Liquidity Crunch Threatens Continued Dollarisation

BMI View: Near-deflation and bank queues indicate that a liquidity crunch, which has haunted the Zimbabwean economy for the last five years, is only getting worse. The authorities have two options to address this: attracting net external inflows or reverting to a domestic currency. We believe that the latter looks more likely following several developments that seem to reaffirm the government's commitment to its foreign investment-deterring indigenisation program. The 2014 budget speech scheduled for December 17 2013 will provide further clues as to the likely policy trajectory.

Annual inflation declined to 0.54% year-on-year in November 2013, down from 0.59% y-o-y in October as tight liquidity and a weak South African rand push the Zimbabwean economy closer to deflationary territory.

It is the former point - the issue of tight liquidity - which is playing havoc with economic growth and causing headaches for policy-makers. As the chart below illustrates, deposit growth has stagnated with the deposit base barely having increased over the course of the last 12 months. At the same time, banks are being buffeted by high and rising non-performing loans, which are eating into capital bases. Queues have formed at some banks as these institutions are limiting the amount each customer can withdraw. There were reports in local media on December 17 that frustrated customers damaged property and assaulted a manager at a central Harare branch of Allied Bank after the bank reportedly ran out of cash.

Flirting With Deflation
Zimbabwe - Annual Headline Inflation, % y-o-y

BMI View: Near-deflation and bank queues indicate that a liquidity crunch, which has haunted the Zimbabwean economy for the last five years, is only getting worse. The authorities have two options to address this: attracting net external inflows or reverting to a domestic currency. We believe that the latter looks more likely following several developments that seem to reaffirm the government's commitment to its foreign investment-deterring indigenisation program. The 2014 budget speech scheduled for December 17 2013 will provide further clues as to the likely policy trajectory.

Annual inflation declined to 0.54% year-on-year in November 2013, down from 0.59% y-o-y in October as tight liquidity and a weak South African rand push the Zimbabwean economy closer to deflationary territory.

Flirting With Deflation
Zimbabwe - Annual Headline Inflation, % y-o-y

It is the former point - the issue of tight liquidity - which is playing havoc with economic growth and causing headaches for policy-makers. As the chart below illustrates, deposit growth has stagnated with the deposit base barely having increased over the course of the last 12 months. At the same time, banks are being buffeted by high and rising non-performing loans, which are eating into capital bases. Queues have formed at some banks as these institutions are limiting the amount each customer can withdraw. There were reports in local media on December 17 that frustrated customers damaged property and assaulted a manager at a central Harare branch of Allied Bank after the bank reportedly ran out of cash.

Deposits Stagnating
Zimbabwe - Banking Sector Deposits

Although a reminder was hardly needed, the move towards deflation and the banking sector's woes drive home the point that the Zimbabwean economy is in dire need of a significant capital injection. With the central bank powerless to grow the dollarised money supply, this can only happen via an increase in external inflows in the form of export revenues, portfolio flows, foreign direct investment and foreign grants and loans. However, the outlook for these inflows is not good given signs that the ZANU-PF-led government will intensify the country's indigenisation drive in early 2014. Indeed, signs of moderation since ZANU-PF regained power at the July 31 election were largely absent from ZANU-PF's annual party conference, which took place in December 2013. White and foreign-owned businesses reportedly received a form entitled 'Notification of Extent of Indigenisation Implementation Plan' in December, which reiterates that these businesses must comply with the empowerment legislation by January 1 2014.

In this context, it is very difficult to see how the economy will attract the inflows needed to stimulate domestic demand. As such, the authorities will have to choose between their plan to indigenise the economy and their promise to maintain the multicurrency regime if they are to make any progress at addressing the liquidity crisis. Given the recent developments outlined above, it looks more likely that the latter rather than the former will be reneged upon even though this would almost certainly be devastating to macroeconomic stability over the medium to long term. Finance Minister Patrick Chinamasa is due to present the 2014 budget on December 17 2013 and we will be keeping a close eye on the budget statement for further indications of policy direction.

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Sector: Country Risk
Geography: Zimbabwe
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