The Global Credit Crunch – Implications For Zim

THE global economic slowdown precipitated by the turmoil in the inter-twined world financial markets is unlikely to have a direct impact on closed economies like Zimbabwe.

Advanced economies, whose banking systems offer exotic financial products such as asset-based securities, have already experienced a direct hit.
This has seen central banks coming out with bail out plans. To avoid a global financial sector meltdown, respective central banks pumped liquidity into the market and simultaneously reduced interest rates.
Africa has not been totally insulated from the chaos and the after effects are yet to be felt. The immediate reaction has been portfolio outflows from the more developed African markets. Among the sharp declines have been the Egypt CASE 30 index, down 47,9% YTD, and the Mauritian Semdex index down 22,43% YTD.
Other evidence of the flight of “hot money” from African countries has been the currency depreciation evidently noticeable through the South African rand, Kenyan shilling and the Mauritian rupee.
The countries that were financing current account deficits with unstable international funds which are in essence “carry trades”, where investors take advantage of higher interest rate regimes compared to their home countries were also hit as institutional investors grapple with liquidity. The sell-off in most of the markets has also been a result of genuine investor concern on the sustainability of earnings given the global slowdown.
A case in point is Mauritian tourism counters which have taken a pounding on the market.  Investors anticipate fewer visitors from overseas due to a decline in disposable incomes. The assumption is “credit squeezed” American investors would rather go to close-by Hawaii, if at all they can still afford the holiday, than come all the way to Africa.
In this context, Zimbabwe has not had any direct exposure to the crisis. The banking system is totally insulated from the meltdown due to the fact that there has been minimal international investment flows from anywhere largely as a result of poor economic policies on Zimbabwe’s part.
The slowdown in the global economy will not help the country in the interim as consumer demand worldwide slows down. The country will require international capital flows which will not come like a flood as the potential investors are trying to douse the fires in their own backyards. The traditional development finance institutions like the International Finance Cooperation (IFC) and the World Bank, which are primarily funded by the US and other European countries that are facing a potential recession, may still provide grants and other development financing albeit on a potentially smaller scale compared to times when economic prospects looked brighter.
Zimbabwe, under the current circumstances is also faced with competition for the limited international capital from other African countries which now have more stable economic policies and more favorable sovereign credit ratings.
Botswana, for example, currently has an “A” S&P rating whilst Kenya has a  “B+” from both S&P and another international credit rating agency, Fitch. Zimbabwe on the other hand is not rated due to a protracted period of economic decline and inconsistent policies such as those pertaining to property rights and exchange controls.
The general opinion which is debatable is that if the country was to be rated it would be classified as a “D” which in essence is very high risk. The implication in simplistic terms, is that if an international investor has 1 US dollar to invest in a recession, this risk–reward consideration will have a great influence over his decision. Other African countries such as Ghana have in recent years discovered oil thus there will be a scramble for that “one investible US dollar” from other African countries.  
The analysis nevertheless should not be viewed as a “doomsday message” for Zimbabwe as the world has seen chaos before but it still did not come to an end. The potential for any capital flows at this stage hinges squarely on the politics.
The successful implementation of the much hyped power sharing agreement will restore some confidence in the economy as we could see inflows especially directed at infrastructure, manufacturing, mining and other key economic sectors.
The country, relative to other African countries also possesses a developed infrastructure base and a skilled labour force which should give it a competitive edge in attracting investment. A good number of South African companies have operated in Zimbabwe before and these may also be keen on re-establishing a presence in the country in the total absence of or minimal international capital.
The void left by the demise of the country’s industry has informally been filled by South African companies exporting cooking oil and even tissue paper through cross border traders. Thus a more conducive and stable environment could encourage their direct participation.
Sovereign Wealth Funds with plenty of oil money which have already taken positions in hugely discounted and distressed western banks may be considering diversifying and could consider directing some of their investments our way. This will in the short term be for those with a higher risk appetite. The future nevertheless is swinging on the hinges of one variable which, as we all know, is the politics.
lThis view from the outside is courtesy of our correspondent Precious Mhlandhla, an equities trader now based in Johannesburg South Africa and formerly of the Tetrad Group.

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