Why Zimbabwe and Greece have nothing in common

by Justice Zhou

Zimbabwe and Greece have in recent years attracted heated global debate and offered typical case studies due to their on-going economic problems.

Some people have gone as far as suggesting that the two countries have similar problems. Those who say they have something in common are missing the point, and here is why:

Zimbabwe is facing problems that are a result of bad governance, bad policies and international isolation. In other words, the crisis in Zimbabwe is deliberate and can be fixed when those inflicting it are no longer in political power.

Nothing will stop Zimbabwe rising from the ashes if a proper leadership is elected in future and abides by proper principles and procedures of running a country and economy.

Unlike Greece, the Zimbabwe government has nowhere to borrow money from at the moment to balance its fiscal books.

The IMF and other international creditors are reluctant to lend to the southern African country because they believe it doesn’t have the ability to repay loans.

Even its better-off neighbouring states haven’t had any intentions of pouring substantial amounts of loans they know will only end up in a bottomless pit.

So there is no way Zimbabwe would become as indebted as Greece if nobody is lending it more money it obviously would fail to return.

On the other hand, Greece is reeling from a structural problem that isn’t necessarily a deliberate political infliction.

Greece has already received a staggering €240bn worth of bailout funds that, quite frankly, have hardly extricated the country from its mess as earlier intended.

Greece has a duly-elected government, it isn’t subject of international isolation.If there are any investors avoiding the country, it would be for reasons other than bad governance, not upholding the rule of law and election-rigging.

Every government has a responsibility to see to it that it lives within its means, thereby avoid crippling insolvency which might lead to dire economic consequences.

Following years of unchecked government spending, Greece’s sovereign debt has soared. When the global financial crisis hit in 2008, the Eurozone state was caught unawares and has since struggled to emerge from the crisis.

In some respects, Greece has a stubborn debt crisis that nobody has ever come up with a tangible solution to although there is political will to deal with it. Despite loads of generous cash being funnelled into that country’s coffers, there doesn’t seem to be a let up to its debt conundrum.

But that doesn’t make Greece’s problems interminable, nor do Zimbabwe’s woes make it a hopeless economic wasteland as some would mistakenly have the world believe.

Don’t get me wrong, I’m not trying to downplay the calamity that Zimbabwe is currently mired in. My point is that we have to be realistic when making comparisons.

The more careful we are when dealing with facts, the more we are likely to keep people well-informed about what is really going on in this world.

While the origin of Zimbabwe’s economic meltdown is bad politics, bad governance and self-inflicted international isolation, these can easily go away if the country overcomes its leadership problems.

Any attempts to compare the economic metrics of a country in the developed world with those in a developing country would sound rather unfair, if not alarmist.

Well, it’s true the government of Robert Mugabe has destroyed Zimbabwe beyond denial. At the same time, that doesn’t mean its economic crisis cannot be overcome.

Zimbabwe has ample natural and skilled human resources and isn’t beyond repair. The bottom-line is it just can’t easily be compared with Greece as the nature, origin and possible solutions to their problems are completely different.

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.