Securitization: Zimbabwe dicing with disaster

By Justice Zhou

Presidential Affairs Minister Didymus Mutasa believes nothing would be wrong if Zimbabwe were to“mortgage” its minerals to raise international finance as the country battles to stem economic meltdown.

As part of a desperate strategy to source funds for its new economic blue print, the cash-strapped government of President Robert Mugabe is considering securitizing the country’s mineral wealth to eastern and other “friendly” emerging economies such as China.
 
The proceeds would allegedly go towards revamping infrastructure, offsetting the country's 10.7 billion dollar external debt, and reviving industry among others. The strategy is seen providing a solution to the nagging liquidity crisis.

Mutasa appears to be unaware of the the current government's recklessness in dealing with the financial system and foreign businesses operating in the country.

The idea that he and others are trying to sell before any prospective foreign lender can blindly lay into the securitization drive is that everything will be tied to collateral, anyway. And nobody would be in for the usual raw deals—never mind Zimbabwe’s poor credit history.

In a country where the rule of law and property rights are hardly respected at times, the hostile indigenisation drive has already packaged Zimbabwe as a bad investment destination on the global financial and economic arena.

Zimbabwe is in fact dicing with disastrous and interminable default. However, this sort of proposal would without doubt be cause for alarm to any potential financier irrespective of origin.

Yet securitization may come in handy for borrowers with a good international credit rating and favourable risk profiles, being a viable source of long-term credit.

If the 2008 global financial crisis is any guide, it would be a miracle if any adverse and sub-investment-grade country was to succeed in luring wary international investors or lenders to rev up its coffers by way of such a risky approach.

Several financial institutions and western governments found themselves in dire straits as a result of such dodgy undertakings and are reeling in debt and financial trouble even to this day. 

This should have provided enough lessons to Mutasa and his government colleagues.

By tinkering with such a half-backed strategy, Zimbabwe is venturing into perilous territory that could plunge the country into a sea of debt, putting its creditworthiness in danger once and for all. It’s actually skating on thin financial ice right now.

Take for instance the root of the collapse of the giant global lender Lehman Brothers in September 2008, whose ripple effects almost brought the world’s financial system to its knees. What of the Eurozone sovereign debt crisis?

It all emanated from these precarious securitization activities, whereby borrowers were duped into recklessly dicing with money that did not belong to them.

These are glaring examples of how gambling with risky and complex debt instruments can put economies into mayhem than can be easily fixed. It’s there in our midst for Mutasa and all of us to see.

Cash is increasingly becoming a coward.International capital markets have become more and more jittery and selective following that crisis. Hence, low-cost capital nowadays can only be easily made available to investment-grade public and private sector entities..

Of course, it’s every government’s responsibility to see to it that it raises finances to execute its goals.

With economic expansion expected to decelerate to a pace of 3.4 percent this year, down from a previous projection of 5 percent, and the jobless rate set to rise more than the current 80 percent, there isn’t a way to bail Zimbabwe out except by looking to foreign sources of finance.

But there are plenty of less-hazardous methods of sourcing capital that could be relied on without leaving policymakers in an irrevocable bind.

It’s apparent that Mutasa and his fellow Zanu Pf partners in government are avoiding these safer ways of obtaining international funding, such as foreign direct investment and aid because their policies aren’t up to the mark.

So they would rather trade their souls to the Chinese for one wish, planning to “mortgage” the country’s resources no matter the high risk associated with this financial procedure. In the process they are selling the whole nation down the river, just for a song.

If the government were to forge ahead with its securitization initiative, it would have prepared an ideal pathway into a debt trap. It won’t be easy to liberate the country once it falls into such a trap, if circumstances surrounding Greece are anything to draw lessons from.

At least Greece has its well-off European peers to look to for bailouts when things get pear-shaped in that part of the world. But what would become of cash-strapped Zimbabwe? Can it do the same without bankrupting its fellow SADC buddies?

Zimbabwe should juggle around with its foreign funding options. Securitization shouldn’t be one of them at the moment because the existing political and economic conditions don’t allow for that.

Or else the government is dicing with default and disaster. Prospective investors also run the risk of finding themselves at some point having unsuspectingly acquired asset-backed debt securities that don’t have “assets” backing them at all, given Zanu Pf’s bad property rights track record. Forewarned is forearmed.

Zimbabwe's platinum refinery the best way to go

by Justice Zhou

Weakening global demand and fluctuating prices of raw materials have left commodity exporters such as Zimbabwe in an awkward position.

No wonder beneficiation and value addition have featured prominently of late in local debate, as the nation grapples with how it could reap meaningful benefits from its resources.

But the country could be on track towards a solution for the raw materials vicious cycle in the wake of plans by some global mining powerhouses to jointly set up a platinum and base metals refining complex at a cost of US$3 billion in Zimbabwe,

Major miners Impala Platinum, Anglo American Platinum and Aquarius Platinum are reportedly mooting the project.

Local production of the auto-catalyst representing about 6 percent of global supply. Zimbabwe also has the world’s second-biggest platinum deposits after South Africa.

Demand for the precious commodity by European car makers has been flagging due to some economic problems in that region.

However, economists say Zimbabwe still failed to take advantage of the recent commodity boom, which was spurred by emerging markets such as China.

And so the continued volatility of international prices of such raw materials requires that the country diversifies its export base by adding value to some of its products from the extractive industry.

The move could help it improve its terms of trade with most of its key trading partners such as China and the European Union so as to expand its revenue streams.

The corrosion-resistant metal is used to manufacture catalytic convertors, electrodes, jewellery, laboratory equipment and dentistry equipment, just to name a few.

Export revenues have hardly provided the solution to the country’s vexing budget, current account, debt and unemployment problems, even as trade has improved somewhat.

Zimbabwe isn’t alone in the value chain debacle, and the discourse pertaining to the subject has taken the rest of Africa by storm.

“To date, African firms have been operating at the lowest rung of the ladder in global value chains… If the continent is to get to the next level, we must accelerate the speed of transformation,” African Development Bank president Donald Kaberuka said recently.

“That is where jobs are created. That is what will reduce the level of dependence by African countries, by trading our way out of poverty.”

Apart from platinum, Zimbabwe doesn’t have diamond cutting and polishing facilities, prompting it to lose out on improved revenues due to depressed prices of rough diamonds.

If the considered platinum initiative were to be a wake-up call to other sectors, the country would have a lot to gain as it seeks to rebuild its stuttering economy.

The damage caused by the resource nationalism route currently being promoted by some politicians and analysts could be curtailed in this way.

Rather than cause more turmoil to foreign investment flows through a radical indigenisation approach, policymakers can as well come up with a model that entails a credible local empowerment programme, also placing beneficiation as a priority in the extractive industry.

The European Union has lifted sanctions on Zimbabwe’s Marange fields, paving the way for resumption of the alluvial diamond exports.

But reports of lack of transparency and accountability have continued to shroud revenues from the sale of the gems in mystery.

Zimbabwe's exports to the EU amounted to US$482 million in 2012 alone. Total trade between the bloc and Zimbabwe amounted to US$791 million, with a positive trade balance of $ 171.5 million in favour of Zimbabwe, according EU figures.

Policy makers will be faced with the task of ensuring that the need to attract foreign capital is balanced with efforts to ramp up fiscal income.

Nonetheless, beneficiation is a necessity which can’t be overemphasised, given the degree to which primary commodities are prone to global shocks.

If indeed the platinum project will become a reality in the foreseeable future as planned by the major miners, this could mark the beginning of an epoch-making era for Zimbabwe.

It’s been extremely hard to get by amid a turbulent international economic landscape for countries that rely mainly on the extractive industry. It’s a jungle out there.

The onus is for both these foreign firms and government to ensure that the project is followed through.

Hopefully, other players in various sectors will emulate this example. By so doing, foreign firms can in effect spare themselves the deep-rooted accusation that theirs is only to fleece the country of its resources.

Why Mugabe is headed for a fairy-tale exit

By Justice Zhou

Robert Mugabe is about to encounter his worst fears. He faces the looming possibility of losing the contest for presidency to his bitter rival Morgan Tsvangirai in the elections billed for July 31, something his backers will unfortunately not be able to prevent.

It’s fairly precise to say that not even a supernatural force will rescue the 89-year-old veteran politician because he couldn’t figure out in time that the reason behind the electorate’s desire to show him the door stems mainly from his poor handling of the economy.

The omens are not encouraging for the wily geriatric. The bottom line is that Mugabe hasn’t a clue about how to fix the country it took him and his party colleagues more than a decade to bring to its knees.

Whereas job creation, the fight against corruption and stuff like that have formed the heart of Tsvangirai’s election campaign, on the other hand Mugabe focused on cheap politics, digging into the annals of history for the same anti-Western propaganda that has for donkey’s years diverted him from the real bread and butter issues ordinary Zimbabweans are grappling with.

Given Mugabe’s track record, a scenario where Zanu PF eventually returns to power is not a promising one. The party already has an irreparable sour relationship with international donors and investors, just when estimates of the cost of rebuilding Zimbabwe’s economy run into tens of US billion dollars.

Those who fancy Mugabe's chances have thrown Tsvangirai’s private love life blunders into the mix, arguing that this has dealt a blow to the former trade unionist’s approval ratings. They are missing the point; love life issues have never had any electoral bearing at all in the history of Zimbabwean politics. Instead, the economy had and it still has even today.

Yes, his indigenisation crusade is also fine-sounding. It’s a remarkable policy on paper, but the moment one begins to see the politically-connected elite being the only recipients, the whole objective of the idea becomes irrelevant and subject of suspicion.

The immediate tasks of a new government will be to revive the productive capacity of industry, rebuild the rundown infrastructure, create jobs and reduce the country’s stock of external debt among others. Zimbabwe’s total external debt has soared to US$10.7 billion, accounting for 113 percent of GDP. Zanu PF doesn’t have the capability to solve these problems.

Nevertheless, Mugabe’s willpower to extend his rule is very clear, judging from his latest outbursts against the regional SADC bloc and others. If he had any surprise that would help him avoid falling by the wayside, he had about four years of the unity government’s tenure to pull it out of the hat, but alas.

For someone whose calibre is a sheer throwback to the bygone era, it wouldn’t be simplistic to imply that he isn't only completely out of touch with how modern economics operates, but the larger voting public as well.

In the true sense of the word, Zimbabwe is in this mess because the government which ruled prior to the coalition administration had completely lost its moral compass. Mugabe should have been aware of this and corrected it rather than spend most of his energy trying to set up his MDC opponents for failure.

The coalition was formed in 2009. This was after Tsvangirai defeated Mugabe in the first round of the disputed 2008 elections and later withdrew from contesting the second round amid violence by Mugabe's supporters and some security forces.

Once MDC entered into a power-sharing agreement with ZANU-PF,  the uneasy coalition left Prime Minister Tsvangirai holding the baby, when it came to cleaning up the economic mess created during the course of the previous government's term.

Prime Minister Tsvangirai’s intentions were apparent when he named Tendai Biti as finance minister in February 2009. His was to revive the economy and Biti proved to be the ideal picking for the MDC leader from the onset.

Obviously, Biti inherited an economy that was literally in paralysis, given that inflation was at 500 billion percent, without any jobs to even talk of. After he scrapped the worthless local currency and adopted the greenback and other foreign currencies to fend off hyperinflation, the move resulted in the immediate revival of economic activity and food and other basic necessities reappeared on supermarket shelves.

Four years down the line the economic growth momentum that had come along in response to Biti’s reformist approach has begun to fade away.

Mugabe actually began preparing his own political obituary in the late 1990s, when he responded to disgruntled independence war veterans by instructing the reserve bank in 1997 to parcel out hefty compensation benefits to them as a means of preventing a revolt against him.

As a result, interest rates spiralled out of control and the Zimdollar fell by almost 50 percent at a time when foreign currency reserves were already taking a slump due to depressed exports, thereby presenting an acute balance of payments problem.

His fortunes turned for the worst following his 2000 chaotic land reforms, the source of the Agriculture sector’s destruction and ensuing economic collapse.

Mugabe’s strategy of keeping the international community at arm’s length has been successful but he still will find himself out of power come July 31.His anti-Western rhetorical stance has been of little comfort to millions who have had to put up with 33 years of corruption, autocracy, broken promises and survival on a bare minimum or less. Rather than solve these problems, he has helped deepen them.

We can fast-forward to August 2013, by which time a new government would have been voted into office. If countervailing forces would have had their way, Zimbabweans who languish in record 80 percent unemployment, with no hope whatsoever for a brighter future could see off these challenges courtesy of pragmatic supply-side economic policies adopted and implemented in due course.

The next government hence should focus on rebuilding the economy to its full potential, as well as accord the masses the democracy and living standards that have eluded them over the decades; it’s as simple as that.

Conspiracy theories and the tendency to play the victim will not prevent Mugabe from bowing out anymore. This blogger certainly hasn’t a crystal ball, but would self-assuredly put  his neck on the block and forecast a new beginning and prosperity in the times ahead once Mugabe’s fairy-tale end has come to pass.