HomeOpinion & AnalysisColumnistsZim needs sovereign credit rating to unlock value

Zim needs sovereign credit rating to unlock value


One of the key reasons often cited by the banking sector for sub-optimal performance is lack of lines of credit which is itself attributable to perceived country risk profile.

At the inception of the Inclusive Government, the promise (or should we perhaps say mirage) of lines of credit was so immense that one felt as if the country might suddenly suffocate in a deluge of liquidity.

The outcome was however woefully, if not painfully inadequate.

As this inconvenient reality began to sink, development assistance (which is also known as the Vote of Credit in budgetary language) became our next (and thankfully not last) hope, which we glibly saddled with the big responsibility of accounting for 37% of the country’s 2010 budgetary needs.

However, earlier this year, the honourable Minister of Finance revealed that only $3 million had been received from donors out of a possible $800 million.

Early this week, he was quoted lamenting this misplaced expectation, and appeared to be in a spot of bother.

“In our 2010 National Budget of $2, 2 billion, about $800 million was going to come from the Vote of Credit. We wished donors would give us that money but that was a wish list, the money never came. Now we have seriously learnt hard lessons. If anyone suggests that a third of the budget should be from donors, I will not do that.”

Post-financial crisis realities have made it clear that the constrained state of public finances in the donor countries will see less aid flowing to Africa in the coming years, despite the promises made by the Group of Seven (G7) richest countries in 2005 to double development assistance.

Clearly, it is time for African countries to seriously consider weaning themselves off aid, in response to dynamic, unfolding realities.

Critics of aid argue that it undermines the social contract that should exist between an elected administration and its people, thereby creating lazy, unaccountable and corrupt governments.

In calling for a drive to reduce donor dependence to begin taking shape, we shouldn’t underestimate the extent to which aid is currently entrenched in the budgets of African countries.

According to the World Bank, in 2008 aid exceeded tax and other revenue such as customs and mineral duties in 14 sub-Saharan states, amounting to $38 billion across the region, translating to $49 for every African and the equivalent of 21 percent of overall government receipts.

Experts argue that the prospect of aid slowdown — if not of outright reversal — will have the impact of forcing African governments to consider alternative, more reliable sources of funding such as more domestic debt, a broader tax base and foreign bonds.

In the case of Zimbabwe, the first two sources of funding are severely constrained due to the liquidity challenges currently dogging the financial markets.

Treasury is collecting only $140 million in revenue per month when the country needs $400 million to function optimally.

With total banking deposits currently in the region of $2 billion, raising funds through domestic debt may not exactly be likened to trying to draw blood out of a stone, but something close to it.

Some have suggested that diamonds are the ultimate solution to the country’s problems but the reality is that so far, they have so far flattered to deceive.

Exports would ordinarily be another key source of market liquidity but given the structural rigidities in the manufacturing sector, which have condemned production capacity to languish in sub-optimal territory (35-45 percent), one would be forgiven for expecting that it will be some time before local products regain the competitive edge that will cause exports to make a notable contribution to the countrys’ Balance of Payments (BOP) position.

In the light of the foregoing information, the posture of Zimbabwe should gradually shifts from one of dependence/entitlement to one of self-reliance, which is all very well and good, but as with all matters in which politics features prominently, the danger of populism looms large.

What is ours is ours — whether it is land or mineral resources — there is not one iota of doubt about that, but we have to use what is ours wisely in order to get what we do not have.

If the land and the minerals are to stand a chance of benefiting the generality of Zimbabweans, they must first be worked and exploited, which requires financial capital and we have to realise sooner rather than later that in order to attract capital, we need to have capital-friendly policies in place.

This is why as they attempt to solve the country’s problems, politicians are encouraged to take note that long-term economic prospects are determined by the political choices being made today.

Partisan political interests – just like political alliances which shift precariously and unpredictably – are typically short-term in nature while their economic implications have long-term effects.

When all is said and done whoever takes over from the current dispensation will have to deal with the consequences of current commissions and omissions.

Politicians from across the political divide must realise that in order to unlock the immense value in its considerable mineral resources; the country needs to attain a sovereign credit rating.

We can’t just keep claiming to be a sovereign nation without looking the part. A sovereign credit rating provides an indication of a country’s overall ability to provide a secure investment environment.

When applied in the context of states “sovereign” means “independent”, so a sovereign rating is a rating of an independent state – there is neither a question of surrendering to anyone nor one of compromising anything.

The essence of a sovereign credit rating submitting to a set of international criteria that are considered open, impartial and transparent.

Essentially, by opening yourself to scrutiny by a rating agency, you enhance transparency.

The sovereign rating reflects factors such as a country’s economic status, transparency in the capital markets, levels of public and private investment flows, foreign currency reserves and political stability – the ability of a country to remain stable despite political change.

It is the first metric most clued-up institutional investors will look at when making cross-border investment decisions because it gives them an immediate understanding of the level of risk associated with investing in a particular country.

A country with a sovereign rating will therefore get more investor attention than one without.

Now would have been the most opportune time for Zimbabwe to have a sovereign credit rating because, like other countries such as Nigeria and Zambia which are doing so for the first time, it would be able to turn to global markets and take advantage of falling yields to raise funds needed to sustain the growth momentum.

Global yields are currently very low and there is so much excess liquidity looking for viable homes across the world, and this has resulted in a flurry of fundraising activity amongst eligible African countries.

According to Bloomberg, in early October, Nigeria appointed Barclays Capital as an advisor for its planned US$500 million Eurobond, while Zambia intends to raise $1 billion once it gets a sovereign credit rating later in the year.

Kenya, Tanzania, and Angola are reportedly considering similar debt issues while Sudan intends to sell Islamic Bonds worth $300 million in 2011.

Only seven sub-Saharan African countries — South Africa, Seychelles, Senegal, Ivory Cost, Gabon, Republic of Congo and Ghana — have sovereign bonds.

Of the 19 Sub-Saharan African countries that have sovereign credit ratings from Moody’s Investors Service, Standard Poor’s and Fitch Ratings, only four have investment-grade ratings: South Africa, Botswana, Namibia and Mauritius.

If Government is serious about securing a sovereign credit rating and its attendant benefits, then it must make it a priority to put its political ducks in a row given the importance of the political factor as a key element of creditworthiness in Africa.

Under those circumstances pursuing the kind of consistent and predictable policies that are the bedrock on which to build a good policy track record should be the rule, rather than the exception.

Only then can our collective actions pave the way for Zimbabwe to first be rated and eventually achieve an investment grade rating.

FSS welcomes your views on the issues raised in the article.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. Feedback: omen.muza@gmail.com

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