LOOMING LIQUIDITY CRISIS THREATENS ZIMBABWE,S

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000091 SIPDIS SENSITIVE SIPDIS AF/S FOR S. HILL NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN TREASURY FOR J. RALYEA AND T.RAND COMMERCE FOR BECKY ERKUL ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: DECL: 11/21/2017 TAGS: EFIN ECON PGOV ASEC ZI SUBJECT: LOOMING LIQUIDITY CRISIS THREATENS ZIMBABWE,S BANKING SECTOR REF: A. HARARE 0089 ¶B. HARARE 0073 Classified By: Amb. James D. McGee for reasons 1.4 (d) -------------- SUMMARY -------------- ¶1. (C) Zimbabwe's banking sector has been heading toward a liquidity crisis arising out of a patchwork of misguided monetary policies and their disastrous consequences. Onerous statutory reserve requirements, punitive overnight accommodation rates, a hyperinflationary environment that is spurring growth of the informal sector, the erosion of the banks' deposit base as the economy shrinks and confidence drops are all factors that have wreaked havoc on the banking sector in the last weeks. Most recently, the bank transfer system has broken down. The Reserve Bank of Zimbabwe (RBZ) has added further to the fragility of the banking sector over the past months by extending deeply concessionary facilities that have dried up banks' commercial lending lines and driven some banks into non-traditional and prohibited activities, a dangerous practice that has caught up with them. As a result, the prevailing liquidity crisis threatens the survival of a number of financial institutions. RBZ Governor Gono has appeared unfazed by the high risk of contagion in the sector. While he provided some relief to the banks January 31 by lowering statutory reserve requirements by 10 percent, without a multifaceted package of internally consistent policies his patchwork of remedies has no chance of restoring the health of the banking sector and of the economy in general. END SUMMARY. -------------- Banks Face Liquidity Crisis -------------- ¶2. (C) Zimbabwe's banks have been facing a liquidity crisis that started in October 2007 and is being fueled by numerous factors as described below. According to Best Doroh, Chief Economist of ZB Bank, at first the banks were able to cover their shortages by borrowing in the inter-bank market. However, the shortages have spread to all banks since mid-January, forcing them to resort to the RBZ at the unprecedented and prohibitive overnight accommodation rate of 975 percent for secured and 1,500 percent for unsecured borrowings. Gono raised the accommodation rates to 1,200 percent for secured and 1,600 for unsecured lending in his Monetary Policy Statement (MPS) of January 31, 2008 (septel). -------------- Onerous Statutory Reserve Requirements -------------- ¶3. (SBU) The statutory reserve requirement on banks, which is intended to be a prudential measure against default and does not earn interest, has also been punitively high at 50 percent for demand deposits and 45 percent for time deposits. Gono reduced the requirement by 10 percentage points in his MPS yesterday. The still very high rate acts as a tax on banks as they seek to mobilize deposits. -------------- -------------- Bank Surpluses Swept Into Zero-Interest 270-Day CDs HARARE 00000091 002 OF 004 -------------- -------------- ¶4. (C) Furthermore, the RBZ has been sweeping any surpluses that banks hold at the end of a trading day into 270-day non-negotiable zero-percent interest certificates of deposit (CD); the funds are unavailable for balancing out subsequent shortages. Pindie Nyandoro, former MD of Stanbic and outgoing president of the Bankers Association, explained to Ambassador on January 28 that to counter this additional onus banks tried valiantly to "hide" any day-end surpluses, for example, by pre-paying taxes or by onward lending at nearly any price, rather than hand money over to the RBZ on these terms. In his MPS, Gono lowered the tenure of the CDs to seven days from 270 days. (Comment: The move will have little effect on the immediate liquidity problem as no banks have surpluses these days. End Comment) -------------- -------------- Coupled With High Demand For Cash And Low Infusion -------------- -------------- ¶5. (C) At the same time, the banks' deposit base has shrunk just as demand for cash has skyrocketed with the increased informalization of the economy. Indeed, few traders in the informal sector maintain bank accounts and Zimbabweans' confidence in the banks is at an all time low. According to ZB Bank, higher new cash withdrawal limits for individuals and companies (Z$500 million per day) without a commensurate injection of cash have also contributed to the net outflow of cash from the banking system in the past weeks. In addition, since mid-January 2008, the RBZ has slowed the pace of concessionary lending (25 percent annual interest) through the Basic Commodities Supply Side Intervention (BACOSSI) facility, which had been a major source of bank liquidity. -------------- Electronic Transfer System Stutters -------------- ¶6. (C) Further exacerbating the liquidity crunch in the past few days has been a breakdown in the banking sector's electronic transfer system (Real Time Gross Settlement - RTGS),caused, according to the government mouthpiece The Herald, by recent prolonged power blackouts (Ref B). The power failures have affected Zimbabwe's link with its South Africa-based server, as telecommunications have been relying on generators that "gobble up a lot of diesel." Rather than occurring in real time, the RTGS transfers have been only trickling through the system, thus further raising the overall demand for cash. In his MPS, Gono raised the check limit from Z$500 million (US$80) to Z$10 billion (US$1610), which should provide volume relief to the overwhelmed RTGS system, but the power supply problem and challenge of handling mounting numbers of zeros will persist. ¶7. (C) Our informal survey of the banks this week found them to be struggling; much of their borrowings from the RBZ are to cover clients' cash withdrawals and do not add to their profitability. Reflecting these challenges, a number of the newer banks, such as ZABG, Genesis, Renaissance and Kingdom, failed to raise the required statutory reserves on January 21, 2008. Pindie Nyandoro told Ambassador that the banking sector had been short a staggering Z$160 trillion (US$5.3 billion at the official exchange rate and US$25.8 million at the current bank transfer rate) on one particular day last HARARE 00000091 003 OF 004 week. -------------- Banks Resort to "Non-Traditional" Activities -------------- ¶8. (C) To stay afloat in an exceptionally difficult business environment, some banks have engaged in non-core and otherwise prohibited activities such as trading on the Zimbabwe Stock Exchange and trading in foreign exchange on the parallel market. These ventures have further exacerbated the liquidity problem, as not all assets can be easily liquidated, or liquidated without a loss. Francis Macheka, Executive Director of Agribank told econ specialist that Gono directed "errant banks" earlier this week first to sell their shareholdings on the ZSE before coming to the RBZ for accommodation. Relatedly, Nyandoro told Ambassador that on January 25, the RBZ had denied even unsecured accommodation to some banks. She said Kingdom Bank, newly merged with the Meikles group, had most egregiously misdirected depositor funds to the stock market. In addition, CFX, ZABG, Metropolitan Bank and Interfin had weak balance sheets and were particularly illiquid. ¶9. (C) The market believes Gono wants to see certain institutions collapse. At a press conference one week ago with Finance Minister Mumbengegwi, Gono recklessly stated that there were too many banks in Zimbabwe for the size of the economy. Macheka, for his part, believes Gono has been spurned in trying to buy into certain banks, such as NMB and Genesis, and has put them on his "hit list." -------------- Tinkering At The Margin Not Helping -------------- ¶10. (C) Gono's solutions to date have failed to address the liquidity crisis. Indeed, notwithstanding recent threats by both the Minister of Finance and Gono that if bank queues for cash persisted, they would take some unspecified action against the banks, the queues are still there. Many banks have capped daily withdrawals at Z$200 million and ATM machines are only dispensing Z$50 million per customer. -------------- Financial Engineering Masks Major Losses -------------- ¶11. (C) While the figures on private sector borrowings from banks look reasonably good, they hide the real problem created by the RBZ's subsidized funding to the private sector. Official figures show that the year-on-year rate of growth in money supply accelerated from 17,807.1 percent in August to 24,463.6 percent in October 2007 (the latest date for which data are available). Much of the recorded growth was accounted for by growth in domestic credit to both government and the private sector. In fact, growth in domestic credit to the private sector accounted for over 82 percent of the recorded growth in total domestic credit. Although banks have raised their minimum non-concessionary lending rates to as high as 1,150 percent (Standard Chartered Bank),the bulk of the banks' loan book is deeply subsidized. In view of this, most banks are likely to record losses at the approaching end of their fiscal year. HARARE 00000091 004 OF 004 ¶12. (C) Most worrying of all to Stanbic chief economist Panashe Chitumba and Nyandoro on January 28 was the high risk of contagion that Gono did not appear to be taking into serious account (Ref A). In this regard, they described to the Ambassador the great extent of bank interdependence that arises through their borrowing on the inter-bank market, their common client base, and syndicated loans. -------------- Comment -------------- ¶13. (C) Given the current liquidity crisis, the odds have been rising that some banks would fail in the near term unless a shift occurred very soon in monetary policy. Gono's announcement of slightly lower statutory reserve requirements in yesterday's Monetary Policy Statement provides some relief to the banks. But in the medium term, it is just another patch on the tattered economy. Many factors, as outlined above, are contributing to the bank crisis and only a multifaceted package of internally consistent policies has a chance of restoring the health of the banking sector and macroeconomic stability. None of Gono's remedies, either individually or collectively, equates to such a comprehensive package of reforms. MCGEE