Zimbabwe’s Wayward Waterfall Soak
Zimbabwe stocks finished Q3 with a 10 percent MSCI frontier index pop despite drought and banking and diamond setbacks and heavy borrowing from China at over 1.5 percent of GDP for Victoria Falls airport reconstruction. GDP growth and inflation are both put around 4 percent this year by the IMF, with a whopping current account deficit financed by the rundown of international reserves to less than a month’s imports. Fiscal stress was “aggravated” in the first half by the hiring of 8000 security officers as half the banking system fell below the 25 percent mandatory liquidity ratio. Three institutions were shuttered by the central bank, which itself is in arrears after freezing statutory reserves on account. Marange diamond field exports met the Kimberly process but are subject to US bilateral sanctions, and individuals associated with the Mugabe regime remain under multilateral penalties as another round of elections is widely anticipated in 2013. Reverse contagion is a risk as mining woes in South Africa cut remittances even as the SADC bloc has allowed phased customs tariff reduction in view of lower competitiveness reinforced by the “chilling effect” of indigenization policy transferring foreign investor control in the Fund’s description. The budget deficit is over 6 percent of GDP and the government has resorted to “second best” capital spending elimination and may also try to get grants and credit lines from neighbors in response. The upcoming election cycle will foster further imbalances, and donor support may be needed to cover combined census, poll and constitutional referendum costs. Legislation that would channel precious metal revenue through a separate authority is stuck and the government has yet to join the Extractive Industry Transparency Initiative. One-third of banks do not meet higher capital requirements after Royal Bank and Genesis were closed. The monetary authority will issue securities over the medium term to reimburse seized deposits and may explore local-currency alternatives to the dollar-rand framework as confidence is restored, which could include revival of the T-bill market. As it no longer has a lender of last resort function the finance ministry has provided an initial endowment for emergencies but a comprehensive overhaul involving recapitalization, non-core asset disposal and outside audit is still pending.
Regional and international participants may withdraw equity and management skill if indigenization is handled in a forced “destabilizing” fashion, according to the report. The current account deficit will be 20 percent of GDP, and the World Bank’s Doing Business ranking is 170 out of 180 countries with bottom marks for property rights, infrastructure and governance. External debt is unsustainable at 115 percent of national income, over half in arrears, and a complex relief strategy will have to be in place before start of a simple staff-monitored arrangement, the Fund admonished.
