Zim asks SA for $1.2bn bailout

Neigh­bour in trou­ble asked SA for bailout of $1.2bn on Box­ing Day

Sunday Times - - Front Page - By ASHA SPECKMAN and NTANDO THUKWANA speck­mana@sun­day­times.co.za thuk­wanan@sun­day­times.co.za

● Des­per­ate se­nior gov­ern­ment of­fi­cials from Zim­babwe met the South African gov­ern­ment a day af­ter Christ­mas and asked for help with a bailout.

The del­e­ga­tion, led by Zim­babwe’s fi­nance min­is­ter, Mthuli Ncube, is un­der­stood to have sought $1.2bn in aid.

Zim­babwe faces an eco­nomic cri­sis which has re­sulted in the price of petrol in­creas­ing by 150% from R19 a litre to R41, the high­est in the world. Ri­ots broke out this week against the in­creased costs.

In­fla­tion in Novem­ber was 31%, the lat­est fig­ure avail­able. In­de­pen­dent es­ti­mates have put the rate at more than 100% in real terms.

Teach­ers and doc­tors are pick­et­ing for salary in­creases.

The De­cem­ber meet­ing had been at­tended by South African Re­serve Bank gover­nor Le­setja Kganyago and deputy gover­nor Daniel Mminele, Re­serve Bank of Zim­babwe gover­nor John Man­gudya and per­ma­nent sec­re­tary in the Zim­babwe min­istry of fi­nance & eco­nomic de­vel­op­ment, Ge­orge Gu­va­matanga.

Na­tional Trea­sury di­rec­tor-gen­eral Dondo Mo­ga­jane told Busi­ness Times that SA de­clined to lend the $1.2bn be­cause of its own dif­fi­cult fi­nan­cial po­si­tion and con­cerns over how Zim­babwe would re­pay the money amid fuel short­ages, a hefty pub­lic sec­tor wage bill and other chal­lenges.

“Ini­tially they wanted money, $1.2bn …We don’t have $1.2bn but what we have is the will to as­sist them. [What we can do] is to open trade lines. We said we can look at in­ter­ven­tions where pos­si­ble,” said Mo­ga­jane.

“Our en­gage­ments are across the sys­tem — as­sist­ing from a bud­get­ing im­ple­men­ta­tion point of view, and repri­ori­tis­ing of pub­lic ex­pen­di­ture, in­clud­ing on their be­half en­gag­ing mul­ti­lat­eral de­vel­op­ment [fi­nanc­ing] in­sti­tu­tions, which we have started.”

It is un­der­stood that there are no ex­ist­ing credit lines be­tween SA and Zim­babwe. SA lent Zim­babwe $200m-$300m when Robert Mu­gabe was still pres­i­dent. Zim­babwe is in ar­rears with the IMF, World Bank and African De­vel­op­ment Bank (AfDB).

Zim­bab­wean Pres­i­dent Em­mer­son Mnan­gagwa is vis­it­ing Rus­sia, Be­larus, Azer­bai­jan and Kaza­khstan in the hope of at­tract­ing in­vest­ment. He will at­tend the World Eco­nomic Fo­rum in Davos, Switzer­land, which starts on Tues­day.

SA is in dis­cus­sions with the Paris Club on Zim­babwe’s be­half. The club is a group of of­fi­cials from ma­jor cred­i­tor coun­tries who find co-or­di­nated so­lu­tions to pay­ment dif­fi­cul­ties ex­pe­ri­enced by debtor coun­tries. It com­prises the IMF, World Bank, OECD, UN Con­fer­ence on Trade & De­vel­op­ment, the Euro­pean Com­mis­sion, the AfDB and the Asian De­vel­op­ment Bank.

SA has the African Re­nais­sance & In­ter­na­tional Co-op­er­a­tion Fund (ARF). The ARF Act was pro­mul­gated on Jan­uary 22 2001 to iden­tify and fund projects for re­gional in­te­gra­tion to pro­mote democracy and good gov­er­nance, pre­vent or re­solve con­flicts, and for so­cioe­co­nomic de­vel­op­ment in­te­gra­tion.

SA used this fund to help with the elec­tions in the Demo­cratic Repub­lic of Congo and Mada­gas­car. The fund is not big enough to help Zim­babwe.

Com­men­ta­tors say that at the heart of Zim­babwe’s chal­lenges are its cur­rency woes.

Fi­nance min­is­ter Tito Mboweni sup­ported Zim­babwe’s in­ten­tion to in­tro­duce a new cur­rency to counter its failed bond note, which has dropped dra­mat­i­cally in value.

Jee-A van der Linde, an econ­o­mist at NKC African Eco­nomics, said: “The cur­rency cri­sis … is crip­pling the very sec­tors that are re­quired to help cre­ate an eco­nomic turn­around.”

He said the cri­sis had cre­ated a large in­for­mal mar­ket, pre­cip­i­tated by wide­spread dis­trust in the fi­nan­cial sys­tem.

The gov­ern­ment had to find so­lu­tions to un­lock for­eign di­rect in­vest­ment into agri­cul­ture and min­ing, which were key to gen­er­at­ing for­eign cur­rency, Van der Linde said.

Last year the risk con­sul­tancy Fitch So­lu­tions, a di­vi­sion of the in­ter­na­tional credit rat­ings agency, warned that in­de­ci­sion on cur­rency re­forms by the Zim­bab­wean fi­nance min­is­ter was ag­gra­vat­ing the for­eign­cur­rency cri­sis. The cri­sis was caused by a trade deficit of $1.6bn in the seven months from Fe­bru­ary to Au­gust 2018.

Es­ti­mates put the in­fla­tion rate at more than 100% in real terms

Jane Mor­ley, head of Sub-Sa­ha­ran Africa coun­try risk at Fitch So­lu­tions, said: “The prob­lem for au­thor­i­ties is that re­serves need to be built up and the fis­cal deficit con­tained be­fore they can switch to a new cur­rency regime. But these can­not be achieved un­less and un­til there is sub­stan­tial de­val­u­a­tion.

“Even a large cash in­jec­tion [from what­ever source] would not be suf­fi­cient to ad­dress struc­tural prob­lems and spark sus­tain­ably higher lev­els of eco­nomic growth.”

Mor­ley said for eco­nomic growth to be achieved, Zim­babwe’s gov­ern­ment needed to adopt a more in­vestor-friendly ap­proach and es­tab­lish a track record of busi­ness­friendly re­form.

At­tempts to reach the Zim­bab­wean gov­ern­ment were un­suc­cess­ful.

● Since his rise to power nearly 14 months ago, Zim­bab­wean Pres­i­dent Em­mer­son Mnan­gagwa has an­chored his rule on the mantra “Zim­babwe is open for busi­ness”.

But this is just half of the re­al­ity for the coun­try’s busi­nesses; there are in­vest­ment op­por­tu­ni­ties but there are also risks.

Mnan­gagwa has cho­sen to fo­cus on the for­mer. This week he trav­els to the World Eco­nomic Fo­rum in Davos, Switzer­land, to try to per­suade the global busi­ness elite to in­vest in the coun­try.

But for­eign-owned com­pa­nies are strug­gling to repa­tri­ate their earn­ings.

A per­sis­tent for­eign-cur­rency short­age, which shows no signs of eas­ing, is the lat­est chal­lenge. Es­ti­mates put Zim­babwe’s for­eign-cur­rency re­serves at only a two-week cover, far less than the World Bank’s rec­om­mended three to four months cover.

Star­ing down the bar­rel of this gun are South African-owned com­pa­nies and sta­te­owned en­ter­prises (SOEs) do­ing busi­ness in Zim­babwe.

Be­cause they are in­vested across many eco­nomic sec­tors, South African com­pa­nies have borne the brunt of the for­eignex­change crunch.

This has chipped away at the at­trac­tion for them of be­ing able to gen­er­ate earn­ings north of the Lim­popo in dol­lars, a gen­er­ally far stronger cur­rency than the rand.

Dol­lar-rich only in the­ory

A port­fo­lio man­ager at PSG Wealth, Adrian Cloete, said: “The US dol­lar at­trac­tion that Zim­babwe has for most South African busi­nesses hasn’t re­ally been that big of an ad­van­tage, as you can’t re­ally repa­tri­ate all of those US dol­lars back to SA. Zim­babwe is ex­pe­ri­enc­ing short­ages of US dol­lars in its econ­omy in any event.”

Neville Mandimika, RMB’s Sub-Sa­ha­ran Africa econ­o­mist and sovereign fixed­in­come strate­gist, said the frac­tured for­eignex­change mar­ket would act as a con­straint and had made do­ing busi­ness dif­fi­cult.

“What in­vestors will be wait­ing for is an out­line of what the road to the Zim­bab­wedol­lar in­tro­duc­tion looks like,” he said.

“Is this a time­line that is con­di­tional on cer­tain fun­da­men­tals like suf­fi­cient for­eignex­change re­serves be­ing in place? Such ques­tions will need to be an­swered be­fore busi­ness takes a view of the in­vest­ment case in Zim­babwe.”

A tally done by Busi­ness Times this week showed that at least 15 ma­jor South African­linked com­pa­nies with op­er­a­tions in Zim­babwe were strug­gling to repa­tri­ate funds.

These in­clude Delta Bev­er­ages (40% owned by AB InBev), Mul­tiChoice (owned by Naspers), Ton­gaat Hulett, PPC and Zim­plats (owned by Im­pala Plat­inum).

Other firms such as Ed­con, Pick n Pay, San­lam, Tiger Brands, Ned­bank and Alexan­der Forbes ei­ther have units in Zim­babwe or are in­vested in lo­cally owned busi­ness.

To get around the bur­den of try­ing to un­lock funds, some com­pa­nies have rein­vested earn­ings in ex­pan­sion pro­grammes or bought sav­ings bonds with the cen­tral bank.

Last week, Delta Bev­er­ages said in a state­ment that AB InBev had “agreed to place over $120m, due to them in re­la­tion to un­remit­ted div­i­dends and fees”, into the cen­tral bank’s sav­ings bonds.

Naspers, in its fi­nan­cials last year, red­flagged Zim­babwe as one of three coun­tries that owed it a com­bined $131m. “Con­strained liq­uid­ity in An­gola and Zim­babwe per­sists be­cause of lim­ited avail­abil­ity of for­eign cur­rency,” Naspers chair Koos Bekker and CEO Bob van Dijk said at the time.

PPC is strug­gling to ex­tract $60m stuck in the coun­try, and su­gar gi­ant Ton­gaat said in its re­cent fi­nan­cial re­sults: “A process to re­mit a fur­ther div­i­dend from Zim­babwe is cur­rently un­der way.”

A Ned­bank Zim­babwe ex­ec­u­tive in Harare said that “over the last few years” the bank had not been able to send div­i­dends to the par­ent com­pany in SA.

Fast­jet is owed nearly $2m in air­line fees. Eskom and SAA have not been spared. SAA is es­ti­mated to be owed about $60m in ticket fees. Eskom, which was at one time owed $40m, said Zim­babwe was mak­ing good on its ar­rears pay­ment.

Robert Bes­sel­ing, the di­rec­tor of busi­ness in­tel­li­gence firm Exx Africa, said an ex­o­dus of South African com­pa­nies from Zim­babwe was un­likely. He de­scribed them as “ex­cep­tion­ally re­silient”, not­ing they had sur­vived even worse eco­nomic con­di­tions in the past.

“South African com­pa­nies op­er­at­ing in Zim­babwe will face pres­sure from the [South African] gov­ern­ment to avoid their with­drawal en masse,” he said. “Big South African re­tail, min­ing and lo­gis­tics com­pa­nies hold a strate­gic po­si­tion in the Zim­bab­wean econ­omy … Many South African busi­nesses will re­tain their po­si­tions since they are com­mit­ted to Zim­babwe for the long term.

“How­ever, smaller South African firms are un­likely to be able to re­main open and will shut their doors in the next few weeks and months,” said Bes­sel­ing.

Ex­pect scal­ing down

Mandimika said it was likely that South African com­pa­nies would scale down their op­er­a­tions if the for­eign-ex­change cri­sis con­tin­ued. “Dur­ing the hy­per-in­fla­tion era we saw the likes of Mul­tiChoice and PPC opt to stick it out, al­beit at re­duced op­er­a­tional scale,” he said.

This week, protests over a 150% fuel price hike re­sulted in the clo­sure of many busi­nesses. The in­crease is likely to push up the cost of goods and ser­vices. In­fla­tion rose to 42% last month from 31% and is inch­ing closer to the 50% hy­per­in­fla­tion mark.

The real lit­mus test for South African com­pa­nies, how­ever, is prob­a­bly the plan to in­tro­duce a new cur­rency “within the next 12 months”, re­cently an­nounced by fi­nance min­is­ter Mthuli Ncube.

Bes­sel­ing said Ncube’s plans to adopt a new cur­rency regime were “pre­ma­ture”.

“Zim­babwe is in no con­di­tion to adopt a new lo­cal cur­rency at this stage … any new cur­rency would face im­me­di­ate col­lapse,” he said.

Cloete said the in­tro­duc­tion of a lo­cal cur­rency would have its own chal­lenges for South African busi­nesses with in­ter­ests in Zim­babwe.

“These busi­nesses would have to deal with a rel­a­tively high in­fla­tion rate and a de­pre­ci­at­ing cur­rency.”

Cloete said an ex­porter like Im­pala, with its in­vest­ments in Zim­plats and Mi­mosa Min­ing, would ben­e­fit from a weak­en­ing ex­change rate, but would have to con­trol the in­fla­tion­ary im­pact on in­put costs.

Pic­ture: Reuters

Chil­dren walk past a petrol sta­tion closed af­ter protests in Harare. The fuel price has been hiked 150%.

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