Zimbabwe’s Tempestuous Transition Toss

2018 December 24 by

Emerging and frontier stock markets this year have been battered with one unusual exception: Zimbabwe’s MSCI Index was up 100% through October as local investors are desperate to preserve savings value, with bank collapse and hyperinflation again looming a year after longtime President Robert Mugabe was forced to resign. His successor and former deputy and army head Emmerson Mnangagwa won his own term for the ruling Zanu-PF party in elections this July, with the opposition claiming widespread violence and vote-rigging. The President and his team, with previous African Development Bank chief economist Mthuli Ncube as Finance Minister, have tried to shake off years of international commercial sanctions and shunning with outreach at the recent International Monetary Fund-World Bank meetings and conferences in the US and UK. They have endorsed state enterprise privatization, fiscal discipline and official arrears clearance while the banking and multi-currency systems heavily reliant on electronic transfers and artificial “bond notes” unravel. Foreign portfolio investors remain at a distance from the monetary chaos and lingering pariah status, when they could join domestic counterparts in formal collaboration to press for urgent steps to hasten a return to the developing financial market mainstream.

In October in Washington an executive delegation, hosted by the US Chamber of Commerce and Corporate Council for Africa, proclaimed Zimbabwe “open for business.” Banking and finance was not represented as presentations focused on difficulties accessing credit and funding normal operations in real estate, energy, agriculture and technology. Potential partners attending the roundtable noted the absence and basic nature of slide shows reflecting inexperience at global investor gatherings. Zimbabwe’s Ambassador urged participants to again consider its human and natural resources after a long period where cross-border engagement was confined mainly to the South Africans and Chinese. A State Department official expressed the Trump Administration’s view that political and economic reforms were preconditions to stronger diplomatic and trade ties, as individuals associated with the Mugabe regime remain under asset freezes.

President Mnangawa later ramped up the rhetoric for a Financial Times London event, when he compared planned restructuring efforts to the Thatcher “revolution” four decades ago in cutting the public sector payroll and selling off state-run companies. He promised to collect taxes and proposed a new levy on electronic transfers comprising 95% of financial transactions, and also targeted hundreds of millions of dollars in revenue through an anti-corruption crackdown. A “zero tolerance” campaign resulted in top business and government representative arrests, with suspects going into exile to avoid investigation. Gross domestic product growth may exceed the IMF’s 3%-4% forecast with gold production already higher than the 2017 total, and the private sector will expand in farming with compensation for previous seizures. The President lauded Minister Ncube’s official creditor overtures on debt settlement, and progress toward a full Fund program.  

However the Minister admitted in October that the 11% of GDP budget deficit was triple the original target. Staple food, fuel and medicine costs suddenly spiked several hundred percent, recalling the pre-2009 hyperinflationary era, as he signaled intent to purge bank accounts of “bad” electronic and bond note dollars which trade at a discount to hard cash. His office also threatened 10 years in prison for underground currency traders, and the central bank further stoked financial system anxiety with an order to keep remittance flows in separate quick access facilities. The Cairo-based African Export-Import Bank, which backed the bond notes introduced in 2016, again agreed to guarantee them at full parity value with physical money, and the Mnangawa administration as a backstop also borrowed $250 million from London investment fund Gemcorp, which was founded by a former executive with Russia’s VTB Capital. According to local brokerage reports, out of $9 billion in deposits only around 10% is US dollars, euros or South African rand, with the overwhelming balance so-called “zollars” which economists agree should be phased out over time for monetary stability.

Minister Ncube has implored citizens for patience over the transition, but the memories of massive devaluation and lack of trust are too embedded. Against this background, London conference investors in November were unmoved by the MSCI Index’s triple-digit gains and his pledge to end indigenization laws and permit foreign majority ownership of listed companies. To resolve confidence and policy impasses, both sides should form a joint economic and financial market task force to speed rebuilding and reintegration. It would concentrate private capital focus still lacking under the new leadership, while finally tackling dual banking and currency crises for a fresh start. This interim model could also fill a glaring gap as post-sanctions countries elsewhere on the continent, like Sudan, begin the journey toward longer-term commercial financing.

African Securities Development’s Index Indentations

2018 November 12 by

The UK-based OMFIF and South Africa’s Absa Bank released the second annual African Financial Markets Index measuring progress in a half-dozen categories in 20 countries, with improved scores in Kenya, Morocco and Nigeria alongside deterioration in Mauritius and Namibia. In an introduction African Development Bank President Adesina cited its own local bond initiative operating for a decade which catalyzed $250 billion in issuance last year, 80% in short-term maturity Treasury bills. The AfDB’s data base covers twice the number of index economies, and the chief executive noted that universal energy access alone will demand $50 billion in annual capital mobilization through 2025. On a scale of 100, South Africa was again the runaway leader at 93, followed by Botswana, Kenya, Mauritius and Nigeria in the 60s.  At the bottom from 25-35 were Ethiopia, Angola and Mozambique, while Namibia, Ghana, Zambia, Morocco and Uganda were in the middle in the 50s. The components were market depth, foreign exchange availability, tax/regulatory framework, domestic investor capacity, economic potential and international agreement entry. The survey praises dedicated financial sector deepening strategies in Mozambique and South Africa, but criticizes low local investor and currency liquidity averages. On accounting rules, 17 of the 20 mandate IFRS, with Cote d’Ivoire just added to the list. Equity and bond turnover are generally minimal at one-tenth of capitalization, and regional coordination is lacking according to the analysis, which combined desk work with fifty field interviews. In 15 countries size is less than 50% of GDP, and corporate bond activity is negligible where it exists, with the government segment six times bigger at $315 billion. Secondary trading, benchmark yield curves and new listings are rare, and domestic institutional investor allocation guidelines can be rigid. Small company tiers are under consideration, and real estate trusts and Islamic-style sukuk are in the product pipeline. Technology has moved to online dealing and electronic infrastructure, and West and Southern Africa have platforms for exchange integration.

Kenya relaxed exchange controls, while South Africa’s over $1 trillion hard currency volume dominates the continent. Reserves fell in Angola and Nigeria with oil price declines, and Egypt’s tripled the past five years with Gulf and IMF assistance. Half the currencies float freely, while the CFA Franc zones and rand area have pegs. Only half the index countries have corporate credit ratings from the three global agencies, and Uganda has high 20% withholding tax and Rwanda’s legal shareholder protections are not well translated in practice. South Africa has multiple regulators, and just one-third the index follow Basel III banking norms. Pension and insurance funds are undeveloped, with the ratio to domestic assets under 20% apart from Botswana, South Africa, Namibia and Seychelles. Strict product and geographic restrictions limit diversification, and manager knowledge and expertise is likewise narrow. Mauritius is an exception with widespread exposure to derivatives, but risk aversion prevails even in the index members with a sophisticated spectrum of contractual savings providers. Financial inclusion is also a capital markets challenge with scant outreach to small business, women and rural locations. With economic growth expected to stay below 5% and infrastructure needs alone estimated at $150 billion annually, the compelling case for market expansion is clear even if future plans are murky, the review concludes.


Africa’s Fumbling Favorable Narrative

2018 August 21 by

African frontier stock markets were down 2% through midyear on the MSCI index as the group struggled to reprise the “rising” story amid uneven commodity price recovery and renewed debt crisis warnings. Kenya and Zimbabwe were exceptions with double-digit gains, as the  threat of political violence faded in the former with reconciliation between perennial party rivals, and the latter conducted the first post-Mugabe elections with his former vice president and leading general predicted to win a full term against the unorganized opposition also at a disadvantage in funding and media coverage. Nigeria was flat heading into its 2019 contest, with President Buhari vying for another term against the advice of civilian and military allies and medical experts. Oil rebound has ended recession and foreign reserve drain, aided by wider hard currency access while the central bank has kept the benchmark rate close to15%. The Boko Haram fight is a major campaign issue with the cost and mixed results of security operations, and recognition that a broader displacement and refugee crisis has developed with neighboring Cameroon, where the English-speaking south increasingly agitates for separate rule. Cameroon’s President Biya now holds the tenure record with Mugabe gone approaching forty years in power, and his health is uncertain with no designated successor. The July review of the 3-year $700 million IMF facility reiterated fiscal and banking weakness while disbursing another $75 million. As the biggest economy in the Francophone Central Africa zone it has catalyzed “fragile” recovery, with 4% growth set for 2018 with new natural gas production and construction around next year’s football Africa Cup. Inflation with the euro peg is minimal at 1%, and the current account gap should settle at 3% of GDP. However public debt ballooned to 40% of output in 2017, with the state oil refinery a chief cause.  Government borrowing in the regional bond market tends to stifle private credit, which barely increased through March. Banks have large sovereign exposures that can compromise capital and liquidity positions as the zone central banks apply stricter prudential standards. They also have business customers owed contract arrears that officials have yet to tally and honor. The tax/ GDP ratio is below 15%, and debt managers do not have a full accounting of state company contingent liabilities. Financial inclusion also lags with only one-tenth the population with a bank account, and structural competitiveness reforms do not match peers, according to the Fund.

In West Africa Ghana’s marks improved on its program following successful Eurobond issuance in May, as first quarter growth was almost 7% and inflation dropped to single digits. A fiscal responsibility law will cap the deficit, and the central bank sold dollars to support the slumping currency. The mining code will be revised, and UK-based Tullow Oil is under fire for alleged tax underpayment. Francophone giant Cote D’Ivoire likewise tapped the external market at 30-year maturity, and the IMF predicted another year of 7% growth on good cocoa prices and halving of previous 30% annual credit expansion. President Outattara, a former Fund executive, reshuffled his cabinet amid ruling coalition disputes, as jockeying starts for the end of second term contest which may recycle old political and personal rivals in a numbing narrative.



Africa’s Private Equity Road Ruts

2018 July 6 by

The EMPEA trade association offered a 5-year retrospective on Africa private equity investing in a paper to chart the “road ahead,” and cautioned that traditional fixed-life funds may hamper business improvement and exit. Record fundraising was $6 billion in 2014-15, with US and European pension and endowment pools joining development lenders for the first time. In the aftermath commodity-induced economic slowdown and currency volatility have dented enthusiasm and returns, especially in the leading spots Nigeria and South Africa which had recessions. Even though consumer focus has often avoided the fallout, exchange rate effects battered portfolios, as companies are forced to grow out of depreciation over longer holding periods. From 2015-17 deal flow was only $1 billion annually despite big fund closings by KKR, Carlyle Group and Helios, and rising valuations may have contributed, with earnings multiples at 7.5 times according to one estimate. $100 million-range transactions were considered then shunned on narrow exit prospects, as frustrated investors expected GPs to allocate more industry and risk expertise. Regional strategies are increasingly standard either through organic or partnership arrangements in a so-called “platform model.” By sector technology is the future priority from finance to e-commerce, with East Africa the prime target, as small-firm orientation favored by aid sponsors has lost luster. With scarce capital markets and strategic buyers, fund managers have turned to secondary sales as an outlet. A 10-year life under limited terms may no longer be suitable, and “ever greening” and flexibility will likely be the success formula over the coming decade.  Liquidity provision is an overriding concern, and investments in local securities market deepening will facilitate outcomes at both ends, the organization believes.

Sovereign debt ructions have also affected the asset class, with index spreads widening in particular for frontier market components this year. South Africa was in recession Q1 with mining and agriculture setbacks, as the weaker rand hurt consumption. GDP growth may only be 1% again, as the central bank aims to keep the benchmark rate steady. The fiscal deficit plan is 3.5% of GDP with major union negotiations and state enterprise reforms pending, and new President Ramaphosa due to consider constitutional changes for land redistribution. Sub-Saharan external debt is up 10% from 2015, and budget consolidation is under scrutiny as current account gaps swell at the same time for energy importers. Nigeria’s growth should be 3% heading into 2019 elections, as the PMI manufacturing gauge was almost 60 in May. Reserves are over $45 billion and the central bank has eased the foreign exchange crunch under tight monetary policy with a 14% policy rate. Ghana’s expansion is forecast at 6-7% on good commodity and oil export performance, and a primary surplus has set a path for public debt reduction to 60% of output under the IMF program. Inflation may settle in single digits, and foreign investors have retained exposure to local debt despite currency volatility bouts and an estimated 5% balance of payments hole. Kenya too has twin deficits, and President Kenyatta in his second term has maintained bank lending and deposit rate controls, which may soon be reinforced by new rules on customer fairness to choke private sector credit landing in the ditch after the poll results.


Nigeria’s Prolonged Presidential Visit Preening

2018 May 30 by

Nigerian shares looked for further catalysts to sustain rebound as President Buhari became the first Sub-Saharan leader to meet individually his US counterpart on a state visit, where he diplomatically dismissed reports that President Trump had previously described the region in crude language. His trip served to bolster global prestige that can translate into votes at home after declaring a reelection bid next year against media and APC party age and health objections. Security was in the forefront with his government considering $1 billion in additional spending to fight Boko Haram and protect Northern border and Niger Delta villages. On anti-corruption he and his team have maintained relatively clean reputations in contrast with predecessors, and oil economic diversification has seen progress in agriculture and infrastructure despite the deliberate pace of promised privatization. GDP growth could reach 3% this year, as the PMI index neared 60 in Q1 on rising oil exports and foreign exchange access. Inflation dipped below 15% with the central bank policy rate kept at 14% with possible cuts in the second half. International reserves top $45 billion on current account and portfolio inflows, with continued currency intervention sterilized by open-market operations as the multi-tier system lingers to bar reinstatement in JP Morgan’s local bond index. Eurobonds, including a diaspora issue, have been placed easily as the chronic budget deficit is manageable at 2% of GDP with the country rejecting resort to a formal IMF program.

South African financial assets in turn were poised to extend momentum with President Ramaphosa’s takeover as ruling ANC head on a reform and investment platform starting to take shape. The investment-grade sovereign rating is preserved for now with the fiscal gap predicted at 3.5% of GDP on better 2% growth despite consumer slack. Capex spending and real wage gains support the uptick, with commodity exports holding steady. The President’s “New Deal” has removed state company chief executives and mounted prosecutions against alleged corrupt senior officials, but he remains under attack from party activists calling for harsh redistribution policies, including on land where section 25 of the constitution is under review to allow outright seizures. The minority white population still controls 95% of farms under the existing willing buyer-seller scheme adopted post-apartheid, and poor and middle-class advocates also urge a national minimum wage and more labor protections in the face of 25% unemployment. The central bank slimmed the repo rate 25 basis points in March with inflation in the 4-5% target band and rand stability, but the quasi-fiscal risks of state enterprise borrowing may resume upward pressure. The administration, rejoined by planning stalwart Gordon, aims to attract $100 billion with a “conducive investment climate” breaking from the last two decades, and it envisions a heavy Chinese dollop under the Belt and Road natural resources and infrastructure project initiative. Renewed mining interest is a priority as the basic charter is renegotiated and strategic stakes in Eskom and other major ailing monopolies could be sold off, but elite wealthy families may be ineligible to widen the buyer base.  The government will press its case against the influential insider Guptas and their network of political and commercial allies at the same time to help rewrite the art of the deal.


Africa’s Truncated Free Trade Tug

2018 April 20 by

The African Union, with stock exchange unification still a vision, struck an outline continental free trade accord in March with 45 countries signing to set the ratification clock with the notable exception of Nigeria with strong protectionist business and labor lobbies. Studies show that less than one-fifth of the region’s mostly raw material exports are cross-border due to tariff, administrative and infrastructure barriers, and that with manufacturing catching up at almost half the total, growth could increase 1% with integration. In principle 90% of duties will be eliminated on a common product list, and customs processing and licensing should also be harmonized. However specific time frames are absent until parliaments in half the entrants endorse the treaty, and they must also accommodate sub-regional arrangement like COMESA. Host Rwanda also took up traditional political and investment issues prominent in the East Africa zone with Kenya jitters despite good securities market performance. Re-elected President Kenyatta and perennial rival Odinga insisted they and party-tribal camps had reconciled, following months of street violence and a government media crackdown criticized as a dictatorship precursor. Despite another year of predicted 5% economic growth, private sector sentiment plunged at the height of confrontation and has since rebounded above the 50 neutral reading. The investment authority touts FDI lure with an Ernst and Young survey placing the country at the top of the list after the World Bank Doing Business ranking climbed twenty spots. Industrial policy centers on manufacturing diversification, but the financial sector remains handicapped by the interest rate ceiling as heavy borrowing has run up 50% of GDP public debt. A China-built high-speed railway between Nairobi and Mombasa completed last year cost over $3 billion and halved bus passenger travel time, but was designed chiefly to accelerate cargo shipment. The World Bank estimated 10 million tons annually will bring viability, but the most optimistic projections so far are for half that amount.

Nigeria opted out ahead of 2019 presidential elections, where the incumbent Buhari has been urged not to seek a second term due to illness, unpopularity and an anemic economy. His anti-corruption platform is in tatters with multiple scandals and the Boko-Haram insurgency and North-South religious and income divide are in global headlines with the continued child abduction saga and border town attacks. The naira was floated in theory but the central bank continues to intervene as access restrictions maintain benchmark local bond index exclusion. South Africa is preoccupied with its own imminent contest now that President Ramaphosa was picked to finish out the Zuma tenure and assembled an interim cabinet to unveil a cautious budget. It will boost social spending and raise value-added tax, and modestly shave the fiscal deficit to 3.5% of GDP allowing retention of Moody’s residual investment grade. 3% growth was registered in the end-2017 quarter, but still lags the rest of the continent as gold and platinum exports are subject to stricter mining charter employment and ownership mandates. Ruling party activists call also for forced land transfers to redress income inequality and insist on extending the swollen civil service payroll, one-third the budget. Banks have been stock market leaders but may be compromised by consumer loan provider connections as opposition politicians join in ratifying debt relief edicts.




South Africa’s Sedulous Cyril Bettors

2018 March 9 by

South African stocks and bonds after gaining momentum on Vice President Cyril Ramaphosa’s win as ANC head postponing a sovereign ratings downgrade, were further buoyed as President Zuma was forced to resign before the end of his term in 2019 on overwhelmingly member vote. He had tried to fend off immediate departure by agreeing on a comprehensive corruption inquiry, in light of bribery and favoritism disclosures around the influential Gupta family, which had reportedly engineered cabinet appointments. Representation of their interests claimed another scalp when a prominent London public relations firm was abandoned by clients and employees after it was found to be behind a racist social media campaign, which was described as “ setting back black-white-Indian relations a decade.” The President made his final stand ahead of the scheduled state of the nation speech before ceding power to his former deputy, a wealthy business executive who has advocated investor-friendly economic and monetary policies. He struggled to control the timing of his departure as hundreds of money laundering and corruption counts are outstanding from serial investigations. Among the sensitive issues at the top of Ramaphosa’s agenda going into the next elections are land redistribution, the new mining code and the heavy household debt load. On farmland, party activists advocate forced seizure and transfer along neighboring Zimbabwe’s lines, since voluntary commercial deals have been slow to evolve under the original program. The latest proposed black empowerment provisions for mining had increased mandatory stakes to 30% and were fought by the main industry association as prices and production seek to rebound. Although the Big 4 banks have a global reputation as well-managed and conservative, supervisors are scrambling to come to terms with the extent of small enterprise and personal uncollateralized lending at exorbitant rates, often through specialist providers ultimately tied to the mainstream system. Retailer Shoprite, a leading stock, was fined for pushing expensive customer credit without proper warnings, and the government is not in position to mount a rescue with public debt already at 50% of GDP on anemic 1% growth. Foreign investors have steered clear of the mess with non-financial picks and buying bonds instead with real 4% yields, but central bank credibility is at stake over reducing individual and household leverage with unemployment stuck officially at 25% and the transition period to new polls likely to inject more uncertainty.

Cross border ties with Zimbabwe also feature prominently in the mix over coming months as President Mnangagwa, another forced successor, promises free elections with international observers, an end to indigenization laws prohibiting majority foreign ownership, and reconciliation with Western official lenders including the IMF and World Bank where massive arrears have accumulated. In December Finance Minister Chinamasa outlined initial plans in the budget emphasizing anti-corruption crackdowns but otherwise vague on potential privatization of hundreds of loss-making companies and elimination of the recent shunned “bond notes” introduced to address real hard currency scarcity. Banks have less than $50 million in US dollars and rand to support $6.5 billion in deposits, according to estimates, and even the central bank is long overdue for recapitalization as bilateral and multilateral creditors including the Chinese look for historic heavy lifting.


African Private Equity’s Tricky Confidence

2018 January 29 by

Deloitte and the East and Southern Africa Private Equity Associations released their annual survey of industry economic and asset class attitudes from 75 respondents highlighting “adaptability and agility” despite deal and growth difficulties. In the latter sub-region manufacturing is increasingly popular next to energy and real estate and although 60% believe South Africa’s economy is in bad shape 80% plan greater allocation. The East’s 6% growth leads the continent and is “coming of age” despite controversial presidential elections in Kenya and Rwanda and stricter regulation in Tanzania. New fundraising is up as first stage PE vehicles reach maturity and local pension funds subscribe, but at steeper entry multiples with rising transaction competition. Small business is a current focus, especially in agriculture and financial and retail services, and renewable energy is a major technology play. Of the limited partners asked 15% expect exits in the coming year, whereas none were contemplated in 2016. Sub-Sahara Africa GDP expansion is forecast at 2.5% in 2018, with “muted” commodity price advance. The East has experienced prolonged drought, and Ethiopia is now the largest economy and growth champion, with 10% jumps the past decade from domestic demand and infrastructure as it slowly opens to foreign investment. South Africa has been in recession amid sovereign ratings downgrades close to junk, and Mozambique will join Botswana and Malawi in 5% growth despite its external debt travails. In the West Nigeria has stabilized with wider foreign exchange availability and Cote d’Ivoire, Senegal and Ghana should see 7% range output upticks over the medium term. PE activity will climb in all three areas the next twelve months, but most in the West with Nigeria’s predicted turnaround, according to the research. Existing funds should be fully deployed in 2-4 years, and among countries Ghana, Tanzania, Rwanda, and Cote d’Ivoire have emerged as preferred destinations.

By sector the consumer is the top priority, especially in food, healthcare and pharmaceuticals. Small and midsize and mature companies are equal emphasis, and typical fund size runs from $50-$200 million-plus, while deals are around $20 million. General partners differ by geography, with governments and development banks dominating the South and West and endowments-pensions the East. Europe is the main external source, followed by South Africa and the US. Debt finance is due to rise alongside equity, and the main exit paths are strategic and secondary market investor sales. The return time horizon extends beyond five years, and backers tilt toward mid-size Pan-African strategies. Corporate governance and transparency are the chief domestic issue challenges, with owner-manager distinction an important underappreciated concept. Internationally, Brexit’s impact on bilateral trade and signaled US protectionism are high on the list. The Trump administration’s initial budget blueprint recommended big African aid cuts, and AGOA’s duty-free preference extension is under review for several signatories, while the older GSP poor-country program may not be renewed. The new heads of development agencies AID and OPIC expressed commitments to economic growth and venture capital fund support, and the State Department held a summit with dozens of foreign ministers, but a bungled counterterror operation in Niger has overwhelmed the joint agenda with possible future supplementary private capital dimensions yet to offer confidence.


The CFA Franc’s Dogged Devaluation Designs

2017 December 25 by

The CFA Franc two-decade old peg to the French counterpart and then the euro, with a 50 percent devaluation in 1994, is again under the microscope after recent commodity price decline worsened domestic and external imbalances in the respective Central and West Africa monetary unions, according to a ratings agency report which identifies countries most at risk from currency realignment. CEMAC’s oil export dependence puts it in worse position as current account and fiscal deficits were in the high single digits to national income at end-2016, with $5 billion in reserves covering just over half of monetary liabilities against the 20 percent minimum needed under the French Treasury arrangement. Budget gaps have eaten into liquid assets at the regional central bank, which has also exhausted overdraft facilities to member governments. WAEMU is more diversified with bigger output and leaders Cote d’Ivoire and Senegal register 7 percent GDP growth and better governance, S&P comments. Foreign exchange and fiscal reserves are “comfortable” and the analysis does not forecast formal depreciation but offers a sensitivity index ranking the most vulnerable in a switch. Congo, currently in negotiations on an IMF program with a low “CCC” sovereign grade, is at the top of the list with an 80 percent share of imports/output, the worst fiscal deficit in the two groups and a default record on its $500 million international bond. Its statistics are not reliable or frequent, and although the commercial debt burden would spike the relative damage would be greater in Cameroon, Gabon, Cote d’Ivoire and Senegal with bigger and more regular Eurobond issuance. They may have partially hedged risk through an African Development Bank window but another 50 percent CFA Franc drop would compromise budget positions and hurt ratings. Petroleum exporters Cameroon and Gabon already signed Fund programs and Senegal’s economic indicators are “much better” than in the 1990s. The sustainability debate over the currency regime has been “largely political” reflecting colonial era estrangement and new Asia outreach. In September protests erupted across the zones as Paris under President Macron unveiled a fresh Africa strategy stressing bilateral investment and security improvement, but immediate alternatives are lacking. Monetary flexibility is limited but low inflation in the 2-3 percent range, versus 15 percent for the rest of the continent average, has been a stability buffer outweighing possible competitive gains from devaluation, the review concludes.

Sovereign debt restructuring that may be in play regardless of exchange rate level should follow market-based recommendations compiled by an expert study group, according to the UN’s Economic and Social Affairs Department sponsoring the effort. Detailed templates should be developed for loans as well as bonds, and the more popular fiscal agent could be shifted to a trust structure to more easily bind creditors. Their committees should be free of conflict of interest, including holding credit default swaps on instruments while in dialogue and negotiation. The IMF’s “good faith” requirement must entail information disclosure and prevent arbitrary voting pool designation and is otherwise a “safety valve” to flag egregious behavior. Bank regulators including the BIS should reconsider capital standards and other treatment that foster pro-cyclicality and delay resolution despite both sides earnest engagement, the UN panel urges.


Zimbabwe’s Post-Mugabe Crocodile Tears

2017 December 5 by

Zimbabwe stocks as the only savings haven paused after a near 400 percent advance on the MSCI frontier index through October, as the ruling party turned against President Mugabe approaching four decades in office after he cleared the succession path solely for his spouse Grace. The longtime army chief and vice president for the past two years, nicknamed The Crocodile for his alleged patient ruthlessness including violence against the political and tribal opposition, was dismissed for suspected plotting, but military allies sprung to his defense and deployed tanks into the streets and around key government installations to assert control. The President was confined to quarters and stripped of party leadership and subject to impeachment vote, as local and foreign democracy campaigners urged fresh elections. The power struggle had been brewing for months and coincided with a grim Article IV IMF review in July highlighting the depth of continuing economic and financial system collapse and remoteness of official lender reengagement with continuing arrears despite a staff monitoring program. The report traces a sad history since independence when per capita income was higher than neighbors and manufacturing lead output, and points to 1990s farm confiscation and runaway spending triggering hyperinflation as low points. It cited informal private sector resilience as a rare bright spot and praised the decision to replace the domestic currency with the dollar and rand a decade ago despite the “imperfect regime” in view of the undercapitalized central bank and scarce liquidity.  Public sector wage giveaways and an overvalued exchange rate soon endangered the system, and reserves have run out with steep current account deficits and unpaid external debt. New “quasi-currency” instruments were introduced as a half-measure, but so-called bond notes, electronic transfers and Treasury bills are poor substitutes for hard cash in circulation. Additional exchange and deposit withdrawal controls underscore the country’s isolation from mainstream trade and investment as well as diplomacy in light of sanctions over bad governance and human rights, the review commented.


To finance the 10 percent of GDP fiscal deficit above Treasury bill issuance capacity the government borrowed directly from the central bank, as the external position likewise weakened on falling agricultural exports and rand-based remittances. Overdue payment was cleared to the Fund’s concessional poverty facility under the 2015 “Lima process” but other bilateral and multilateral obligations remain outstanding despite attempts to line up commercial sources and to collateralize gold assets for refinancing. One fifth of currency in circulation is now bond notes trading at a sizable discount to dollars, and bank account daily limits are $20 with interest rate ceilings also in place. Foreign exchange priority is essential goods with an Article VIII restriction assigned under the Fund’s rules promoting open capital follows. Both growth and inflation were originally forecast at 2-3 percent this year, and before the official infighting over the post-Mugabe path fiscal consolidation was “urgent” especially with state enterprise losses likely to drain the central asset management company. Financial sector functioning was impaired with heavy bad loans and the severing of 50 correspondent relationships the past two years with increased credit and reputation risks. The business environment may improve from a meager base with recent Special Economic Zones, but the “indigenization” legacy may continue to prey on stock market wading safety, the analysis suggests.