BMI View: We are sceptical that a planned Zimbabwe an banking sector bailout will go ahead due to the government's financial constraints and possible reluctance on the part of the banking sector. Even if it does go ahead, we do not believe that it will be a panacea for Zimbabwe ' s liquidity-centred economic woes.
During his semi-annual state of the economy add ress, Finance Minister Tendai Bi ti outlined plans to establish a bail-out program me that will take non-performing loans (NPLs) off the balance sheet of Zimbabwe ' s troubled banks . The program is set to be financed by a US$1bn syndicated bond whic h will be issued by the Zimbabwe Resolution Corporation (ZRC), a special entity to be created for the purpose. According to local media, the syndicate of creditors will be led by Global Emerging Markets, a Dubai-based private equity firm and will be made up of variety of creditors including sovereign wealth funds, Afriexim Bank , the Development Bank of Southern Africa and domestic pension funds. The bond will be unconditionally guaranteed by the Finance Ministry . Zimbabwe's banks would be asked to contribute 2% of their total risk weighted assets to a s inking fund which will be used to service the bond.
Positive On The Surface...
Although detailed information on the prevalence of NPL s is not available , Biti estimates that they account for as much as 80% of total outstanding loans at some banking institutions. On the surface, clearing these from banks ' balance sheets would improve the health of the sector and would allow banks to lend more aggressively to the capital-starved economy. A lthough details on how the program will operate are similarly unavailable, we assume that it will involve a debt for equity swap which will help banks to achieve the substantially higher capital requirements announced by the Reserve Bank of Zimbabwe (RBZ) in July . ( B anks will be required to hold minimum equity capital of US$25mn by December 2012, up from US$12.5mn currently. This amount will increase to US$100mn by 30 June 2014). Finally, the removal of NPLs from their balance sheets will make those banks wh ich are unable to raise required capital , more attractive take-over targets and will likely accelerate consolidation in the industry.
...But Questions Exist
However, there are several questions about whether the bail-out plan is feasible and whether it will have as positive an effect as the authorities are hoping. Our first concern is whether the authorities will be able to raise the money that they are planning to. The government's unconditional guarantee of the bond is unlikely to give much solace to investors given that it has recently revised down its planned spending to US$3.4bn (from an initial estimate of US$4.0bn) owing to insufficient fiscal resources. The fact that the authorities already owe multilateral creditors close to US$8.0bn will also diminish the comfort provided by the government's guarantee.
It is also uncertain what sort of response the plan will get from the banks themselves. A significant portion of NPLs are in the hands of individuals who are connected to the banks and their employees. The fact that the ZRC bailout entity is likely to be far more aggressive than the banks have been in attempting to recover outstanding obligations could very well diminish the eagerness of bank executives to participate in the bail out.
Even if the government is able to raise the money and banks can be persuaded to participate, the positive effect that the bailout will have on the economy will be limited for several reasons. The sector-wide loan-to-deposit ratio had reached 0.87 in July 2012 meaning that there is limited room for significant additional lending against the existing pool of deposits.
|Loan To Deposit Ratio Already High And Rising|
|Zimbabwe - Total Banking Sector Credit & Deposits and Loan To Deposit Ratio|
Furthermore, as the chart below illustrates, the majority of deposits are short-term which is prec luding banks from lending for tenures long enough to be beneficial for meaningful corporate investment. Although any bailout would go some way in improving confidence in the banking sector and therefore attracting longer term deposits, we believe that a great deal more will need to be done to rebuild a functioning credit market.
|Zimbabwe-Breakdown of Banking Sector Deposits In July|
Finally, we have argued frequently in the past that the main problem for the Zimbabwean economy is a liquidity crunch as inflows into the dollarised economy are not sufficient to increase the domestic money supply to the extent that it is meaningfully stimulating domestic demand. Although the resuscitation of the banking sector will go some way to addressing this, it is a small piece in a much larger puzzle. Indeed, in order to decisively address the liquidity crunch, the economy will need to attract greater net foreign currency inflows. To achieve this, the authorities will need to provide an environment that will lure in foreign investment which will require the provision of certainty on issues such as the constitution, the next elections, President Mugabe's successions and the indigenisation drive.