The curse of debt overhangs

BATANAI MATSIKA

The Morgan & Co Research 2020 Zimbabwe Economic Outlook Report published early this year makes useful comparisons between Zimbabwe and Venezuela. An important area that is covered by the report is the issue of external debt. 

Both Zimbabwe and Venezuela have a significant amount of external debt. It should be highlighted that external arrears hinder a country from accessing new financing from the International Financial Institutions (IFIs), traditional bilateral and commercial creditors.

External debt in Venezuela has more than doubled over the past decade, rising to about US$156bn in 2018. 

In addition, Venezuela’s debt has continued to increase from a build-up of arrears, bilateral loans, and legal fees from arbitration cases. Further, US sanctions have further squeezed Venezuela’s once-booming energy industry, where output was already collapsing.

Oil accounts for about 98% of export earnings, according to OPEC.

Similarly, Zimbabwe will have to expunge its external debt that has been increasing over the years. 

The recently announced 2021 National Budget states that total external debt is estimated at US$8.2bn as at end September 2020. This is an increase of USD106m from the end 2019 amount of US$8.1bn and was mainly on account of penalties and interest arrears. 

Arrears remain a major component of the external debt at US$6.3bn (77% of external debt). Multilateral external debt, as at end September 2020, stood at USD2.7bn of which 90% are arrears.

Similarly, bilateral external debt is estimated at US$5.6bn (68% of total publicly guaranteed external debt), of which arrears account for 71% of total bilateral debt. 

Zimbabwe is still classified as “in debt distress”, with unsustainable public and publicly guaranteed (PPG) external and total debt coupled with large external arrears.

Restoring debt sustainability will require the sustained implementation of a significant fiscal consolidation, cessation of quasi-fiscal activities that lead to debt increases, as well as reaching agreement with creditors on a comprehensive treatment of Zimbabwe’s external debt and arrears.

This will enable the country to create more room for investment in capital expenditure as well as boosting productivity in key sectors of the economy such as Agriculture and Mining.

The Minister of Finance and Economic Development; Professor Mthuli Ncube maintains that the arrears clearance plan for Zimbabwe is tied to economic reforms that are earmarked to lead Zimbabwe towards attaining Upper Middle-Income status by 2030.  

Overall, it remains to be seen how the engagement process will evolve considering that sanctions remain in place.

That said, we maintain a view that political and economic constraints affecting Zimbabwe  are largely systemic and intertwined and include (i) limited FDI and lines of credit, (ii) a massive debt over-hang, (iii) corruption and poor rankings in terms of Ease of Doing Business, (iv) infrastructural deficits and (v) weak institutions. 

In conclusion, we maintain that investors on our markets should park ZWL balances in stocks that generate foreign currency as well as those with ex Zim exposure.  

Share prices have declined significantly in real terms and there is an opportunity to pick up good assets at depressed prices.

We like regional plays, well managed net exporters or companies with significant export potential as they provide value preservation opportunities to investors with a long-term perspective. Some of the preferred names include Hippo Valley, SeedCo, SeedCo International, Padenga Holdings and Simbisa Brands.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com

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