Government spending spree oils banks


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The government’s spending spree in the run-up to the presidential elections run off of 2008 provided commercial banks with liquidity as all the money was channelled through formal banks.

Banks had nothing else to offer because real interest rates were so low that cash-rich clients poured their money into the Zimbabwe Stock Exchange rather than the money market.

Because of the rush to the equity market, the industrial index rose by 527 million percent between January and 4 September 2008. The mining index was up 436 million percent.

Central bank governor Gideon Gono continued to accommodate the government’s demand for credit by printing money.

 

Full cable:


Viewing cable 08HARARE773, ZIMBABWE’S BANKS RIDING ON GOVERNMENT SPENDING

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Reference ID 

Created 

Released

Classification

Origin

08HARARE773

2008-09-04 15:09

2011-08-30 01:44

UNCLASSIFIED//FOR OFFICIAL USE ONLY

Embassy Harare

VZCZCXRO5358
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0773/01 2481509
ZNR UUUUU ZZH
R 041509Z SEP 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 3377
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2052
RUEHAR/AMEMBASSY ACCRA 2255
RUEHDS/AMEMBASSY ADDIS ABABA 2375
RUEHRL/AMEMBASSY BERLIN 0904
RUEHBY/AMEMBASSY CANBERRA 1652
RUEHDK/AMEMBASSY DAKAR 2008
RUEHKM/AMEMBASSY KAMPALA 2429
RUEHNR/AMEMBASSY NAIROBI 4861
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/JOINT STAFF WASHDC
RHEHAAA/NSC WASHDC
RUEHGV/USMISSION GENEVA 1524
UNCLAS SECTION 01 OF 04 HARARE 000773 
 
AF/S FOR G.GARLAND 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
COMMERCE FOR BECKY ERKUL 
TREASURY FOR J. RALYEA AND T.RAND 
NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
 
SENSITIVE 
SIPDIS 
 
E.O.12958: N/A 
TAGS: EFIN ECON PGOV ZI
SUBJECT: ZIMBABWE'S BANKS RIDING ON GOVERNMENT SPENDING 
 
REF: HARARE 0760 
 
------- 
Summary 
------- 
 
1. (SBU) The liquidity crisis that gripped Zimbabwe's banking sector 
at the end of 2007/early 2008 has abated thanks primarily to high 
election-related government expenditure. On the other hand, 
borrowings associated with the funding of these expenditures along 
with concessionary finance facilities offered by the Reserve Bank 
have led to explosive growth in money supply and hyperinflation. 
Commercial lending has almost dried up for lack of bankable projects 
and due to the Reserve Bank's pervasive subsidized lending, leaving 
bank assets dominated by zero-risk-weighted treasury bills. 
Consequently, credit risk within the banking sector is almost 
non-existent. In regard to recent new minimum capitalization 
requirements, banks have complied mainly by re-valuing their 
property at favorable, but deeply distorted, exchange rates, leading 
them to appear well capitalized, at least in the short term. Once 
the GOZ implements sound macro-policies and lending to the private 
sector resumes, however, they will need recapitalization and some 
consolidation within the sector can be expected. (End Summary) 
 
--------------------------------------------- 
Government Spending Resolves Liquidity Crisis 
--------------------------------------------- 
 
2. (SBU) John Mushayavanhu, Deputy President of the Banker's 
Association of Zimbabwe, told us that bank liquidity had improved 
dramatically in the past four months as a result of high government 
expenditure associated with the June 27 presidential run-off and 
post-election populist policies. Government spending is channeled 
through the formal banking sector and thus provides liquidity to the 
banks. The spending spree compensated for the banks' inability to 
offer real positive interest rates on deposits. Real interest rates 
are, in fact, so low that cash-rich clients pour their money into 
the Zimbabwe Stock Exchange rather than into the money market. 
Buoyed by the inflow, the Industrials index on September 4 had risen 
527 million percent since January 1 and the Mining Index was up 436 
million percent. 
 
-------------------------------- 
RBZ Applies Punitive Instruments 
-------------------------------- 
 
3. (SBU) Typical of monetary policy since Gideon Gono became Reserve 
Bank Governor, the RBZ continues to accommodate the government's lax 
fiscal policy. Government's demand for credit from the monetary 
banking sector has been the main cause of the exponential growth in 
Zimbabwe's money supply as the RBZ covers its losses from its 
quasi-fiscal activities by printing money. 
 
------------------------------------------ 
Punitive Statutory Reserve Requirements... 
------------------------------------------ 
 
4. (SBU) Notwithstanding that the RBZ itself is the source of 
monetary expansion, it has addressed the consequent problem of 
inflation by hiking bank statutory reserve requirements to levels 
well above the international norm. Statutory reserves serve as a 
fallback to depositors should a bank be threatened by a run on 
deposits. Mushayavanhu told us banks were lobbying for a 
substantial reduction in statutory reserves from the average of 
 
HARARE 00000773 002 OF 004 
 
 
about 50 percent to the internationally accepted level of around 10 
percent, since Zimbabwe already had in place a deposit insurance 
scheme to protect its depositors. (Comment: We don't expect the RBZ 
to lower statutory reserves by much, as the RBZ uses them to fund 
subsidized lending. End Comment) 
 
5. (SBU) In addition, the RBZ employs harsh terms for settling 
overnight accommodations for institutions that are either caught 
short or have excess funds at the end of any trading day. For 
institutions that are caught short, the accommodation rates are 
8,500 percent and 9,000 percent per night. Being caught with excess 
funds is equally onerous: The excess is swept into non-interest 
bearing 90-day non-negotiable certificates of deposits (NNCD). 
(Note: Until January 31, 2008, NNCDs had an even more punitive 270 
day maturity which had rendered liquidity management a nightmare for 
most banks. End Note). ZB Financial Holdings Chief Economist Best 
Doroh told us that bank borrowing from the RBZ had been the norm 
earlier this year until high government expenditure put the banks in 
a surplus position. 
 
-------------- 
No Credit Risk 
-------------- 
 
6. (SBU) Doroh and Mushayavanhu each commented that bank lending on 
commercial lines had all but collapsed since introduction of the 
RBZ's concessionary facilities. Barclays bank and CFX bank half 
year results, for example, show that advances fell by 94 and 96 
percent respectively between June 2007 and June 2008.   Not only was 
there a dearth of bankable projects due to the poor macroeconomic 
environment, but most loans and advances were made under the RBZ's 
Agriculture Sector Productivity Enhancement Facility (ASPEF) and 
Basic Commodity Supply Side Intervention (BACOSSI) facilities at 25 
percent interest per annum. With the official rate of inflation for 
June 2008 at 11.2 million percent, and the actual rate in the 
billion percent range (reftel), the real return on concessionary 
lending is deeply negative. 
 
7. (SBU) Moreover, government borrowing from the monetary banking 
sector through treasury bills (TBs) has left the sector holding 
significant amounts of very low yielding (currently 340 percent per 
annum) TBs, for lack of acceptable alternative assets. Financial 
results show that, on average, bank loans and advances accounted for 
only 15 percent of the total assets of the banking sector at end 
December 2007-a very low percentage considering that loans and 
advances constitute the core function of banks. In addition, of this 
small amount, the bulk was ASPEF and BACOSSI lending. 
 
8. (SBU) Doroh and Mushayavanhu each said separately that banks were 
also involved in very short-term lending through bankers acceptances 
at rates between 25 and 30 percent either overnight or for up to 30 
days as a way of avoiding locking up funds for 90 days in the RBZ's 
non-interest bearing NNCDs. Mushayavanhu explained that credit risk 
was therefore non-existent as the loan book did not contain doubtful 
clients who might default on their obligations. Doroh shared this 
view, stating that ZB Bank screened lending rigorously to minimize 
default risk. 
 
9. (SBU) Doroh said that banks indulged in non-core activities to 
preserve their capital base and hedge against inflation: They bought 
and sold shares on the stock exchange, traded in property, and 
traded in foreign exchange. Indeed, Fulton Chibaya, the Chief 
Executive Officer of Genesis Bank told us that the partial 
liberalization of the foreign exchange market introduced on April 
 
HARARE 00000773 003 OF 004 
 
 
30, 2008 had contributed to resolving the banks' liquidity problems 
as they could sell foreign exchange when short on any trading day. 
He also noted that banks with immobile assets and shares were 
turning out high unrealized profits through fair value adjustments 
thereby boosting their balance sheets. Although the liquidity 
situation had improved, Doroh said the challenge of poor returns 
nevertheless remained. 
 
----------------------------- 
Minimal Foreign Exchange Risk 
----------------------------- 
 
10. (SBU) Zimbabwean banks do not extend foreign currency loans 
because of the binding foreign exchange constraint in the economy. 
As a result, foreign exchange risk is minimal except for banks' 
difficulty in obtaining foreign exchange to pay for computer 
hardware and software licenses. In that regard, in the past year 
U.S. debt collectors have called on post to express interest in a 
half dozen cases in which Zimbabwean banks and telecommunications 
companies could not access foreign exchange to pay for their IT 
licenses. 
 
------------------------ 
Fraud Poses Greater Risk 
------------------------ 
 
11. (SBU) Mushayavanhu viewed internal fraud as the major risk 
facing banks in the prevailing hyper-inflationary environment, as 
salaries have collapsed in real terms. Godfrey Kanyenze, Director 
of the Labor and Economic Development Research Institute of Zimbabwe 
(LEDRIZ) concurred, and added that the collapse in earnings had also 
triggered massive skills flight. 
 
--------------------------------------------- ---- 
Higher Capital Requirements Pose Little Challenge 
--------------------------------------------- ---- 
 
12. (SBU) Mushayavanhu said that as of June 2008 all banks had met 
the new minimum capital requirements effective September 1, 2008 of 
US$12.5 million for commercial banks, US$10 million for merchant 
banks and building societies, US$7.5 million for Finance and 
Discount Houses, and US$2.5 million for Asset Management Companies, 
calculated in local currency at the inter-bank exchange rate. Most 
of the banks held properties that had been revalued in US$ terms, 
allowing them to meet the new capital requirements easily. James 
Mushore, co-founder of NMB Bank, told us that NMB, for example, had 
met the requirement in this way. CBZ Holdings' Finance Director 
Never Nyemudzo indicated that CBZ Bank was sitting on a capital base 
of US$42.48 million and its building society on a base of US$48.96 
million. Mushayavanhu stated that most banks had capital adequacy 
ratios of 200 percent, which is ridiculously higher than the Basel 
standard of just about 10 percent, indicating that the banks are not 
deploying their assets effectively. 
 
------- 
Comment 
------- 
 
13. (SBU) Banks are currently enjoying the benefits of high market 
liquidity stemming perversely from high government expenditure, but 
the downside risks associated with a return to sound macroeconomic 
policies are high. Government expenditure will inevitably fall and 
money market conditions tighten, forcing banks to manage liquidity 
more prudently. Lending to the private sector will also likely pick 
 
HARARE 00000773 004 OF 004 
 
 
up as companies borrow to upgrade plant and equipment. To the 
extent that interest rates will rise in the first instance, 
increased lending will bring with it interest rate risk as well as 
credit risk. Moreover, we foresee a massive devaluation of the 
Zimbabwe dollar to offset the high inflation differential between 
Zimbabwe and its trading partners. Banks are likely to obtain 
foreign lines of credit for their clients, which will require that 
they set aside some capital to cover foreign exchange risk. 
Clearly, when Zimbabwe undertakes the necessary reforms and banks 
re-engage in their core businesses, they will have to recapitalize 
substantially and return to active asset and liability management to 
remain viable. In this regard, some consolidation within the sector 
is likely given the sharp contraction of the economy over the past 
ten years. Small indigenous banks, in particular, are likely to 
merge in order to raise required capital. End Comment. 
 
 
 
MCGEE

 

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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