Beyond the pale
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Emerging Markets

Beyond the pale

Donors can no longer ease the suffering of ordinary Zimbabweans. Nevertheless, some investors are lining up to come back “after Mugabe”

The soaring inflation that has become a symbol of Zimbabwe’s descent into economic hell is expected to climb beyond 5,000% by the year-end, according to the International Monetary Fund, which like so many other donors has suspended its assistance to Harare.

Barring a policy turnaround by President Robert Mugabe – who remains doggedly resistant to calls for reforms to avert famine and what Aziz Pahad, Deputy Foreign Minister of once supportive neighbour South Africa, has called “total meltdown” – Zimbabwe’s already shattered economy will fragment further, with the opposition Movement for Democratic Change (MDC) effectively crushed by Mugabe’s political/security machine.

 “We expect the economic crisis to get worse if current policies continue,” an IMF official tells Emerging Markets: “GDP will continue to contract, scarcities of inputs and basic goods will get more acute, while inflation is likely to accelerate to over 5,200% by the end of this year.”

Such talk has led previously staunch allies such as South Africa finally to look for alternatives

to veteran nationalist leader Mugabe. South Africa’s Deputy President, Phumzile Mlambo-Ngcuka, met potential ruling Zanu-PF party successor Joyce Mujuru in March, and other senior South Africans have talked to kingmakers such as Emmerson Mnangagwa.

But even under increased pressure, parlia-mentary and presidential elections will be held at the earliest in March 2008 – and, barring a not-impossible challenge to Mugabe from a Zanu-PF grandee, the most likely outcome is that the octogenarian president will agree to retire only after another ruling party victory. “Pressure is rising, from the region at last, as well as from abroad and the MDC, but Mugabe might still be at least two years away from departure,” says one analyst.

Less than a decade ago, Zimbabwe was a widely favoured sub-Saharan investment play, but it was Africa’s worst economic performer in 2006, with GDP contracting by 4.4%, according to a UN study released on April 3. As the authorities have printed floods of new cash, inflation has devastated average incomes, leaving four out of five Zimbabweans living in abject poverty, and forcing thousands of refugees across the border to South Africa each week to escape shortages of food, fuel and foreign exchange.

“Government spending should be prioritized to ensure that food imports are adequate, health infrastructure is rapidly improved, and social safety nets are well targeted to protect the poor,” the Fund spokesperson says. “Poor policies and weak governance” were the main causes of economic crisis, in the IMF’s view, not to mention “the sizeable subsidies provided to public enterprises; price supports to exporters given the highly overvalued interbank exchange rate; and rising interest payments on public debt”.

In February, the Fund urged Zimbabwe to “promptly” resolve some $129 million in arrears to help reopen access to external funding.

POLITICIANS PROSPER

Harare’s lingering ability to function financially intrigues analysts, in the light of Zimbabwe’s exclusion from orthodox global financing circles. This began when key Western donors, including the World Bank, imposed sanctions in 2002 in response to what they perceived to be widespread human rights abuses, repression of political opposition and rigged elections.

“Most of the population is on its knees, so how come the politicians aren’t?” asks Commerzbank’s emerging markets strategist, Gregory Kronsten: “You have to assume that foreign players are bankrolling the government.”

Sanctions – as well as the need to make provisions to meet Basel 2 terms – have stopped virtually all commercial banks from structuring financing packages linked to trade transactions. At Standard Bank, a former stalwart supporter of the government, trade finance director Maarten van Alkemade tells Emerging Markets: “We still exclude Zimbabwe, and there is not much being done anywhere now except via collateralization.”

Some deals still seem to be done. Asked by Emerging Markets about reports that his bank had recently done small cash-backed transactions, an executive in Rand Merchant Bank’s structured trade and commodity finance team says: “We would rather not comment – the environment around Zimbabwe is currently rather charged.”

DEALS GO ON

According to a specialist pre-export financier, the South African government cannot be seen to be backing any deals with Harare. “However,” he says, “the Industrial Development Corporation has provided political risk insurance to some of the banks that have operations there and that have been doing business in Zimbabwe for their South African clients.”

A major French bank is said to have done an oil-backed deal last year, and there has been some Iranian financing for oil products.

“Commercial activities have almost gone underground,” says Ian Henderson, who runs the southern hemisphere office for Texel Finance in Johannesburg. “From our side, we know of the ongoing trade, which is practically on a barter basis. A number of South African hauliers and logistics providers are moving goods.”

South Africa Revenue Service figures show that South Africa remains Zimbabwe’s chief trade partner, exporting goods worth R7.26 billion ($1 billion) to its neighbour in 2006. South Africa imported goods worth R4.46 billion in return, with platinum a rising component. These flows were augmented by shadow economy dealings.

Most analysts canvassed by Emerging Markets see regime change as the sole way in which Zimbabwe will become a recipient of investment again. The consensus is that endgame for the Mugabe regime would prompt natural resources investors to pile into a country holding huge unexplored mineral deposits.

In the domestic debt market – where government stocks, Treasury bills and central bank advances had risen to some $211.1 billion by mid-February as a result of Harare’s efforts to finance a fiscal deficit now equivalent to some 40% of GDP – “the play would be for investors to buy early, then wait for the rates to fall off and the currency to stabilize,” says Commerzbank’s Kronsten.

“People are waiting for the recovery trade – there is a huge recovery potential in the ‘post-Bob’ environment,” says Francis Beddington, Standard Bank’s head of local and sovereign strategy for the Middle East and Africa.

Given the lack of an open market for non-residents, “the questions are what to invest in and how to do it – and most people will be looking at equities”.

Another banker says: “It might take three to four years to turn things around, but once they get it right, trade and investment will pour in. People are very clever in Zimbabwe – they survived on a shoestring for so long before that they could make things work very quickly.” Provided Mugabe goes without too great a bang, that is.

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