Impact of global developments on local liquidity in 2012


As 2012 unfolds, many still sit on the fence, unsure of whether to embrace it fully or keep it at arm’s length until further notice.

With memories of an eventful 2011 still fresh in their minds, many will be excused for finding it hard to be absolutely sure about what to expect in 2012. Most of the things that came to pass — particularly at an international level — were unimaginable at the beginning of the year.

From the Occupy Wall Street movement that started right in the citadel of capitalist America and spread to other parts of the world in various forms, to the raging sovereign debt crisis that threatens to break up the eurozone even as you read this, 2011 had no shortage of intrigue.

In view of the palpable apprehension about the key variable of liquidity in local and international markets, I figured that a brief look at its impact on the local market and how it will in turn be impacted by key global developments would be a fitting departure point for the Financial Sector Spotlight in 2012.

As 2011 drew to a close, it was apparent that the liquidity squeeze would be one of the “survivors” of the year.

As it contrived to make its way into 2012, it assumed various forms threatening to the banking sector — non-performing loans, assets/liabilities mismatches and loan-to-deposit ratios considered too risky at well above 70%.

Though the potential of non-performing loans to complicate liquidity management for banks had always been acknowledged to be lurking in the background, tangible effects were not apparent until towards year end.

Reports of banks failing to settle interbank transactions and corporate borrowers “opting” to roll over loan maturities became harder to ignore though they were not circulated widely enough to cause market-wide panic.

Going forward in such an illiquid environment, the rising threat of non-performing loans will make lenders ill-disposed towards issuing new loans and where loans will be available, the cost of borrowing will reflect bankers’ determination to price risk appropriately.

The countermeasure to this might be an increase in deposits at a rate which cancels the credit lack of disposition to seek exposure — if the loan-to-deposit ratio falls below certain psychological levels, banks will be under pressure to lend, just as pressure as been brought to bear on them in the past.

Impact of global slowdown on local liquidity
Europe’s sovereign debt crisis is driving member countries to embrace fiscal austerity and live within their means as they attempt to manage debt at sustainable levels.

This will have an impact on growth rates within the eurozone itself, just as it will on African economies. In fact, economists contend that the slowdown has already begun to affect Africa with most countries’ forecast GDP growth in 2011 adjusted downwards by about half a percentage point.

The direct impact on Zimbabwe’s liquidity position is manifold.

Firstly, European demand for African exports may slow down significantly, resulting in lower export earnings for countries such as Zimbabwe.

Experts say 37% of Africa’s non-oil exports go to the European Union.

The saving grace for Zimbabwe is that South Africa is the biggest destination for its exports, but the downside is that South Africa is itself a significant exporter to Europe, so it is conceivable that some of what it imports from Zimbabwe is ultimately destined for Europe.

Additionally, European countries such as Switzerland, Netherlands, Belgium, United Kingdom and Italy are amongst the list of Zimbabwe’s top 10 export destinations.

Secondly, commodity prices may fall they way they did during the 2008/2009 global financial crisis. Yet Zimbabwe’s 2012 Budget is premised on the “anticipated firming of international prices for major exports such as tobacco, gold, cotton, and platinum” which “. . . will support increased export earnings and financial system liquidity”.

Following permission by the Kimberly Process Certification Scheme for Zimbabwe to sell Marange diamonds, Treasury has been “assured” of additional revenue of $600 million, whose realisation is entirely dependent on global demand dynamics.

Thirdly, private financing flows (portfolio and foreign direct investment), which is already constrained by a Zimbabwe’s perceived high country risk profile, could be curtailed further.

Fourthly, this anticipated slowdown in global investment and growth could result in rising unemployment which could affect Zimbabwe’s sizeable population in the Diaspora, with an attendant fall in workers’ remittances into the country.

Lastly, with multiple fiscal fires to put out in their own backyards, it is conceivable that support from the development community — estimated at $500 million in 2012 — may underperform “in view of the challenges facing most development partners” according to Finance minister Tendai Biti.

Low global interest rates

In order to stimulate growth, monetary authorities in the developed world have promised to maintain low interest rates until at least the end of 2012 or until economic growth regains momentum.

Under normal circumstances, Zimbabwe could expect to benefit from cheaper credit and improve its liquidity profile, but this will hardly be the case as the country is currently unable to access meaningful lines of credit anyway due to a high country risk profile with imposes a risk premium.

Given all of the above, it is easy to see why the liquidity situation in Zimbabwe is inextricably linked to global developments, and given the downside risks characterising the global economy, there are reasonable grounds for apprehension, if not downright pessimism.

Notably, the 2012 National Budget is largely optimistic about the prospects of achieving its objectives, but it has its heart in the right place and has no illusions about the restraining context.

It duly acknowledges “the background of the anticipated adverse effects of global economic slowdown on commodity prices, export demand, as well as on capital flows”.

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• Omen N. Muza writes in his personal capacity. He is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd.