Markets jittery amidst bank concerns

By Lance Mambondiani

THE current market-wide liquidity crisis has brought back to the spotlight the soundness of Zimbabwean banks and their role in the long drawn econom

ic crisis.

There is no doubt that the country’s macro-economic conditions have had a negative bearing on the health and soundness of banks. Faced with contraction in the economy and the challenges of unsuitable exchange rates and interest rates, the Zimbabwean banks have actually demonstrated remarkable resilience.

The importance of banks in financial markets cannot be underestimated. Many economic studies have pointed to the importance of banks and the financial sector as engines for economic growth.

A well-developed and sound financial system can contribute significantly to economic growth because of the important role that financial intermediaries play in bridging the disequilibrium between savings and investment needs within an economy.

The importance of banks to the stability of the financial system is also highlighted in their broader public role in the payment systems and in being the main depository for the economy’s savings.

The liquidity crisis has brought back memories of the 2003/4 financial sector crisis ignited by the central bank’s “shock therapy” monetary policy changes after years of regulatory forbearance. The policy changes exposed inherent weaknesses in some indigenous banks resulting in a sector-wide liquidity crisis. That crisis culminated in the collapse of 13 financial institutions between December 2003 and June 2004.

Within six months, five banks were placed under curatorship, two under liquidation and three collapsed into the ZABG project under the Troubled Banks Fund.

The 2003 Zimbabwe banking crisis was however not systemic because the affected banks collectively accounted for 12% of bank deposits and 16% of total bank assets.

A liquidity crisis occurs whenever a firm is unable to pay its bills on time or lacks sufficient cash to expand inventory and production or violates some terms of an agreement by letting some of its financial ratios exceed limits.

A liquidity crunch in Zimbabwean banks reflects a multi-dimensional problem. A volatile economy creates moral hazards with strong speculative elements. Overregulation has also resulted in an unprecedented increase in black market activities. Bad banking practices, weak regulation, ineffective supervision by the agencies and the market also induces excessive risk-taking by banks such as the increased participation on highly illiquid markets such as the property or stock market in an attempt to avoid inflationary pressures.

Almost always and anywhere, bank distresses have a macro and micro origin, being a complex interactive mix of economic, financial and structural weaknesses. To focus myopically on the weak internal governance of banks as the major cause of distress misses the essential point. The recurrent cash crisis, the RTGS gridlock, out-of-control inflation and the continued pressure on the exchange rates indicates a deeper economic fracture than the authorities would care to admit.

The liquidity crisis is said to have been ignited by Value Added Tax payments by companies due a couple of weeks ago. Despite all these problems, the liquidity crisis in banks appears to have started with the cash crisis back in December 2007. The explanation for the crisis, which seemed plausible, then, was that cash barons hoarding approximately Z$30 trillion from the formal banking system ignited the crisis.

As the cash problems persisted, it became clear that the problem was deeper than first anticipated. A number of other factors have also contributed to the crisis, these include the increase in the statutory reserve ratio by 5 percentage points across all banking classes except building societies which were effected on 6 December 2007.

The increase in cash withdrawal limits to $500 million on January 18 also piled pressure on banks. The central bank is also said to have scaled down quasi-fiscal disbursements such as the Agricultural Mechanisation Programme, Basic Commodity Supply Side Intervention Facility and Agricultural Productivity Enhancement Facility.

Significantly, the central bank’s recent position suggests that banks were failing to provide security in the form of Treasury Bills (TBs) when collecting cash since a significant portion of bank assets were locked in speculative investments in the stock market, real estate, motor vehicles, foreign currency and other non core inflation hedges.

Surprisingly, this is one of the reasons fingered for the 2003 banking crisis. This would seem to imply that the central bank’s regulatory reforms over four years have not made that much of a difference.

Considering the initial explanation given for the cash crisis, there is every reason to conclude that the origins of the crisis exhibit a two-way link, internal to banks and external or macro-economic in origin.

So how has the liquidity crisis affected the market and most importantly how will it affect your investments? Many investors have watched and seen the value of their portfolios halve overnight as corporates, especially banks, scrambled out of the stock market to improve their liquidity positions. Since corporates account for approximately 80% of the investors on the ZSE, it was inevitable that the stock market would take a massive hit leaving many investors shocked into disbelief.

The losses were wholesale across banking counters reflecting the liquidity crunch and how companies had bought into each other.

By Tuesday January 29, the top five losers were NMBZ leading the loss table having lost 75% of its value from an all time high of 200 000 a share to 50 000.

Halogen was also down 75% from 60 000 to 15 000. Mashhold down 70%, Turnall (68%) and Apex (67%).

The market had started to show signs of recovery, with the industrial index opening this week on Monday at 1 982 803 340,57 up 4,63% from previous week.

By mid-week Wednesday the 5th of February, the industrial index again shed 3,14% to 1 920 607 907,63 points in mixed trading. The mining index retreated 4,09 percent to close at 1 635 455 785,07 points as the entire market swings back and forth.

So what caused share prices to plummet when the stock market rally was breaking record ground and seemingly resisting gravity? The truth is the January seas of red could be put down to one thing, fears of a 2003-like liquidity crisis.

The stock market volatility is being caused by lower-than-usual amounts of ready cash for assets to trade hands without the sellers taking a significant loss.

Liquidity is what the Zimbabwe stock exchange is lacking at the moment. Stockbrokers are not permitted to accept cash for stock market transactions. Most stock market payments are settled through the RTGS system which is currently experiencing settlement delays stretching many days.

The warning to banks by the Finance minister to immediately clear cash queues or face unspecified action together with the central bank’s revelation that banks were not picking up cash due to lack of security caused by investments in illiquid assets sparked a sell-off frenzy with banks unwinding huge chunks of their stock market portfolios.

The stampede out of shares has caused money market rates to firm significantly. Money market rates were quoted at 500% and 700% for short-term deposits, whilst 30 to 90 day money was quoted at 300 to 500%.

Despite the increase, real rates remain negative in relation to hyperinflation.

Whilst it may be difficult to convince punters that it is actually a good idea to buy shares at current levels and average out your losses, stocks now look ridiculously cheap by historical standards. After the fall out from the latest bout of jitters is done, there could be some real bargains. Most counters can now be picked up for a mere 60% off their highs, they are trading on low price/earnings (P/E) ratios, they appear to offer good dividend yields, their earning yields compared to the money market are good and in the case of property companies they are trading on huge discounts to their net asset values (NAVs).