Zim should try to access global debt markets

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Minister Chinamasa

The key is to convey structural discipline and inflation stability

Chris Chenga
In the first quarter of this year, the IMF published its Regional Economic Outlook report on sub-Saharan Africa. It was titled “Restarting the Growth Engine”. There was an intriguing section on what were described as turning points; moments that economies transitioned into growth spells of either “up-breaks” or “down-breaks”. 

The simple premise of these growth spells is that up-breaks occur when a nation sees economic growth. Down-breaks occur when it experiences contraction. Emphasis, however, was placed on the lifespans of either trend. Up-breaks in our region have historically been shorter than other regions in North Africa, Asia and South America. The typical up-break in sub-Saharan Africa is six years, while other regions sustain up-breaks of up to ten years.

That means for investors, regionally, we tend attract “money-in-money-out” type of investments. We struggle to inspire patient long-term investment because our up-breaks are short lived.

Moreover, according to the report, when we approach the end of the short lived up-breaks after six years, the economy and investors are victim to hard landings; an economy abruptly slows down and enters into almost sudden recession. The uniform theme within these hard landings is inflation and increased public expenditure!

Why our region is not attracting long term investment?

Money in-money out investment is not as structurally guided as patient long term investments. That is to say, investors attracted to short lived up-breaks are not as convinced by the intentional structural management of our policy makers and governance. Instead, they seek returns based on technical factors of investment that spot short lived opportunity. A cross regional analysis would help expand this point.

Consider for example, presently according to Henrik Raber, head of capital markets at Standard Chartered, Asia’s bond markets in general have had a buyout year so far. He says “Asia excluding Japan (AEJ) issuance is up 61 per cent compared to this time last year, to $221 billion, according to financial markets platform, Dealogic.” The surge in Asian issuance and take up by foreign lenders can be attributed to strong macro-economic fundamentals and intentional economic strategy by Asian policy makers and governance. The $221 billion issuance is significantly higher than our regional bond                                                                                                                              market.

But here is the key difference; according to a different World Bank report at the start of 2016, even though debt issuance in our region may have gone marginally up, one of the main reasons is that some of our regional peers benefited from Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) debt relief programs. This means lenders in our region are less inspired by our intentional structural management than they are in Asia’s.

Source: Brookings & Dealogic

The other difference is that as most of our economies are resource dependent. Improvement in commodity prices as the other factor for lending. But, again, that is less of a structural persuasion. It is a short lived opportunity from global prices. This cross regional analysis is at the macro-level, where bond are publicly guaranteed by central governance.

Let’s take it further to a micro-level analysis. As Raber of Standard Chartered continued looking at Asia, “High yield issuance is up 350 percent year-to-date in Asia compared to this time last year, totalling $48 billion. European high yield volumes, by comparison, are up 39 percent to $75 billion, while US high yield issuance is up 11 percent to $145 billion.”

So within a more micro-context, borrowers within other regions are attracting higher risk investments that are not even investment grade as per ratings agencies. It is fair then to assume that when there is trust in the structural management of economies, micro-entities such as the banks, construction and telecommunication companies operating there are also enabled to access their own investors; notwithstanding the absence of any formal investment grade recognition of their own.

What does this mean for Zimbabwe?

Dollarisation was our turning point to precede a growth spell since 2009. This was the beginning of an up-break. Based on GDP trends, Zimbabwe is still riding an up-break that is in its eighth year, surpassing the regional average up-break.

However, economic growth has been marginally slowing down from 12 percent per annum in 2010 to near 3 percent this year. Simultaneously, investment flows have been diminishing. At first glance, Zimbabwe is currently exposed to inflation risk as foreign currency shortages threaten price stability.

It has been identified and acknowledged that government expenditures are pressured, with consistent fiscal deficits. This does not give an optimistic outlook, as we are reflecting uniform themes of a hard landing. Unmitigated, an abrupt and sudden recession can occur ending the up-break.

It is timely then for economic governance to attract long term investment confident in our structural management, and more importantly, circumvent any signs of the typical hard landing that ends up-breaks! We are at a pivotal point if we are to sustain our up-break.

How do we access debt market?

Bonds are the best kind of investment to reflect investors’ conviction in structural management. There are a number of things Zimbabwe can do to win over investor confidence in debt markets.

Firstly, to gain investor trust, Finance and Economic Development Minister Patrick Chinamasa must give productive and stimulus feedback on the Treasury Bills he has put in the market. In the past several years, he has accumulated just over $2 billion worth of treasury bills, which would equal to the third highest Eurobond to foreign investors in the region. Whil he has argued that this has been invested in productive and stimulus use, precise evaluation would help convince potential investors on central government’s debt utility.

Secondly, Government must show an ability to avert currency risk. Many regional peers struggle to service foreign denominated coupons due to racing inflation. The next few months will be telling for Zimbabwe as presently bond notes are under pressure to sustain a nominal parity with the USD due to a lack of foreign currency.

There is reason to be optimistic though, balance of payments are improving, gold and tobacco exports were sound, and manufacturing capacity has increased. This helps improve foreign currency accumulation for bond payback and currency parity.

Thirdly, debt strategy must be targeted towards consistent income generating projects. The fact that central government is struggling to access global debt markets may not necessarily be the end all of effort. We must take the opportunity to support micro-entities like ZB Bank recently loosened sanctions. Micro-entities unlike central government have specific income generating initiatives which give confidence to investors. For instance, with our housing deficit near 2 million homes, Housing bonds such as those of the IDBZ recently fully subscribed can be performing bonds with consistent payments that encourage investors. Sectors such as agriculture have improving value chains, and entities such as Chemplex and ZFC may potentially be aligned to revenue streams that can service debt obligations.

Conclusively, there is increasing factorizability for global bonds both on the demand and supply side. Lenders are not earning high returns in financial institutions. As banks face stringent capital constraints in the new Basel era and IFRS 9 on default provisions, credit conditions will be tighter.

Zimbabwe should be alert to these global trends and device effective strategy to access debt markets. We have surpassed the average regional up-break, but without urgency in debt access, we may struggle to avoid an investor disappointing hard landing.

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