Expansionary monetary policy is still the order of the day in developed economies as central bankers remain at the forefront of the battle to keep recession at bay.
With those markets awash with money, bond yields have gone right down and United States government 10-year bonds, for example, are maintaining a yield of below 3%!
The search for high yields has lured investors to emerging markets and even to underdeveloped frontier markets. Despite all this activity, Zimbabwe has been unable to raise meaningful amounts of capital on the international bond markets and consequently the economy is starved of liquidity in a world where money is chasing returns.
Examples of investors’ appetite for riskier bonds abound. In this second half of 2013 Russia and South Africa raised US$7 billion and US$2 billion respectively, in bond issues with yields of between 5% and 6%. These investments came despite the fact that investors have increasingly become wary of currency risk in emerging markets. The South African rand, for example, has shed about 19% of its value against the US dollar since the beginning of the year.
It may seem that better developed emerging markets like Russia and South Africa are not a fair comparison to Zimbabwe. But even equally underdeveloped economies are attracting lenders. Last year Zambia raised US$750 million at a yield of 5,6%. In September, a Mozambican state-owned fishing start-up raised US$500 million with the help of international banks. In April, Rwanda raised US$400 million through a dollar-denominated bond with a yield of just less than 7%. Tanzania raised US$1 billion in April. Kenya and Nigeria have between them raised even larger amounts and are the leading destinations for investors in African frontier market bonds.
Zimbabwe is glaringly missing from this list of small aid dependant and underdeveloped economies that have managed to defy odds and attract investors who are hungry for returns in what has now been termed a “dash for trash”, referring to the stampede for junk bonds.
Potentially profitable projects are not in short supply. For years, Zimbabwe’s potential to generate electricity in excess of its needs has been touted. Hwange coalfields apparently have enough proven coal reserves to sustain power generation for Zimbabwe and its neighbours for 50 more years.
Gas fields in Lupane reportedly have equally exciting prospects. Various mining and infrastructure development projects could use the capital. Surely, most of these projects have a more sound business case than the tuna fishing project in Mozambique that managed to raise US$500 million a few weeks after its inception!
Why, with all this potential has Zimbabwe failed to attract even those investors who seem to be willing to take on higher risk? The key seems to be Zimbabwe’s standing with the International Monetary Fund (IMF). Without the IMF’s stamp of approval, most investors will continue to shy away from Zimbabwe.
This is especially true for sovereign debt issues where even a government guarantee would not be good enough. If the country were to implement the measures required by the IMF towards mending the economy, raising debt capital would be much easier. Recent reports suggest that the country is making token payments of just US$150 000 towards settlement of its total bill of about US$11 billion.
Zimbabwe agreed to engage in the IMF’s Staff Monitored Programme which seeks to make various changes which would place the country on a sound financial footing and enable it to service its existing debts. Changes that the country is required to make include passing a 2014 budget that has expenditure in line with revenues, increasing financial sector stability, implementing structural fiscal reforms and improving relations with external creditors. Essentially, the government is being called upon to make concessions on various unwise policy decisions.
The ball is now in the country’s court and whether Zimbabwe will also be able to raise much-needed capital depends on the extent to which the IMF’s requirements are met. Without that, the country remains uncreditworthy even in the eyes of the bravest of lenders out there.
Perhaps a consolation for most observers is that it is good not to increase the country’s indebtedness. Experience here and elsewhere suggests that windfalls from debt issues are often misappropriated or misused and debt ends up being defaulted on or refinanced with further borrowings.
Rather than temporarily enjoying the benefits of being able to borrow, Zimbabwe is better off living within its means. This romanticised view sounds very noble, but the reality is that the economy is in limbo and debt financing is urgently needed.
“Tight liquidity” is the buzz-phrase in most business circles. Raising money from international bond markets seems one of the only viable ways to get out of this quagmire. Yet Zimbabwe is still perceived as not being creditworthy by bond investors. It remains to be seen whether the country will make the tough policy choices needed, appease the IMF and get the ball rolling before it is too late.