Zimbabwe Financial Services Secure From External Shocks

AFRICANGLOBE – The financial services sector in Zimbabwe has not been directly affected by movements in United States financial markets due to its limited exposure, a local economic consultant said last week.

Independent economic consultant Rongai Chizema said the road to recovery from the global recession was proving to be difficult.

“The global economy is in a dangerous new phase with the Japan earthquake and tsunami, eurozone crisis and US debt crisis, with the latter two raising concerns of renewed financial instability.

“Since we use the US dollar we are prone to shocks in the US markets. If we were in a situation of total dollarisation, our level of exposure would be even higher than it is,” he said.

The concerns come as the US state debt was recently reported to have reached US$15 trillion – a mere 1 percent less than the country’s Gross Domestic Product – raising fears of more negative information that could provoke markets to fail before the end of the year.

The fact that Zimbabwe’s economy is largely dollarised means the Government is constrained in controlling monetary developments through monetary policy or exchange rate adjustments.

An examination of global market dynamics reveals that downside risks to activity are probably higher today than at any other time this year.

The major risks relate to weak sovereigns and banks in a number of advanced economies, weak policies to negate the effects of the global crisis, vulnerabilities in some emerging markets and volatile commodity prices.

Notwithstanding the exogenous threats posed to the local banking sector, it still faces challenges inherent in the macro-economy, especially with regards to liquidity constraints.

For instance, official figures show that the average liquidity ratio, excluding illiquid claims on the Reserve Bank of Zimbabwe, exceeded 30 percent as of February, but was below 20 percent for eight banks, and below 25 percent for 11 banks.

Chizema said the domestic interbank market was not yet fully operational and was likely to be inaccessible in case of a systemic liquidity shortage.

Bankers’ Association of Zimbabwe president John Mushayavanhu urged the Government (RBZ) to recapitalise the Depositors Protection Board to ensure that it plays its role effectively in case of a bank failure.

Mushayavanhu also agitated for the return of statutory reserves that were scrapped last year as a stop-gap measure to reduce bank vulnerabilities and systemic risks.

He said the reserves could yield around US$80 million, which could help ease the liquidity crunch.

But analysts believe that, going forward, market illiquidity would continue to be very tight because the demand for credit will continue to exceed supply, which will also result in interest remaining high.

Chizema lamented that international banks were not doing enough in terms of lending.

“Bank credit growth has been high in a number of emerging market economies, and in some cases credit has grown much faster than nominal GDP in a number of economies.

“To this extent, international banks operating in the country have a greater opportunity to make profits through lending hot money in countries such as Zimbabwe,” he said.

‘Hot money’ is money that moves across country borders in response to interest rate differences and that moves away when the interest rate differential disappears.