GOZ POLICIES CRIPPLING BANKING SECTOR

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000731

SIPDIS

SIPDIS

AF/S FOR B. NEULING
SENIOR AFRICA DIRECTOR C. COURVILLE
TREASURY FOR J. RALYEA AND B. CUSHMAN
COMMERCE FOR B. ERKUL

E.O. 12958: DECL: 06/19/2015
TAGS: ECON EFIN PGOV PREL ZI
SUBJECT: GOZ POLICIES CRIPPLING BANKING SECTOR


Classified By: Charge d'Affaires, a.i., Eric T. Schultz under Section 1

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Summary
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1. (SBU) Stricter liquidity controls implemented in January
by the Reserve Bank of Zimbabwe (RBZ) are sapping the banking
sector of vital capital at the same time as the industry
struggles to comply with higher capital requirements that
take effect later this year. This impending crunch has
fueled speculation that some smaller, indigenous banks may
fold. Foreign-owned banks will likely weather this storm,
mitigating the impact of this development. That said,
Zimbabwe's rapidly shrinking economy is producing an even
greater long-term threat to the banking sector as banks
become dependent on government treasury bills and jettison
traditional banking functions. End Summary.

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Tighter Liquidity Controls
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2. (SBU) In a stated attempt to combat inflation, RBZ
Governor Gideon Gono last January announced tighter liquidity
controls. Statutory reserves for the banking sector were
increased to 60 percent for demand deposits and 45 percent
for saving deposits, up from the rates of 45 and 30 percent,
respectively. Statutory reserves do not earn interest and,
given the dominance of demand deposits, absorb about 58
percent of all banking sector deposits, according to
independent media accounts. At the same time, Gono announced
harsher provisions for settling nightly accounts to stimulate
interbank lending of excess funds. Funds held in excess of
the proscribed ratios would be automatically exchanged for
2-year government paper at a punitively low rate of 200
percent interest payable at expiry. Conversely, those banks
that find themselves short at the end of the day must borrow
from the RBZ's accommodation window at 850 percent secured or
900 percent unsecured, payable the next day.


3. (SBU) In meetings with econoffs over the past few weeks,
financial sector insiders have universally condemned the
stricter liquidity controls. NMB Bank executive Lionel
Chinyamutangira noted that the maturities gap between
low-return assets and high-rate liabilities presented a major
challenge to funds managers, who now spend much of their day
pouring over cash flow data lest they be caught short.
Erratic government open market operations have compounded
this problem, according to Zimbabwe Allied Banking Group
(ZABG) Finance Director Priscilla Mutembwa, as one day the
money market can be flush with funds from the expiry of
treasury bills and the next day the market can be in a severe
deficit as the government moves to mop up spare cash.


4. (SBU) The sector's inability to manage liquidity in this
harsh environment is causing banks that once earned profits,
at least in nominal terms, to begin to see red. John Legat,
the CEO of Imara Asset Management, estimates that this
failure to adequately manage funds has forced large banks to
borrow an estimated Z$1 trillion per day from the RBZ's
accommodation window to cover nightly shortfalls. Mutembwa
noted that the losses to the sector peaked in about April and
that, while half year reports due out soon would probably
show continued nominal-term gains, the relative good times
that the sector enjoyed last year were gone.


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Higher Capital Requirements
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5. (SBU) According to FINHOLD principal economist Best
Doroh, liquidity controls were introduced at the worst
possible time, as the sector was also bracing for the higher
capital requirements that are due to come into effect later
this year. Doroh said that under new RBZ guidelines,
commercial banks would be required to maintain capital bases
of at least US$10 million. This requirement would be phased
in; by September banks would have to meet the target using an
exchange rate of Z$10,000 to the US$, or Z$100 billion. Then
in December, the capital requirement would be calculated
using the official interbank rate, which at a current rate of
Z$101,195 to US$1 equates to more than Z$1 trillion. Doroh
noted that as of last December four of the five largest banks
in Zimbabwe had more than Z$1 trillion in capital, but he
suspected that because of the stricter liquidity controls
many of them were now short.

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Indigenous Banks Look Frail
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6. (SBU) Indigenous banks in particular are scrambling to
raise enough capital to meet the December requirement and to
create a cushion should the RBZ devalue the official rate, as
currently expected, which in turn would hike the capital
requirements. Metropolitan Bank tops most lists of banks
expected to fold but, with only nine branches and few
deposits, the impact would be minor. Most local banks, such
as Kingdom and NMB, are planning rights issues to raise the
necessary funds. Local financial advisor Emma Fundira noted
that uncertainty in the local stock market would limit the
amount of capital that banks could raise domestically.
Investors, she said, would also surely question why Kingdom,
for instance, was embarking on a record-setting rights
issuance of Z$1.5 trillion only a year after its last rights
issue. For its part, the quasi-government owned ZABG was
seeking to raise Z$1.5-2 trillion through a fund at the
Finance Ministry, according to Mutembwa.


7. (SBU) Despite widespread speculation as to which banks
were likely to fold, banking sector insiders tell us that
most indigenous banks are likely to survive, albeit in some
cases by only a hair. Fundira expected that the GOZ was
likely to sever its ties to ZABG, which the RBZ formed in
2005 out of the forced consolidation of banks that failed in

2004. Without this backing, Fundira said ZABG could also go
under. Meanwhile, Fundira speculated that political ties to
Gono and other GOZ officials were likely to keep other
indigenous banks, such as CBZ, Premier, and Renaissance,
afloat.

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Sector Looking to RBZ To Limit Contagion
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8. (SBU) Bankers with whom we have spoken are confident that
the RBZ would successfully prevent possible problems at one
bank from impacting the wider financial sector. Recounting
the activist role of the RBZ since Gono's appointment in
2003, Mutembwa and Standard Chartered executive Ralph
Watungwa separately said that the central bank would
intervene at the first sign of weakness. To this end, the
RBZ was monitoring capital requirements on a monthly basis

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and regularly meeting with bank executives. Moreover,
Stanbic Managing Director Pindie Nyandoro told econoff that
the RBZ saw the negative impact of its stricter liquidity
controls on the banking sector and said that she expected
Gono to reduce the statutory reserves within the next week.
She speculated that the RBZ hiked statutory reserves as only
a temporary measure to present an improved balance sheet to
the IMF and to mop up excess liquidity earlier this year as
large amounts of treasury bills expired.

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Foreign Banks Safe
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9. (SBU) Financial contacts were uniform in their confidence
that larger, foreign banks would survive the stricter
liquidity and capital requirements. The foreign banks
largely view the new liquidity and capital requirements as a
hiccup in their operations and profitability. There is a
consensus, moreover, that despite these immediate problems
and the prolonged economic decline, Zimbabwe in the long-term
is simply too important of a market to be left out. Fundira
said that foreign banks recalled the difficulty of
penetrating the South African market and had drawn the
conclusion that the cost of pulling out and then reentering
Zimbabwe in the future would be prohibitive compared to the
cost of simply sustaining operations.

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Survivors Face A Grim Future
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10. (SBU) Although most banks seem likely to survive the
coming crunch, according to several industry insiders the
rapidly shrinking Zimbabwean economy has created a bigger
long-term challenge. According to these executives,
Zimbabwean banks no longer earn a profit on the traditional
banking functions of issuing loans and accepting deposits.
Profits instead are derived from returns on government paper,
reducing the once sophisticated banking sector to little more
than a discount house.


11. (SBU) Nyandoro noted that of Stanbic's Z$20 trillion
assets, about Z$18 trillion was held in government paper.
While treasury bills offered a risk-free return, Nyandoro
said the GOZ's continued issuance of debt was unsustainable
and that the government was now issuing paper simply to pay
the interest charges on expiring paper. Nyandoro and
Watungwa added that the banking sector's problems were also
fueling a continuing emigration of skilled professionals.
Watungwa confided that he himself would be leaving Zimbabwe
next month to join Standard Chartered's office in Boston.

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Comment
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12. (C) We agree with those industry insiders who see the
new capital requirements and tight liquidity controls as a
manageable crisis but who see the sectorQ,s growing
dependence on government debt as a real threat to its future.
Banks in Zimbabwe have become glorified bond traders that
earn profits, not from lending to productive sectors, but
from the government's ever growing deficit. As a result the
sector will be poorly positioned to help turn around
ZimbabweQ,s economy when the time comes by mustering needed
capital and distributing it to productive enterprises.

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SCHULTZ