LIQUIDITY, LIQUIDITY – WHAT A CRUNCH!

The happenings on the economic front in Zimbabwe are reminiscent of horror movie scenes. Every other policy or public official announcement on key aspects, save for inflation figures, points towards more disaster. The government revenue collection figures are very disappointing and having been missing its revenue targets by about $30 million every month this year, the government is fast running broke. On the back of unemployable expenditure reduction and switching alternatives to manage our huge appetite for imports, the trade figures show that the negative balance of payment position is shooting through the roof and unless the figures are incorrect, and indeed they could be, managing liquidity and creating jobs will remain problematic for a long time.  

Statistics from the banks are revealing household indebtedness that is rising at alarming pace! And worse, even nature doesn’t seem to sympathise as below average rainfall is forecast for the 2-012/2013 agricultural season. The biggest of all, the liquidity crunch, does not seem to be ameliorating and has reached worrying levels. It is now being blamed for everything wrong in the economy, just like the shortage of foreign currency, price controls and high inflation were the scapegoats for everything wrong prior to dollarisation in 2009. If Zimbabweans were like the Greek that have taken full time jobs in street strikes and demonstration against austerity measures being undertaken by its government, by now we would have been fed up of demonstrations against the liquidity crunch. 

Save for a few giants in mining such as the diamond, platinum and gold mines, and a handful of companies focusing on fast moving consumer goods and services such as Delta, Innscor and Econet and a few isolated others, the liquidity crunch has had its fair share in battering the economy into bad shape and signs of worse things to come are there for everyone to see. The mid-year results from the banking sector, which are generally the barometer to gauge the healthy state of the economy, are far less impressive and reveal a troubled economy underneath that needs more collective efforts from policy makers and politicians than before to steer it into the right direction.

But sustaining the argument that the liquidity crunch is the cause of most the challenges facing the economy is very flawed, at least from a fundamental perspective. Rather, it is important to note that the liquidity crunch is a product of largely bad decisions by economic agents that have been draining away the massive liquidity flowing into the economy since dollarisation.  There is abundant evidence to prove that the overall nominal liquidity position in the economy has been improving significantly since dollarisation and the structural economy-wide rigidities that make the liquidity untenable needs more of policy coherence and meeting of minds among the policy makers and politicians than focusing solely on liquidity as if it’s the most important economic variable.

The growth in broad monetary aggregates, a good proxy in measuring the general liquidity position, has been impressive since dollarisation in 2009. Banking deposits, which stood at $475 million in April 2009, leapt to a billion dollars six month later in October of the same year. By December of 2010, deposits stood at $2.5 billion and presently there are estimated around $4 billion. An informed conclusion would therefore concede that broad money supply, and indeed private sector credit expansion,  have been skyrocketing at a break-neck speed.  

Another indicator that can shed more light on the directional aspect of the economy-wide liquidity position is the cost and structure of credit in our market. In line with the massive growth in the quantum of liquidity in Zimbabwe since 2009 and rising loan-to deposit ratios, the cost of credit has been coming down sharply, from the highs of over 100% per annum just after dollarisation to the current rates of around 25% per annum. Equally, from a structure perspective, the tenors of credit facilities being offered in the mainstream financial services sector has improved markedly from just 3 months, which was the norm in 2000-2010, to around 1 year in best case scenarios presently, and indeed much better for mortgages finance. All these aspects clearly buttress the notion that the liquidity position in the economy, by and large, has been improving markedly.

On the other hand, evaluating the behavioural aspects of the lenders and borrowers can equally give a good picture on the status and transition of the economy’s overall liquidity position. An economy that is enjoying considerable amounts of fair and easy flowing liquidity is usually characterised of banks lending expansively, whilst borrowers, because of the existence of easy credit, pile up loans quickly and unreasonably. The US sub-prime mortgage market crisis of 2008 has its root problems from this phenomenon. It is much easier to draw a casual link of similar nature in Zimbabwe.

The increasing monetary aggregates since 2009 tempted and indeed misled both lenders and borrowers that the ‘good times would roll forever’. The resultant increasing bank loan-to-deposit ratios, which leapt from 33% in April 2009 to a peak of 87% in December 2011, provide evidence of the lending over-drive by lenders and on the other side, the speedy gearing or indebtedness on part of the borrowers. This reason behind this is quite easy to comprehend though. The abrupt dollarisation of the economy in February of 2009 wiped all the working capital of domestic companies and the need to borrow became so urgent and the only way to survive was through borrowing not only to produce, but equally to pay wages and salaries as the companies had lost everything to inflation, save for physical capital. Yes, the massive gearing of balance sheets by companies was for a noble cause since the dollarisation, without international support, created havoc and indeed the banks need to be applauded for having been lending generously. But, still, not sufficient restraint was employed by the borrowers and lenders.

Therefore the liquidity crunch which has been building up in the economy is in actual fact, emanating from the reality that the many borrowers have lost money on their balance sheets and cannot repay the banks to enable continuos flow of credit in the economy. The problem, as has been explained before, is easily traced to the avalanche of liquidity flowing through the economy since 2009 which, unfortunately, intoxicated weak business models via loans they accessed from banks. The swelling liquidity rivers of life that borrowers jostled to drink from have unfortunately turned to become the same rivers that devour most of those that recklessly drank from them. And the messengers of court and deputy sheriff, who are the undertakers and executors of estates of those that get intoxicated by drinking from these assumed rivers of life, have been very busy. Indeed if these were a business to be listed, the share prices and certainly the dividend payouts would not disappoint for the next three years or so!

Policy makers have attempted to intervene in the crisis. There has been talk of ZETREF and DIMAF funds to improve liquidity and revive financially distressed companies. Inasmuch as it is a good policy to ease pressure off the balance sheets of these distressed companies by pumping cheap and long term money into these weak balance sheets, the fact that the funds are targeting financially distressed companies means that the money is most likely to be lost. One of the most plausible consequences of this intervention is that the companies that will access these loans will simply re-finance their existing loans and at the best case, remain in their current situation awaiting bankruptcy. And for a broke government that is battling to balance key emotive day-to-day survival priorities with such economic interventions, the execution of such decisions will be slow and very painful, if at all they live to be executed.

The foregoing analysis clearly points out that the fundamentals of our economy are quite bad and it is difficult to ascertain the amounts of liquidity that would need to be pumped into this economy until it starts to tick sustainably. Most of the business models that companies are running on are beyond their sale-by date and no matter how much money is pumped into their balance sheets, they will continue to struggle. Given these many liquidity-sapping corporate dinosaurs that litter the economic landscape and the fact that Zimbabwe is dollarised and has no capacity to quantitatively ease the markets, the liquidity crunch is definitely going to stay for another long, long season.

Elsewhere, quantitative easing seems to be the only consensus in stimulating growth that has become very elusive. US Fed announced on Thursday last week that, in the name, letter and spirit of quantitative easing, would start pumping $40 billion monthly in the economy buying mortgage backed securities for an indefinite period until it starts witnessing improvements in the labour market. And interest rates would be kept low until mid 2015!