Zimbabwe central bank reforms pay off as bad loans decline, but there's a catch

by Justice Zhou

A reported slight decline in bad loans may allay fears that Zimbabwe’s banking sector is on the brink of a crippling credit crisis.

The decline follows a special programme by the central bank in which it buys toxic loans from lenders through its recently formed asset management company.

Non-performing loans (NPLs) in Zimbabwe’s eighteen banks dropped to 15% in the first quarter of 2015, from 20% last year.

So, it would be tempting to believe the sweeping reforms introduced by central bank governor John Mangudya, after his appointment last year, have started to pay off.

Commercial banks have sold roughly $383 million worth of NPLs to the Zimbabwe Asset Management Company (Zamco); local media quoted the central bank head as having said.

The ratio of NPLs to total loans stood at 18.5 percent as of November 2014; up from 16 percent in the previous year.

But in a country plagued by a severe liquidity crisis, renewed economic meltdown is fast gaining momentum.

A waning economy spells trouble for the central bank because it could easily thwart its ambitions to curb NPL’s and nurse the financial sector.

The recent patch-up of its lender of last resort function hasn’t helped prevent some banks from buckling under the weight of toxic loans.

As has always been the case in Zimbabwe, minor lenders are the hardest hit by the current liquidity crunch. They also are the most vulnerable to defaulting borrowers amid slowing growth and as depositors shun banks.

According to the Reserve Bank of Zimbabwe (RBZ), the six smaller banks that went bust over the last twelve months posed low systemic risk. Hence, the threat of domino effect, in a landscape with such foreign giants as Barclays and Standard Chartered, has been ruled out.

Anyhow, the major lenders managed to keep safe because they enforced stricter lending criteria. This included measures whereby loans were only given to borrowers considered to have the ability to pay them back.

Is there every reason, thus, for people not to freak out too much about the health of Zimbabwe’s banking system? Hang on people, there’s a catch in all of these financial metrics.

Apparently, the bad loan decline can be linked in part to the collapse of several smaller banks. Their exit from the scene eventually takes their balance sheets out of the central bank accounting equation.

Besides, rising provisioning levels for bad loans mean that getting them written off has put a damper on banks profitability. 

To make matters worse, institutions filing for bankruptcy often find it hard to repay depositors while their liquidation is being processed.

Research by MMC capital, a top brokerage firm, shows that banks’ after-tax profits slumped 17% last year as impairments soared.

Companies and households’ inability to repay loans stems primarily from the fact that Zimbabwe’s economy is once again in a tailspin.

With foreign investment drying up and firms shutting down due to tight liquidity, unemployment has worsened, putting paid to disposable income.

The RBZ is already grappling with confidence in the financial sector, which is at its lowest ebb. A widespread lack of public trust in the banks is partly due to the reserve bank’s controversial policies legacy.

Authorities have laid part of the blame for lack of confidence on poor lending practices and weak corporate governance by financial industry executives.

They argue some bankers have been the authors of their troubles, dipping into customers’ accounts and diverting funds into dodgy and risky financial market dealings.

With about 18 banks scrambling to get their hands on meagre deposits, some critics say the industry is inundated.So it might as well be a blessing in disguise for players that cannot survive stiff competition to cave in and exit the scene. But, is it a good idea to encourage banking sector oligopoly?

Now, let us unpack how this conundrum of toxic loans came about. Well, it all emanated from an orchestrated consumer credit bubble which formed between 2009 and 2013, when the economy was pumping during Zimbabwe’s coalition government era.

Everyone was optimistic that the country’s prospects will keep getting brighter. And then, smaller banks indulged in a wild lending frenzy, doling out unsecured loans in an excessive fashion.

With bank credit awash for households, people went on buying sprees for cars and houses, among other expensive goods without regard for the possible consequences.

By December 2012, toxic loans had swelled to 14%, from 1.6% in 2009.The lending blitz was probably motivated by the strong belief that a new government was soon to take over from President Robert Mugabe’s ruling party.

But all that did not happen as Mugabe claimed to have been re-elected in a disputed poll in July 2013.There was a run on the banks just after the elections, as major depositors and investors felt their money was no longer safe under Mugabe.

The 91-year-old leader’s nationalist threats to seize control of foreign firms have spooked investors and put his disrespect for property rights in the spotlight.

To a larger extent, the massive withdrawal of funds exposed some minor banks to defaulters, leaving them vulnerable to collapse.

And when credit could not be created to keep factories running, many companies scaled down or shut down altogether while loan defaulters grew in number.

For that reason, problems in the banking sector are far from over even as it looks like the reserve bank is finally pricking the consumer credit bubble. Without the much-needed foreign investment to help boost liquidity, nothing will stop NPLs resurfacing.

And the problem of bad loans being the main reason for banks that go bust is nothing new in Zimbabwe, much to the chagrin of customers. When several banks failed in the past, none of the depositors were refunded, a development which has made efforts to restore public confidence more difficult.

The scale of the erosion of confidence became apparent when Zimbabweans resisted "bond coins" which were introduced last year to tackle the lack of US coins. Zimbabwe shelved its worthless dollar and adopted the greenback in 2009 to rein in hyperinflation following decade-long political instability and economic crisis.

Although the paper greenback has since been readily available, coins were hard to come by. This prompted  Mangudya to bring in the new "bond coins" last year. A $50 million bond was floated to mint the money in neighbouring South Africa, hence the name.

Some depositors had watched helplessly as their money was engulfed by hyperinflation during the crisis. Critics blame the RBZ’s role in fuelling depositor losses during the crisis, having continuously printed and pumped money into the system, stoking hyperinflation.

The government forecasts GDP growth this year of 3.2 per cent, while the International Monetary Fund expects Zimbabwe's economy to weaken further this year after growing by 3.1 per cent in 2014.

Justice Zhou is a Johannesburg-based freelance journalist and blogger. He writes in his personal capacity and can be contacted via email: justice_zhou@yahoo.com

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.