Zimbabwe's economy faces growing cash and liquidity challenges ahead of the government's planned launch of bond notes, Moody's Investors Service said in a report today. The high and rising share of government securities on banks' balance sheets poses a systemic risk to the domestic banking sector.
The report, "Zimbabwe , Government of - FAQ: Drivers and Credit Implications of Zimbabwe's Cash and Liquidity Shortages", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.
The Zimbabwean government's plan to introduce bond notes -- a new means of exchange backed one-to-one by the dollar, to be injected through a performance-related export scheme -- had been intended to ease the shortage of cash in the economy.
"Growing cash and liquidity challenges in the Zimbabwean banking sector have intensified ahead of the government's planned introduction of bond notes," said Zuzana Brixiova, a Moody's Vice President -- Senior Analyst and co-author of the report. "Although the bond notes are intended to ease the cash shortage, there are concerns in Zimbabwe that they represent the first step towards the return of a domestic currency. This has exacerbated net deposit withdrawals and cash hoarding."
The developments in Zimbabwe's banking sector are taking place against the backdrop of a domestic economic crisis fuelled by low global and regional growth, lower-for-longer commodity prices, and severe drought.
These factors have combined to exacerbate existing domestic challenges stemming from deflation, growth stagnation, weakening fiscal stance and persistently low productivity in Zimbabwe. The country's external competitiveness has been impeded by a sizeable real exchange rate over-valuation, driven in part by the multicurrency regime peg to the resurgent US dollar.
Zimbabwe has been running structural current account deficits since the official dollarization of the economy in 2009. These deficits, alongside weak capital inflows have led to a steady drain of dollars out of the economy.
The government's increasing fiscal deficit and excessive treasury bill issuance required to finance it have contributed to the cash and liquidity shortage by depleting the banking system's liquid assets.
The government has also contributed to a strain on the banking sector via heavy borrowing from domestic banks, even though it has limited capacity to service the debt and has to roll it over instead, weakening the banks' liquidity positions and solvency.
Zimbabwe's balance of payment challenges will continue unless the country implements sustainable fiscal policies and comprehensive structural reforms.
With protracted balance of payments pressures, dollar shortages are likely to intensify. In addition, the inability of enterprises and households to obtain sufficient cash for daily transactions will weaken economic activity and put pressure on growth, in turn lowering government revenues.
