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.
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