Zimbabwe’s Tempestuous Transition Toss
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.