On the 9th of May,
Zimbabweans woke up to a sweeping raft of measures announced by the President aimed
at stabilising the economy. Considering the 100% or so depreciation that had
happened on the exchange rate during the last two weeks and the subsequent
spike in prices of goods, the business atmosphere was already pregnant with
expectation of a drastic policy response. And indeed the response did not
disappoint.
A nuclear bomb detonated
Among the announced drastic
measures has been the immediate suspension of credit and drawdowns on new and
existing facilities. This suspension of credit, if implemented as suggested,
will have a nuclear-bomb effect on solvency of geared corporates who, without
notice, will have to contend with shrinking their working capital base. With the
monetary policy having been reluctant for years to hike interest rates in line
with inflation to tame speculative borrowing, the policy makers have opted for
a total shutdown of credit-induced monetary expansion. Productive sector loans constitute about 76%
of total bank lending, implying therefore that about ZW$190bn of credit has been
impacted. The consequences for the geared corporates are huge, considering that
for some, making a simple electronic transfer of money will almost be
impossible until one extinguishes their overdraft facilities.
Generally, hyperinflation and
mismanagement are known to decimate the real value of working capital for
businesses. In this current scenario, the twin effect of the current high
inflation and this policy-sanctioned amortisation of working capital through a
post-no-debit principle for geared corporates will leave a number teetering on
the edges of bankruptcy. Cash flow management has, all of a sudden, been
redefined for those in debt, in particular for those running overdraft
facilities. For the bankers, banking systems would need to be twitched to
prevent overdrawn accounts from making outbound transfers and or payments. This
is a directive banks will implement begrudgingly as they know fully well that
they will be driving some of their long-standing profitable clients into
despair.
Fighting two axis of evil – the ZSE and Parallel Rate
Surviving the haemorrhage for the
top 100 or so big borrowers is not going to be an easy road. Naturally, a shadowy
and underground lending economy will emerge driven by both greed and
sympathy. Funding cash flow requirements
will force most of the geared corporates to start disposing marketable
securities and foreign currency held in vaults, playing well into the open trap
of policy makers. The thinking and aspirations of the policy makers on these
moves are easily discernible. The allegations (which, unfortunately are a
reality) by policy makers that corporates have been keeping US$ cash in vaults
as well as in nostro accounts as savings and electing to use the ever
depreciating ZW$ bank loans as working capital are hard to dispute.
And the policy makers are
attempting to poke two perceived twin evils emanating from this; the runaway
exchange rate and skyrocketing stock exchange. The liquidity crunch that is
expected to hit the highly leveraged is expected to induce haemorrhage of USD
cash savings and sell-off of shares on the ZSE as companies will scramble to
maintain decent working capital levels after credit facilities are cut off.
With that the policy makers hope to achieve the twin objectives of bursting the
stock exchange and at the same time stabilizing the foreign exchange market. The
policy expectation is that successive years of domestic monetary expansion
bonanza and the resultant asset bubbles and runaway exchange rate will be
corrected swiftly to restore confidence and achieve price stability.
Prisoners Exchange
Whilst the script is well
crafted, with the end game seemingly secured beyond doubt, there are a number
of challenges in the proposed measures. Firstly, the fact that there is a
window for banks to approach the RBZ for considerations on ‘case by case basis’
to vary these measures for some esteemed and strategic corporates means that
sooner or later, the majority of big borrowers will become an exception. (Refer
to paragraph 4 of the RBZ 09 May Circular to Banks and MFIs). In pursuance of
national and personal interests, both the policy makers and banks will agree to
allow a select few but significant borrowers to continue accessing their
facilities.
These will, by natural selection,
be the big corporates and by extension, the biggest borrowers that produce
basic goods and strategic commodities that cannot be allowed, politically, to
be asphyxiated by abrupt credit cut-off. Of the ZW$250bn loans and advances or
so that are in the market today, the banks will be more than willing to plead
on behalf of their key borrowing clients in order to safeguard their interest
income that has suddenly become threatened. And the policy makers wanting to
avoid collapsing the economy, will agree on profitable prisoners’ exchange with
the banks.
Contributing 40%
total revenue for the banks, interest income is the single biggest source of
income and the banks have personal interest in pleading on behalf of their
biggest borrowers to be exempted from the policy. Given an opportunity, they
will gladly exaggerate the relevance of each and every borrower in the economy
to justify them being exceptions.
Bad debts a simple book entry. Just that!
The fears of rising
non-performing loans for the banking sector are real. The non-performing loans
ratio generally reflects management pedigree and astuteness. The ratio
currently sits just below 1% and more than anything, reflects the existing high
levels of inflation that have made every borrowing a profitable affair. Whilst
this rate is surely expected to spike if the credit suspension policy is
maintained, the bankers worry little about this impact as they would gladly
re-establish most the expired facilities once the policy embargo is lifted,
correcting the loan portfolio quality with a simple book entries. Just that! Whatever
will happen, it will take excessive courage for banks to sue their clients for
seemingly non-performing loans induced by this policy shock.
Binoculars zooming from the South
The impact of this policy measure
will not only hit the bankers and their ‘wayward’ clients, but unfortunately
will cascade to the very playground that politicians intend to insulate from
the alleged shenanigans of the corporate elites. The policy makers may not be
aware of how this policy, if sustained for a month or longer, can trigger huge
disruptions in the goods market, causing shortages that will in fact trigger
the very price increases they are attempting to arrest in the first instance.
Without any doubt, and of course
paying credit to globalisation, South African manufacturers and other businesses
alike, accounting for 47% of our imports (2020), are salivating at the prospect
of expanded and new business opportunities to fill the void that will be left
by our own manufacturers.
This policy measure, if sustained, will be credited for finishing-off a sizeable number of resilient domestic manufacturers and producers of goods and services that have stood the test of time in bubble and burst cycles of the last 3 decades, making fortunes and losing the same in equal measure.
And lawyers too will join the dancefloor!
For a discerning observer, the
suspension of credit facilities will not only hurt the primary borrowers. The
intertwined nature of business means that there are as well non-bank creditors
and debtors on balance sheets of corporates. The collateral and systemic damage
will be much bigger and more disruptive than originally thought as settlement
jams will become pronounced and protracted. And sooner or later, lawyers will
start to receive more calls from squeezed creditors wanting to force the hand
of the law to compel their debtors to pay-up, with auctioneers and business
rescue managers dusting their desks once again for busier days ahead.
Seeing a speck in a friend’s eye and missing a log in oneself’s!
Whilst there is an urgent need to
contain money supply growth by all means necessary to foster macro-economic
stability, doing so by swinging a sharp sword at lightning speed on bank credit
may not be the best of options. Understanding that banks and their customers are
not the primary source of the avalanche of liquidity in the market would allow
policy makers to introspect and look at themselves critically with regards how
the central bank and central government balance sheets have ballooned
significantly over the last three years.
As shown in fig 8 below, the stock of money as disaggregated in various items, has grown significantly in just over a year, from around ZW$35bn in June 2020 to about ZW$470bn in Dec 2021. This massive growth in the stock of money supply (even after netting-off the FCA component) would justifiablyaffect the stability of the exchange rate for a small open economy like Zimbabwe. Whilst the economy’s foreign exchange generating capacity has been superb, with for example diaspora remittances surging 43% to US$1.4 bn in 2021, the growth in domestic money supply has, unfortunately, been running faster at over 300% per annum and to expect the exchange rate to stabilise would be putting excessive faith in redefining economic thought.
Equally, the expectation by
policy makers that they can liquefy the markets to over-saturation levels and
expect economic agents not to hedge against the resultant erosion of value of
the domestic currency would be placing excessive faith in principles of collective
market-driven moral restraint.
A change in the auction
The policy announcement touched as
well on the Auction Rate. Leaving the price discovery mechanism to the market
in the allocation of foreign currency on the auction alone in our small open
economy is a contentious policy proposition. Considering that the domestic US$ denominated
revenues have increased significantly for most of those accessing foreign
currency from the auction, it would be more prudent to change the current
format of the Auction system from being a trading platform to a lending
platform. Those confident of their business models should borrow foreign
currency, through their banks, from the Borrowing (not Auction) floor. Allowing
the auction to be a borrowing rather than a trading platform will weed out the
majority of arbitrageurs and only allow those whose business models are sound with
traceable cash flows to access foreign currency. The majority of arbitrageurs,
who are of course important in every economy to help policy makers sharpen
their policy instruments always, can then be left to approach the market on a
willing-buyer willing seller framework and suit the desires of their souls.
Whilst the willing
buyer-willing-seller approach is generally deemed efficient as an allocative
framework, it responds swiftly to changes in money supply and it becomes
imperative for the policy makers to understand that as long as they pump new
stock of money, the exchange rate would never stabilise.
A road to inflation
When all has been said and done,
there is growing consensus in the market that the big contractors implementing
the big infrastructure projects have been behind the recent spike in exchange
rate, an allegation the policy makers have not bothered to respond to or
clarify. For policy makers that are known to formally respond vociferously to
even faceless social media characters, the decision to leave this allegation to
lie without response has even be more suspicious. But again, a mortgage for a
house with just four corners needs 15 years or so to pay-off in a normal
economy. The ongoing infrastructure projects, long overdue and having been
neglected for over 30 years or so, are a breath of fresh air. However, they,
just like buying a house, require long-term funding and should be carefully
spread out to minimise disruptions on the domestic monetary from. As it has been, the road projects have become
good roads to inflation!
A Truce
Criss-crossing the streets,
meeting and attempting to engage one another, policy makers and business
leaders have had a busy few days since the announcement. Whilst the business
community has been blaming policy makers for not consulting, , the policy
makers have opened the bazooka, blaming business for being willing agents of
chaos serving to toe a regime change narrative from their ‘foreign’ handlers
ahead of elections next year. That animosity and suspicion comes from many
years ago and doesn’t seem to be going away. After a round meetings with cups
of tea and increasing sounds of laughter, the policy maker will declare victory
and cease fire. Sooner or later, a truce
will emerge, but of course not without casualties from the business side. But
again, that is the cost of not learning from our previous mistakes.