via An economy starved of liquidity: How did the situation come about? | The Herald November 26, 2013 by Linda Tsarwe
From 2007 to 2008, the global economy suffered a financial crisis, which most world economists dubbed as one of the worst since the Great Depression of the 1930s. The crisis, which manifested as a liquidity crisis, was caused by a number of complex factors. However one of the main factors was the burst of the housing bubble of 2006 which resulted in a decline in value of all real estate linked securities.
Sequel to that, the banks were left exposed on various angles, from a non-performing loan book to a significantly reduced portfolio value on real estate linked securities.
During the global financial crisis, Zimbabwe, like other small developing nations, was almost unaffected. However, five years down the line, Zimbabwe is faced with its own liquidity crisis, although it is underpinned by different factors from those of the global crisis.
Economic data released is indicating that not all is well in economy. Annual inflation stood at 0,59 percent from 0,86 percent in September.
The fall was as a result of weak aggregate demand as consumers are liquidity strapped and spending is much lower than usual.
Being the festive season, one would expect a buzz of activity which usually results in a slight upward movement in inflation. Anything outside this norm is worrisome, to say the least.
The big question therefore is; how did this crisis come about? Initially the problem arose when the economy dollarised.
After adopting the multiple currency system, it was paramount for the country to increase foreign currency generating activities such as exports.
Most importantly, there was need for significant inflows of foreign direct investment which would be channelled towards key economic sectors. Although the country was slowly coming out of the woods and registering positive growth, the levels of FDI were not significant enough to bring the desired change.
In 2012, Zimbabwe received US$400 million against US$50 billion that was received by the rest of Africa. This translates to only 0,08 percent of the total FDI receipts to the continent, which is quite paltry considering what the country was crying out for in terms of outside investment.
As a result of low foreign investment levels, most companies were left hanging and starved of capital. To survive, they had to extend their begging bowls to local banks, which in turn were charging punitive rates for their money. This is because banks were also in a corner, as they only had expensive deposits to on-lend.
Years on, the expensive debt has proved disastrous as most operations have remained unprofitable. Most of these companies have gone back to their shareholders for capital as a means of getting out of the debt trap.
For those that could not raise capital, they continued acquiring debt. Rio Zim is an example of a company that is currently borrowed with various local banks.
Many companies are suffering the same fate and this also extends to individuals. At some point an over-borrowed position will always burst and this creates serious problems, not just for the company, but to all interested parties in the debt cycle.
Furthermore, in an economic environment like ours, debtor default is high. This, coupled by slow moving stocks due to a weakening aggregate demand, can only result in mayhem on the company’s operations and cripples their ability to pay off their loans.
At the moment, the market has a non-performing loan book of 38 percent against the international benchmark of 5 percent.
A liquidity crisis was inevitable. If loans do not perform, banks fail to honour depositors obligations as their money is tied up.
Our national scenario is escalated by the fact that banks are not adequately capitalised. With the absence of the lender of last resort, the pressure mounts further as banks have been caught between a rock and a hard place. The economy has no place of rescue as far as financing is concerned. Already there is news that TN is streamlining business, while companies such as Border Timbers have reported below budget performance in their recent first quarter update. These are just a few scenarios which reflect on how the liquidity crunch has hit hard.
From where we stand at the moment, it seems the problem should be tackled from the top. In response to the global crisis of 2008, developed nations availed stimulus packages to avoid the risk of a deflationary spiral. In our case, however, Government ought to open up the country to outside investors.
Investor friendly policies are key and bilateral agreements might be necessary. If the investment path is clear and satisfactory to the investor, the country can be able to attract the right money into the economy.
We need to do away with speculators with an investment philosophy of ‘‘collect and leave’’. It might even be necessary to set standards of what is expected of every investor, if they wish undertake investment activities in Zimbabwe.
This could vary from infrastructure development, use of local skill only, securing supplies from national firms, just to name the pertinent.
To a serious investor, these conditions should not be a grave task. What makes investors uneasy are issues such as property rights and rule of law, which have a huge bearing on their investment.
If safety is guaranteed and there is proper implementation of policies, then it might not be difficult to attract investment that will be with us for the long haul.
As soon as the foreign investment policy is addressed and FDI starts coming in, the problems down the chain start to resolve themselves.
With improvement in liquidity, the economy becomes more lubricated. Companies become more viable and are capable of paying off their loans.
Banks can start to breath as their non performing assets turnout for the good. Furthermore, deposits increase and even credit lines can become available owing to a better country rating.
More banking products, such as mortgages, become available which resuscitates the real estate sector. Clearly, the positive ripple effects are endless, if we can only make ourselves an investment destination of choice and improve our liquidity position as a country.
Disclaimer — The writer is primarily responsible for this article and certifies that the opinion on the subject or any other views expressed herein reflects the writer’s personal views.
The writer has taken all reasonable steps to ensure that the information in the article is correct and no liability is accepted for any loss arising on reliance on it.
All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of the writer.
- For feedback and comments email — lindatsarwe@gmail.com
COMMENTS
Zanu is allegic to FDI, property rights and rule of law so Zim is a hopeless situation.
The Herald: “Although we printed it, we will not touch it! Only this writer is responsible for these thoughts.” What a bunch of chickensh*ts! That’s because, after all the hurummphing and throat clearing, the writer is essentially saying that the indiginization program and the land reform program are a horrible mistake because both have tainted investors perceptions of whether Zimbabwe can be trusted as a safe destination for their money. Mugabe has shown them that it cannot. So, ergo, nothing will change until ZANU-PF leaves power, OR indigenization ends and investors are compensated for their indigenization losses as well as during the land reform program.
This newspaper calls for stronger laws to force compliance with indigenization
on the one hand and then states that it can’t understand why there is a lack of liquidity in Zimbabwe and calls for, quote, ‘ Investor friendly policies are key and bilateral agreements might be necessary. If the investment path is clear and satisfactory to the investor, the country can be able to attract the right money into the economy’
They really don’t get it do they?
Ignorant fools.
Dolarisation jumpstated our economy only with presents of oposition in gvt securing foreighn firms now looting alone chinees looting all funds to home munosara nei SIMPLY I BHORA MUGEDHI VS BHORA MUSANGO TESTING ONES POWERS Mauraya povo
Plagiarism. O level economics
ZANU through its mouthpiece the Herald has a habit (and it is reflected in this article) of lecturing people. Investors are not going to come to Zimbabwe with their money because some clown economist tells them to do so and what they can or cannot do with their money. The only thing that will attract an investor is if the return on his money is BETTER than anywhere else and the security of his investment is cast iron. Zimbabwe has neither of these at the moment hence no investment. Zimsec economics indeed.
Some of us have been bellowing this information for years on the public media comment forum. Some of us cannot even comment on there anymore (either we have been banned or the system they are using is too complex for some of us). A lot of ZPF fanatics called us uneducated ignorant fools who only want the whitemen to rescue us. Even our most “dear enlightened citizen Bob” has been crying for whitemen’s business for time immemorial yet we, the less enlightened ones, were not allowed to mention that we do need FDIs to function. The cry to remove sanctions is really a call for FDI and other functionaries. Even if we are allowed to do transactions freely with the west, our situation will not change until we start making real products for local consumption first and for export. All the countries that have been successful have always hinged on one principle, exports, exports, exports of finished goods. There is no other way. Increase exports of finished products and the economy will boom, it does not matter who owns the companies. The 2 pronged approach is to reduce imports and increase exports and we will be headed to the promised land. And I say it again, it does not matter who owns the companies as long as our resources, (minerals and labour) are used to make finished goods. The profit that is made by the owners is normally a small fraction (less than 15%) of the bigger picture of utilization and economic benefits. Reduce imports by using our own resources for energy (coal to electricity/liquids) rather than import liquid fuel. Further more why not import crude oil and refine it ourselves (e.g Zambia refines 40% of its liquid fuel from imported crude oil). Reduce import bill and increase exports.