eBusiness Weekly
Bank sovereign nexus alone is enough reason for ED to travel
Chris Chenga
There has been a lot of debate over the number of foreign trips that President Mnangagwa has taken since his inauguration last November. Arguments against his perceived propensity to travel are largely concerned with the cost of trips considering the Government’s budgetary constraints, and a comparison to other potential matters that may need to be addressed on the home front.
These concerns can be narrowed down into an opportunity cost narrative where the President’s trips are compared to alternative activities.
Perhaps then if one was to justify the foreign engagement, one may have to elucidate the relevance of FDI for the Zimbabwean economy at this point, persuasively arguing why it is of high priority to an extent that beats out home front alternatives.
Firstly, Zimbabwe’s economic outlook lacks any substantial internal resolution without foreign financial inflows.
Due to bad fiscal management over the years, Zimbabwe is without much productive credit in the economy. The credit that exists, and continues to be created through Treasury Bills and central bank financing is unsustainable.
In fact, it is a continuous threat to the economy’s long-term concern. Since about 2013, the economy has been vulnerable to what is termed a Bank Sovereign Nexus; whereby the Government’s sovereign debt burdens have pushed it into swallowing up credit in financial markets, particularly the banking sector. The issuing of Treasury Bills and credit financing through the central bank for government spending has shrunk productive credit in the economy.
Zimbabwe needs foreign financial inflows (credit) into the economy, to reduce the growing vulnerability to the bank sovereign nexus. Only when the economy has decoupled Government debt from credit in the market can we start to see productive credit.
On the other end, a Bank Sovereign Nexus unattended ends in total collapse that hits enterprise and citizens with an economy that takes years to recover from.
To show the current level of Bank Sovereign risk in the economy, one should notice challenges in the banking sector such as the difficulty to lend out short term deposits. While certain banks have recorded increase in deposits, the core matter is whether or not these deposits are long term or short term?
Because of the current Bank Sovereign Nexus, savvy foreign investors who typically finance banks are averting to commit invest long term capital; hence you find major banks depending on financing from developmental institutions such as the African Development Bank. We need to notice what foreign investors have already noticed about credit capacity in our economy. The IMF has already warned of this Bank Sovereign Nexus in its reports on the economy.
The composition of bulging RTGS balances in the banking sector should not be perceived as credit in the economy, but rather called out as risk that they are.
There is growing entitlement to bank balances without matching productivity in the economy. That is a credit bubble caused by a Bank Sovereign Nexus. As learnt from the recent earnings season, the three largest banks in the country by market share all show interest income as less than 20 percent of their total revenues year to year.
That means though balances are increasing, credit in the economy in real lending is not showing similar increase; in fact it is paltry. The bank sovereign nexus vulnerability in Zimbabwe is no clearer than in the profit generation activities of the banking sector.
When banks divest from interest earning activities it must indicate two things; first, there is little productivity behind the credit on their balance sheets, and second, there is little opportunity for credit channels that are profitable in the economy.
Furthermore, the market average of a 13 percent annual interest rates is defeatist in any economy.
Very few productive activities yield returns above such a benchmark. That means the productivity capacity of an economy is detached from any sustainable credit. Think of it in terms of actual business.
How many commodities exist with a profit margin greater than a working capital pegged at 13 percent, let alone to yield retained profits and be able to service that credit? If say a loaf of bread costs $0,90, that means 12 cents of the retail price is taken up by cost of credit alone. With costs of raw materials and operational expenses, the business becomes difficult to proposer.
Indeed the argument is to elevate President Mnangagwa’s trips to a priority above home front issues, say, for instance, the recent health care industrial action. It seems that consensus empathized with medical doctors getting better earnings and work conditions.
However, these are all expectations one central government and its fiscal capacity. But consistent with the Bank Sovereign Nexus theme, the shrinking credit in the economy was foremost caused by Government fiscal constraints. Adding to those constraints would be more harmful that resolving those constraints first. Without attending to government’s credit constraints, the civil service, including medical doctors cannot find a resolution that doesn’t risk any further harm on the broad economy as a whole.
Currently, if civil service wages are raised how will the government fund those expenditures? It’s a Catch 22 if looked at without having a foreign investment resolution that eases Government’s fiscal constraints.
The home front supposedly also requires infrastructure investment for better public goods provision. This cannot be denied.
However, again, central government’s fiscal outlook currently doesn’t appeal to the kind of capital needed to avail these infrastructure improvements. Over Minister Chinamasa tenure as Finance Minister, Government has raised less than 10 percent of infrastructure commitment, hence the growing infrastructure deficit.
It is very difficult to issue long term bonds when the fiscal outlook leaves the government without a credit rating at all.
Moreover, and perhaps less complimented for his conservative approach, Treasury Bills and credit financing for infrastructure would risk collapsing the economy and Chinamasa has done well to desist from doing such.
Conceded, there are many activities required on the home front in terms of soft infrastructure, generalized as the ease of doing business and other bureaucratic reforms. Such tasks are not directly to be executed by the President.
In a scenario where government’s fiscal outlook is where it is, only a present face from the Head of State may persuade foreign investment into an economy that by all rationale metrics is a far sell to foreign inflows. There is no other room President Mnangangwa should be than in Presidential Conference halls with foreign counterparts. There is a pending Bank Sovereign Nexus and credit crisis back home in Zimbabwe.
Economic observers must always keep a keen eye on the core problems within an economy, and the potential risk vulnerabilities that exist.
Government’s fiscal outlook is a high priority concern in our economy, and there is a strong case that it is of first priority if there is to be any desirable progress moving forward.
FDI would be the most potent resolution for getting more productive credit into the economy, and perhaps instead of criticising the President’s foreign trips, the market must be interrogating whether the trips are actually yielding and realistic chances of FDI inflows at all.
