Massive blow for desperate Mnangagwa as US$1.2 billion South Africa bailout bid flops

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Desperate senior government officials from Zimbabwe met the South African government a day after Christmas and asked for help with a bailout.

The delegation, led by Zimbabwe’s finance minister, Mthuli Ncube, is understood to have sought US$1.2bn in aid.

Zimbabwe faces an economic crisis which has resulted in the price of petrol increasing by 150% from R19 a litre to R41, the highest in the world. Riots broke out this week against the increased costs.

Inflation in November was 31%, the latest figure available. Independent estimates have put the rate at more than 100% in real terms. Teachers and doctors are picketing for salary increases.

The December meeting had been attended by South African Reserve Bank governor Lesetja Kganyago and deputy governor Daniel Mminele, Reserve Bank of Zimbabwe governor John Mangudya and permanent secretary in the Zimbabwe ministry of finance & economic development, George Guvamatanga.

National Treasury director-general Dondo Mogajane told Business Times that SA declined to lend the $1.2bn because of its own difficult financial position and concerns over how Zimbabwe would repay the money amid fuel shortages, a hefty public sector wage bill and other challenges.

“Initially they wanted money, $1.2bn …We don’t have $1.2bn but what we have is the will to assist them. [What we can do] is to open trade lines. We said we can look at interventions where possible,” said Mogajane.

“Our engagements are across the system — assisting from a budgeting implementation point of view, and reprioritising of public expenditure, including on their behalf engaging multilateral development [financing] institutions, which we have started.”

It is understood that there are no existing credit lines between SA and Zimbabwe. SA lent Zimbabwe $200m-$300m when Robert Mugabe was still president. Zimbabwe is in arrears with the IMF, World Bank and African Development Bank (AfDB).

Zimbabwean President Emmerson Mnangagwa is visiting Russia, Belarus, Azerbaijan and Kazakhstan in the hope of attracting investment. He will attend the World Economic Forum in Davos, Switzerland, which starts on Tuesday.

SA is in discussions with the Paris Club on Zimbabwe’s behalf. The club is a group of officials from major creditor countries who find co-ordinated solutions to payment difficulties experienced by debtor countries. It comprises the IMF, World Bank, OECD, UN Conference on Trade & Development, the European Commission, the AfDB and the Asian Development Bank.

SA has the African Renaissance & International Co-operation Fund (ARF). The ARF Act was promulgated on January 22 2001 to identify and fund projects for regional integration to promote democracy and good governance, prevent or resolve conflicts, and for socioeconomic development integration.

SA used this fund to help with the elections in the Democratic Republic of Congo and Madagascar. The fund is not big enough to help Zimbabwe.

Commentators say that at the heart of Zimbabwe’s challenges are its currency woes.

Finance minister Tito Mboweni supported Zimbabwe’s intention to introduce a new currency to counter its failed bond note, which has dropped dramatically in value.

Jee-A van der Linde, an economist at NKC African Economics, said: “The currency crisis … is crippling the very sectors that are required to help create an economic turnaround.”

He said the crisis had created a large informal market, precipitated by widespread distrust in the financial system.

The government had to find solutions to unlock foreign direct investment into agriculture and mining, which were key to generating foreign currency, Van der Linde said.

Last year the risk consultancy Fitch Solutions, a division of the international credit ratings agency, warned that indecision on currency reforms by the Zimbabwean finance minister was aggravating the foreigncurrency crisis. The crisis was caused by a trade deficit of $1.6bn in the seven months from February to August 2018.

Estimates put the inflation rate at more than 100% in real terms

Jane Morley, head of Sub-Saharan Africa country risk at Fitch Solutions, said: “The problem for authorities is that reserves need to be built up and the fiscal deficit contained before they can switch to a new currency regime. But these cannot be achieved unless and until there is substantial devaluation.

“Even a large cash injection [from whatever source] would not be sufficient to address structural problems and spark sustainably higher levels of economic growth.”

Morley said for economic growth to be achieved, Zimbabwe’s government needed to adopt a more investor-friendly approach and establish a track record of businessfriendly reform.

Attempts to reach the Zimbabwean government were unsuccessful.

● Since his rise to power nearly 14 months ago, Zimbabwean President Emmerson Mnangagwa has anchored his rule on the mantra “Zimbabwe is open for business”.

But this is just half of the reality for the country’s businesses; there are investment opportunities but there are also risks.

Mnangagwa has chosen to focus on the former. This week he travels to the World Economic Forum in Davos, Switzerland, to try to persuade the global business elite to invest in the country.

But foreign-owned companies are struggling to repatriate their earnings.

A persistent foreign-currency shortage, which shows no signs of easing, is the latest challenge. Estimates put Zimbabwe’s foreign-currency reserves at only a two-week cover, far less than the World Bank’s recommended three to four months cover.

Staring down the barrel of this gun are South African-owned companies and stateowned enterprises (SOEs) doing business in Zimbabwe.

Because they are invested across many economic sectors, South African companies have borne the brunt of the foreignexchange crunch.

This has chipped away at the attraction for them of being able to generate earnings north of the Limpopo in dollars, a generally far stronger currency than the rand.

Dollar-rich only in theory

A portfolio manager at PSG Wealth, Adrian Cloete, said: “The US dollar attraction that Zimbabwe has for most South African businesses hasn’t really been that big of an advantage, as you can’t really repatriate all of those US dollars back to SA. Zimbabwe is experiencing shortages of US dollars in its economy in any event.”

Neville Mandimika, RMB’s Sub-Saharan Africa economist and sovereign fixedincome strategist, said the fractured foreignexchange market would act as a constraint and had made doing business difficult.

“What investors will be waiting for is an outline of what the road to the Zimbabwedollar introduction looks like,” he said.

“Is this a timeline that is conditional on certain fundamentals like sufficient foreignexchange reserves being in place? Such questions will need to be answered before business takes a view of the investment case in Zimbabwe.”

A tally done by Business Times this week showed that at least 15 major South Africanlinked companies with operations in Zimbabwe were struggling to repatriate funds.

These include Delta Beverages (40% owned by AB InBev), MultiChoice (owned by Naspers), Tongaat Hulett, PPC and Zimplats (owned by Impala Platinum).

Other firms such as Edcon, Pick n Pay, Sanlam, Tiger Brands, Nedbank and Alexander Forbes either have units in Zimbabwe or are invested in locally owned business.

To get around the burden of trying to unlock funds, some companies have reinvested earnings in expansion programmes or bought savings bonds with the central bank.

Last week, Delta Beverages said in a statement that AB InBev had “agreed to place over $120m, due to them in relation to unremitted dividends and fees”, into the central bank’s savings bonds.

Naspers, in its financials last year, redflagged Zimbabwe as one of three countries that owed it a combined $131m. “Constrained liquidity in Angola and Zimbabwe persists because of limited availability of foreign currency,” Naspers chair Koos Bekker and CEO Bob van Dijk said at the time.

PPC is struggling to extract $60m stuck in the country, and sugar giant Tongaat said in its recent financial results: “A process to remit a further dividend from Zimbabwe is currently under way.”

A Nedbank Zimbabwe executive in Harare said that “over the last few years” the bank had not been able to send dividends to the parent company in SA.

Fastjet is owed nearly $2m in airline fees. Eskom and SAA have not been spared. SAA is estimated to be owed about $60m in ticket fees. Eskom, which was at one time owed $40m, said Zimbabwe was making good on its arrears payment.

Robert Besseling, the director of business intelligence firm Exx Africa, said an exodus of South African companies from Zimbabwe was unlikely. He described them as “exceptionally resilient”, noting they had survived even worse economic conditions in the past.

“South African companies operating in Zimbabwe will face pressure from the [South African] government to avoid their withdrawal en masse,” he said. “Big South African retail, mining and logistics companies hold a strategic position in the Zimbabwean economy … Many South African businesses will retain their positions since they are committed to Zimbabwe for the long term.

“However, smaller South African firms are unlikely to be able to remain open and will shut their doors in the next few weeks and months,” said Besseling.

Expect scaling down

Mandimika said it was likely that South African companies would scale down their operations if the foreign-exchange crisis continued. “During the hyper-inflation era we saw the likes of MultiChoice and PPC opt to stick it out, albeit at reduced operational scale,” he said.

This week, protests over a 150% fuel price hike resulted in the closure of many businesses. The increase is likely to push up the cost of goods and services. Inflation rose to 42% last month from 31% and is inching closer to the 50% hyperinflation mark.

The real litmus test for South African companies, however, is probably the plan to introduce a new currency “within the next 12 months”, recently announced by finance minister Mthuli Ncube.

Besseling said Ncube’s plans to adopt a new currency regime were “premature”.

“Zimbabwe is in no condition to adopt a new local currency at this stage … any new currency would face immediate collapse,” he said.

Cloete said the introduction of a local currency would have its own challenges for South African businesses with interests in Zimbabwe.

“These businesses would have to deal with a relatively high inflation rate and a depreciating currency.”

Cloete said an exporter like Impala, with its investments in Zimplats and Mimosa Mining, would benefit from a weakening exchange rate, but would have to control the inflationary impact on input costs.

– Sunday Times


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