With exports falling and capital thresholds for banks rising, does Zimbabwe have what it takes to resurrect its trade business? Shannon Manders reports.
Things are looking up for Zimbabwe. The country has been working solidly on a campaign to reintroduce a better regulatory framework to support future economic growth, bolster the financial markets and reduce fiscal leakage.
The country’s latest conquest came in late October when it was accepted to join the Africa Trade Insurance (ATI) agency, which – once approved – will facilitate trade flows and foreign direct investment (FDI) by making lines of credit more easily available and allowing investors better access to political risk cover.
Zimbabwe needs to make a US$25mn contribution to ATI in order to seal its membership, and investors are expected to keep a close eye on the country until such time as those funds have been raised.
Other good news came earlier in October in the form of Afreximbank’s decision to increase Zimbabwe’s borrowing limit by US$200mn to US$600mn.
“The enhancement of the limit available to Zimbabwe implies that the volume of Zimbabwean trade the bank is supporting has increased and the number of institutions accessing trade finance has broadened,” Kanayo Awani, Afreximbank director of trade finance and branches tells GTR.
The bank has also provided US$50mn to the Zimbabwe trade revival facility (Zetref), which will use the funds to provide cheap medium-term financing to local companies, predominantly in the agriculture and manufacturing sectors, for retooling purposes.
According to Awani, the bank is also working with the relevant authorities to introduce financial instruments aimed at reviving the interbank market.
“The contemplated financial instruments are specifically intended to support access to liquidity by trade finance banks wherein trade-related assets will constitute the underlying assets, in contrast to the provision of a broader liquidity facility,” Awani says.
These efforts not only facilitate the re-entry of Zimbabwe into the international syndicated market but also the return of other financiers to the country, thereby broadening the supply of much-needed trade finance lines.
Becoming better capitalised
The country itself is working hard to improve its banking sector and rebuild its economy, and in August, Zimbabwe’s central bank announced that it would be increasing the capital requirements for banks by 900%.
According to the central bank governor, the move is meant to help create strong and healthy banks able to withstand competition and survive economic shocks.
Banks in Zimbabwe have been given until 2014 to meet the new minimum requirements, but must be 75% compliant by the end of this year. Commercial and merchant banks have had their capital thresholds increased to US$100mn from their current levels of US$12.5mn and US$10mn respectively.
“In the long run it is anticipated that better capitalised banks can leverage better, therefore benefitting all forms of financing, including trade finance,” says Omen Muza, managing director at TFC Capital in Zimbabwe.
But the new rules present a double-edged sword, and locally-owned financial institutions are likely to face challenges in raising the additional capital.
“We may see the risk aversion of banks that anticipate challenges in raising capital increasing as they try to preserve capital, especially against the background of rising default risk,” adds Muza.
There is a firm belief among some market players that the new capital rules are intended to force mergers and acquisitions in the local banking sector.
“Partnerships are emerging; investors are coming through and bringing new capital,” says Sylvester Dendere, deputy managing director at Zimbabwe’s Kingdom Bank, a subsidiary of the recently formed AfrAsia Kingdom Zimbabwe Limited.
As a result of the local bank’s partnership with AfrAsia, Dendere remains confident that it will meet the December deadline. “At the moment there’s nothing to hinder us given the plans that are afoot to comply with all the requirements going forward,” he says.
It is thought that the country will attempt to achieve a consolidation similar in scale to what occurred in Nigeria a few years ago, which saw banks being reduced in number from 89 to 25.
Already in Zimbabwe, bank holding companies such as FBC Holdings, CBZ Holdings and ZB Holdings, all of which own building societies, have been seeking to merge these with their banking units in order to meet the new capital requirements.
“So far consolidation has largely been a family affair and we are yet to see interbank unions,” reports TFC’s Muza. He explains that as much of the new capital required cannot come from the local market, given the current liquidity profile, the new rules are expected to result in “FDI from new (if we can find them) and existing (if they can make the leap of faith required to commit additional capital in a market with so much uncertainty) foreign shareholders”.
On the downside
But the move has also sparked fears that locally-owned banks will fold, following in the suit of troubled banks Genesis Investment Bank, Interfin Bank and Royal Bank, all of which surrendered their banking licences in mid 2012.
“The liquidity crunch has not eased, and if anything, appears to have worsened. So it would not be surprising to see a reduction in the number of banks,” says Muza.
What’s more, some of the local commercial banks took almost three years to meet the original US$12.5mn capital requirement, so there are questions about whether the 24 months to June 2014 will give them enough time.
“Given the half-year performance of some of the banks, the fears may very well be justified,” adds Muza.
He explains that there is also growing concern that an unintended consequence of these new rules might be to perpetuate a two-tier banking system characterised by stronger, adequately capitalised and “all powerful” foreign-owned banks on the one hand, and weaker indigenous banks “who would struggle to raise the new capital with negative implications on their deposit mobilisation capabilities” on the other.
Any changes to the capital structure of local banks, which tend to have higher loan-to-deposit ratios, will affect lending, trade finance included.
Addressing the deficit
More access to trade finance is what the country needs to save its ailing export sector.
Despite improved export performance since 2009, Zimbabwe’s trade balance widened significantly from US$1.6mn in 2009 to US$3.088mn in 2011.
The data for the first five months of 2012 shows that the country’s trade deficit has marginally improved by 32% compared to the same period last year, yet according to ZimTrade, the country’s trade development and promotion agency, export performance remains “sluggish”.
The country’s major source of liquidity is export receipts and transfers. But with declining export figures, its chance of an economic revival of any kind remains uncertain. Hampering export growth is the manufacturing sector’s outdated infrastructure, which is in dire need of upgrading, and the long-term financing that will facilitate this.
“For those that continue to produce using the old technology, the cost of production is very high,” says Musiwa Chirimuuta, head of international and structured finance at Kingdom Bank. “This means that when they want to compete in the global market, they cannot, as their goods are more expensive.”
Other structural challenges include inadequate power and a high cost of labour, which further impedes Zimbabwe’s products from becoming competitive in the international market and regaining its former low-cost producer status.
Chirimuuta says that it is the Zimbabwean government’s responsibility to create an enabling environment that will allow private players to partake in economic activities.
“Financial institutions are there to play the role of intermediation, so they must be able to mobilise the required resources of foreign lines of credit and then onlend to the industry,” he adds.
Support for commodities
In other news, Zimbabwe has renewed its efforts to re-establish its forgotten commodity exchange. The Commodity Exchange in Zimbabwe (Comez) was launched in early 2011 but has yet to start trading.
According to an announcement made by Zimbabwe’s industry and commerce deputy minister Mike Bimha in mid October, the Zimbabwean government has “resuscitated” the process of bringing the exchange to life, and meetings continue to take place between the various relevant ministries to address the political turf wars that had hampered the exchange’s launch last year. “I’m sure we should be able to announce something positive very soon,” Bimha says.
In the meantime, the private sector has stepped in to ensure price discovery in the agricultural commodities sector. The Land Fortune Commodity Exchange was launched in mid September and will seek to establish an electronic agricultural commodities trading and bartering platform, as well as provide marketing services and storage facilities.