of the country’s GDP, according to World Bank statistics, while spiralling extra-budgetary spending at the local level and huge inequities and swings in tax collection created an air of perpetual, and economically stifling, uncertainty (individual tax collection fell 36.78% short of the Zimbabwe Revenue Authority’s 2017 target, while corporate tax collection was more than double (116.64%) what it set out to absorb, for example). In some cases, long delays in the publication of public sector audits have made it very difficult to hold public servants to account for missing the mark.

Debt is also a growing concern, particularly when combined with the liquidity crunch being faced by the country. Public sector debt accounted for over 70% of GDP and external debt, much of which is already in arrears, accounts for two-thirds of it. Persistent shortages of US dollars combined with the Central Bank’s inability to adequately monitor their use prompted the government to introduce US dollar-linked ‘bond notes’ in November 2016.

The notes, pegged to the US dollar – with greenback stocks held by the Central Bank and their use strictly managed, briefly eased the cash supply and helped tighten the current account deficit. But, the policy made it even more difficult to import everything from electronics to medicine, while dwindling hard currency supplies significantly increased the cost of banking and, crucially, remittances, a growing source of revenue as Zimbabwe’s economy eroded.

Many as a result were pushed away from traditional banking and into digital platforms like EcoCash, a blossoming fintech that enables mobile payments and cross-border transactions at a fraction of the cost of traditional retail banking. Though the dream of a cashless society has been pursued elsewhere in emerging markets (Kenya and India come to mind), the Zimbabwean context bred a confusing parallel exchange rate system that consumers and the Central Bank dread, but put up with out of necessity: new brake pads for one’s car can cost USD100 if they pay through platforms like EcoCash, USD110 if settled in bond notes, USD80 if in US dollars and slightly more in South African rand.

Many Zimbabweans hoard cash because of concerns their bank deposits may not be worth an equal amount once withdrawn; as a result, policymakers find it nearly impossible to accurately quantify the level of liquidity in the market, and many banks that aren’t majority owned by offshore giants like Barclays or Standard Bank find it difficult to shore up a strong enough deposit base to lend meaningfully.

New Beginnings?

Yet despite the numerous challenges the country faces, the new president, who is viewed to be more reform-minded than his predecessor, seems to be navigating the upheaval well. He has moved quickly on tackling corruption at the upper echelons of government – or at least the perception of corruption.

Then Higher Education Minister Jonathan Moyo‚ Local Government Minister Saviour Kasukuwere, and Finance Minister Ignatius Chombo were arrested on numerous corruption charges within weeks of Mnangagwa taking power, while preliminary reports suggest Foreign Affairs Minister Walter Mzembi, a former tourism minister, former Energy and Power Development Minister Samuel Undenge were also arrested early in the new year. Makhosini Hlongwane, a former Minister of Sports, Art and Recreation, was arrested after images of foodstuffs he hoarded over a number of years emerged on social media.

Solutions that are all stick and no carrot don’t work, however, and it would seem, and Mnangagwa knows this. At the end of November, he announced a three-month amnesty running from December 1 for the repatriation of public funds held offshore. “Upon expiry of the three-month window, the government will proceed to effect arrest of all those who would not have complied with this directive, and will ensure that they are prosecuted in terms of the country’s laws,” Mnangagwa said in a statement.

Mnangagwa’s ability to strike a balance between agitating the old guard – a system he is very much part of – and prosecuting those responsible for bringing about Zimbabwe’s economic depravity will be difficult and closely watched in the months to come. That balance is delicate, given the political capital he needs to retain support among senior Zanu-PF apparatchiks. That said, whether the arrests represent attempts to appease the political gallery ahead of elections in six to nine months, or truly tackle systemic corruption, is another question entirely; likely, it’s a bit of both. But even more crucial is the task of reforming the economy, which includes finding a path back to the reintroduction of the Zim dollar, attracting foreign investment, and nurturing skilled workers – many of whom migrated to neighbouring countries over the past two decades.

An obvious solution in the short term would be for Patrick Chinamasa, the country’s savvy new Finance Minister, to secure new commitments from donor countries and in doing so, balance of payments support. This would help Zimbabwe get out of arrears with key lenders, and boost its appeal to international investors.

China, often referred to as Zimbabwe’s “all-weather friend,” is an obvious candidate, explains Jones Gondo, a senior analyst at Nedbank. The country has long described Zimbabwe as its ideological and economic ally, a sentiment reciprocated by Mugabe – who in 2015 secured a direct aid deal worth more than USD5bn from the Asian giant. More than a quarter of Zimbabwe’s exports are sent to China, mostly grain and other crops grown for food security purposes, and while the country looks to ink similar arrangements with others near and far (Brazil among other Latin American nations, more recently) it is hoping to attract lucrative infrastructure investment, which could lead to an influx of skilled labourers and create a wealth of new jobs through subcontracting and manufacturing.

Just one month after Mugabe’s resignation, and perhaps emblematic of the Asian giant’s support of Zimbabwe’s change in direction, China promptly pledged more than USD213mn to be put towards refurbishing the country’s flagship international airport in the capital. Bankers on the ground suggest equal if not greater sums could flow into the country’s energy and minerals sectors through China Exim, which has already lent the country more than USD1.13bn over the past three years, and a raft of commercial lenders. The Hwange Thermal Power Station, which at an installed capacity of 920MW is the largest power plant in Zimbabwe and a key jobs creator in the northwest, has already secured a USD1.5bn commitment from China through various state-backed lenders to finance an upgrade that would add more than 600MW of new capacity to the plant. The upgrade works are being led by Sino Hydro, which has also won a contract (with Chinese financial backing) to nearly double capacity at the Kariba South 750MW hydro plant, which supplies both Zimbabwe and neighbouring Zambia.

Opening the Pipeline: An Opportunity Awaits

The growing presence of Chinese lenders could be a major catalyst that entices banks from neighbouring countries to participate on transactions, or lead them in some cases. Leading financial institutions in South Africa, many of which have deep roots in Zimbabwe, either through joint ownership structures or in supporting retail and corporate clients, have a wealth of experience structuring these kinds of deals.

“There have been whispers around South Africa’s banking community for some time now, but those whispers are certainly growing louder,” explained one banker, who asked not to be named because their own plans in Zimbabwe are rapidly evolving. “It’s certainly likely that we’ll see a FirstRand or a Nedbank – via MBCA Bank – or a Standard Bank or RMB swoop in to lead a transaction in the mining or agribusiness sector in the first instance, leveraging their structuring and distribution capabilities, then selectively expanding into other sectors from there as the economy increases capacity utilisation. It would be expensive at first, but the state and companies know that they can’t rely on credit lines from Afrexim or China forever.”

Zimbabwe’s credit market is nascent. As of 2016, private sector credit accounted for less than 13% of GDP, far lower than the 45.4% average seen across Sub-Saharan Africa. With the cost of credit in Zimbabwe having risen dramatically since, it is unlikely this figure has increased. But the country’s equity market is well-established, despite trading having thinned out dramatically since 2009. The Zimbabwe Stock Exchange, originally founded in 1896, is one of the continent’s oldest, and boasts more than 60 listed companies. By contrast, the ZSE listed its first bond in April last year, a move intended to boost participation of domestic pension funds and attract foreign portfolio investors. Still, with about 18 banks and building societies (nearly a quarter of which owned by other large African lenders) serving just under 16.8 million people, the country is not lacking the financial infrastructure needed to develop the credit market. Indeed, if the sovereign were to tap the bond market, as unlikely though useful for boosting reserves as it may be, it could set a crucial benchmark and clear a path for others to follow suit.

For domestic pension funds, the need for a robust local fixed income market has never been greater. A declining equities market combined with a lack of availability of long-term assets to match their liabilities has pushed many of the country’s pension providers to finance (often struggling) firms directly through private credit.

“Real estate is one of the few assets that allows us to circulate long-term money in the local market, but with a depressed economy, as you can imagine, there aren’t lots of new properties being built. Assets have been drying up for a while, worsened by a lack of diversity, and but it has gotten particularly bad in the past year,” a fund manager at one of Zimbabwe’s largest pension providers explained. “The growth of the local debt market would be significant, but the economic situation has left the country in a state of arrested development.”

Hopefully “the political shift will lead to a more fundamental economic one,” the fund manager added.

Economic and monetary reform through the introduction of macroprudential policy, indigenisation and land use reforms, and further formalisation of the economy – by bringing companies marginalised from the banking system back in from the cold through increased uptake of more sophisticated auditing and risk management practices – are necessary pre-conditions for restoring confidence, developing the credit markets, and creating new opportunities for lenders. But the path to normalisation is long and fraught with risks, explains Neville Mandimika, an Africa analyst at Rand Merchant Bank in Johannesburg.

Mandimika argues that the path back to the Zim dollar is likely through the formal adoption of the South African rand, a move ruled out by Reserve Bank of Zimbabwe (RBZ) Governor John Mangudya in October last year despite receiving support from a number of economists.

South Africa is by far Zimbabwe’s largest trading partner, and given the volatility of the ZAR/USD exchange rate, as well as the high percentage of imports from South Africa – about 60% of total imports into Zimbabwe – among other strong linkages between the two nations, the adoption of the rand as a temporary functional currency would serve to reduce the country’s dependence on the US dollar, easing the liquidity crunch; boost FX reserves; support purchasing power; and, crucially, help boost remittances. But, there’s a catch.

“A big challenge is that joining the Rand Monetary Union would require to adhering to certain macroeconomic policies and targets set by a foreign power – one that is larger and more developed, too. Zimbabwe is fiercely proud of its sovereignty and the country would effectively have to choose between giving up a bit of it in exchange for policy certainty, economic stability, and credibility,” Mandimika cautioned.

Lawmakers also need to address land use rights, a key step towards reviving confidence among foreign investors – and providing regulatory clarity for banks. The forced expropriation of land from white farmers for redistribution among black Zimbabweans in the 2000s was promptly followed by hyperinflation, food shortages, and marginalisation among world powers. Reversing the policies set out in the government’s disastrous land reform and resettlement strategy is something the government case easily address through statute in the first instance, until a more substantial set of reforms can be introduced. The Indigenisation and Economic Empowerment Act, put in place in 2008 as a way of empowering the indigenous population by requiring 51% local ownership in businesses, isn’t unusual within the context of Africa, but in the Zimbabwean context it is problematic because the application of that law has been extremely selective, contributing to an environment of corruption and mistrust among international investors and multinational firms.

“If policymakers want to attract foreign inflows back into Zimbabwe, this is the first topic every investor will bring up.”

Following the coup, many Zimbabweans are optimistic about the country’s fortunes, but Mnangagwa will need to demonstrate more than just an aptitude for platitudes if the economy and confidence is to recover. It’s one thing to sing the praises of economic reform and talk tough on corruption; it’s quite another to address them, and on this front, Mnangagwa could take cues from another recently minted African leader, Joao Lourenco, who within months of ascending to the presidency in Angola, has implemented a number of huge changes including significant expenditure cuts and a radical shift in the country’s FX regime.

One crucial difference, however, is that Lourenco was elected, and did not assume power on the back of a coup many suspect was self-arranged, which leads many analysts to believe Mnangagwa needs to call a snap election in order to rubber-stamp any forthcoming deviation from the mean if he is to move on any reforms quickly. The country’s lawmakers have a real opportunity to transform political euphoria into genuine change, but they must move quickly or risk missing out.

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