CHRIS CHENGA
Oftentimes it is not so apparent to local stakeholders that policy makers are caught right between satisfying the concerns of local market participants, and converging local structural reforms with global standards. This usually makes market participants in a country impatient, and in instances, divest from what could have otherwise been profitable ventures in the long term. Particularly in developing economies, market participants have to start studying global influences on local policymaking so that they can position themselves for the long term.
At the current stage of globalization, developing economy policy makers are frantically occupied with satisfying the compliance demands of global regulatory and oversight institutions. Adding more difficulty, the benchmarks of compliance are ever dynamic, due to the cyclical nature of the political consciousness in developed economies that express varied levels of worry to spill over, or adoption, of structural risks to and fro their jurisdictions. For instance, as the representation of European states oscillate between nationalist and liberal ethos, attitudes towards multilateral integration shift accordingly.
Perhaps there is no greater sector that portrays this policy headache as much as the financial sector. Consider the monetary challenges faced by developing economy central banks as they relate to institutions such as the Bank of International Settlements. With regulatory declarations such as Basel 2, and recently Basel 3, there comes a demand on local banking sectors to adjust their structural outlook in a manner that requires cross-jurisdiction parity on matters such as risk, disclosure, and supervision.
The intentions of such accords are usually benevolent and pragmatically justifiable; for instance, to mitigate the contagion as seen in the last global financial crisis. But, without caution, the challenges they may pose to developing economies may not become more severe. Indeed then, local investors and market participants have to incorporate these global regulatory influences in their own risk and opportunity analyses.
Notable difficulty is the capital requirements expected of local banks. As developing economies are lower income, there is the challenge of accumulating scarce long term capital. Moreover, trade balances exert exchange rate uncertainties that more often than not scare away long term foreign capital too. Evident to these challenges is that only South Africa has complied with Basel 3, and the rest of Africa lags at Basel 2 stage. These are factors to consider when analyzing the concerns of developed economy counterparties such as correspondent banks’ confidence, or lack thereof, to deal with Zimbabwean bank and include them on international payment systems. Some of this detail helps to clarify real global relations from potentially generic perceptions such as sanctions. Smart investors decouple themselves from superficial sentiment and actual occurrences.
The risk premium in instances of banks that do agree to engage in Zimbabwe has broad implications on the capital that finances sectors such as agriculture, manufacturing, mining, and others. Investors in these sectors should fully be aware of these adopted factors that influence the competitiveness of their local investments. Unbeknownst to many observers of Zimbabwe’s recent monetary policy decisions, due to a lack of public communication by its central bank, is that a key contingent in the decision to liberalize the 1:1 fixed exchange rate was the implication on credit risk outlook for banks that have foreign denominated capital to service. By pursuing a liberal exchange rate, there is greater risk that if exchange rate continues to depreciate many banks leveraged on foreign capital may not be able to service that financing. This further pushes the local financial sector outward of global tolerable credit risk regulations, depriving the country prospective confidence for future investment.
There have been other macro incidents whereby global influences have pressured local policy making. Capital markets have also felt the regulatory and compliance events that affect a local market. At the start of 2019, indices on the Zimbabwe Stock Exchange were removed from Fitch reports to its global clients. Sharp asset managers have to understand to decouple the priced in risk of such global perceptions on the market. But policymakers have been responsive. The Securities Exchange Commission did inquire on the reasons and concerns of the global ratings agency’s decision, and the Commission has taken respective action. For instance, the capital markets in Zimbabwe have recently been included into the International Organization of Securities Commissions (IOSCO). These are cases of encouraging responsiveness to global convergence by policy makers and regulators.
As Zimbabwe’s economy continues to open up to the world, smart businesses will show a cognizance of global regulatory and oversight trends in their investor proposals. Key to securing large scale investment in sectors like mining will be concerns such as COP24 compliance, as global investors included environmental, societal, and governmental (ESG) metrics in their investment appraisal. As many manufacturing companies desire capital expenditure, environmental compliance will be a key component of their processes. Future bottom lines are no longer projected by on local legislative frameworks, but on compliance and competitiveness to future global legislative frameworks.
