Indigenisation scares investors

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Zimbabwes indigenisation and economic empowerment policy is deterring risk-averse investors and this has negative impact on the growth of the economy, Russian investment banking group Renaissance Capital (RenCap) has said.

In its Economic Outlook for 2012, RenCap said given the countrys extensive mineral deposits it was not surprising that all mining companies must comply with the indigenisation policy.

It said negotiated outcomes were possible, but premised on the governments subjectivity.

As investors will only willingly part with their money if they are assured that their assets will not be expropriated, Zimbabwes indigenisation policy is deterring, and will continue to deter, more risk-averse investors, reads part of the report.

This is negative for Zimbabwes economic growth, balance of payments position, government revenue collections and domestic liquidity.

RenCap, however, said strong commodity prices will make existing mining companies more willing to negotiate indigenisation agreements with the government.

On liquidity, it said the high share of transitory deposits, which reflected that banks were largely used to facilitate salary payments, explained the severe liquidity challenges.

RenCap said the risk of the economic growth slowing down was made worse by the dearth of fixed investment and tight liquidity.

Not only is long-term credit hard to come by in the local banking system, because most deposits are transitory, but high interest rates imply credit is also expensive.

This suggests to us credit is primarily financing non-productive recurrent expenditure.

Bank loans to capital investments only made up 7,2% of the total in mid-2011, Rencap said.

The group projected that the government was likely to breach the cash budget rule again as civil servants wage increases were greater than those projected in 2011.

RenCap said this was positive for consumer stocks but negative for capital spending, which was crowded out.

Given the absence of external financing options, we expect spending to continue to be dominated by recurrent expenses.

Additional pressure on spending in 2012 is likely to stem from the constitutional process, the bank said.