Creditworthiness of Zimbabwe

Capacity

Capacity measures your ability to repay your debt. Here, your cash flow is paramount, along with your debt-to-income ratio.

The lender wants to know how much you owe versus how much you own. The lower your debt-to-income ratio, the more favorable a bank will look at your request for credit. Other considerations include length of time at your current job and income stability.

Capital

Capital shows lenders you are serious and committed to the credit you are seeking. For individual loans, this means a down payment when applying for a loan. For a business loan, this means you have invested some of your own money into the business.

Do you have any cash on hand to be able to provide as capital? Often, the more equity you have, the more favorable your loan conditions will be.

Collateral

Collateral provides assurance to the bank in case you're unable to pay for the loan. For example, if you secure an auto loan, the car is your collateral. If you default on your loan, the bank can repossess the car.

Lenders will look at what sort of property—bank accounts, real estate, equipment, automobiles—they'll be able to use as collateral as they offer you a loan.

Conditions

This refers to the current economic health of the market and the industry you work in. Is the country going through an expansion or recession? Are your prospects for advancing in your professional life currently growing or shrinking? What are the current trends, and are there layoffs expected?^[1]

Zimbabwe's Creditworthiness

Zimbabwe's obligations are beyond its repayment capacity, owing to the financial crisis and its exclusion from international credit markets. Currency risk is C-rated. Banking sector risk is C-rated. The ratio of non-performing loans (NPLs) has fallen owing to an increase in loans to the private sector. Zimbabwe instead turned to China where they seem to have traded natural resources for Chinese investments. Zimbabwe Debt to China does not take the following credit ratings for Zimbabwe into consideration since they know they have a firm grip on its natural resources and they are not concerned about the core creditworthiness aspects as other lenders do.

Sovereign risk

Sovereign risk is C-rated. Sustained currency depreciation has depressed nominal Gross Domestic Product (GDP), and the government is borrowing to finance a large fiscal deficit, weakening debt ratios. Severe economic distortions, fiscal mismanagement and lack of transparency impair creditworthiness. Zimbabwe's obligations are beyond its repayment capacity, owing to the financial crisis and its exclusion from international credit markets.

Currency risk

Currency risk is C-rated. Under the current Foreign Exchange Auction System, the Zimbabwe dollar has depreciated sharply. Ongoing restrictions regarding access to hard currency through the auction system mean that the parallel market operates at a sizeable discount to the official rate.

Banking sector risk

Banking sector risk is C-rated. The ratio of non-performing loans (NPLs) has fallen owing to an increase in loans to the private sector. Despite declining economic activity, total loans increased owing to depreciation of the Zimbabwe dollar on the conversion of foreign-currency-denominated loans. However, credit to GDP remains lower than four years ago, as banks are unwilling to lend amid the sustained economic contraction (once currency effects are removed).

Political risk

Political risk is CC-rated. Weak institutions, widespread corruption and the ongoing brutal response to strikes and protests and economic contraction highlight the government's ineffectiveness and weigh heavily on the rating.

Economic structure risk

Economic structure risk is C-rated. Commercial agriculture has been weakened by the state's land redistribution policies and by drought, and although mining investment continues, it is threatened by shortages and high costs of capital and energy.^[2]

Zimbabwe's Impossible Global Compensation Deed

The Zimbabwean government announced that it will pay white farmers a whopping US$3.5 billion as compensation for the losses incurred from the chaotic and ill-conceived Fast Track Land Reform Programme of 2000. The agreement, termed the Global Compensation Deed, was entered into between the government and the Commercial Farmers’ Union of Zimbabwe (an exclusive union for white commercial farmers) in July 2020.

While the Global Compensation Deed speaks to the 2013 constitutional provisions as well as the promises of Emmerson Mnangagwa’s administration, it has to be understood in the broader context of the Zimbabwean situation. Mnangagwa’s government – under pressure from a rapidly declining economic situation, boiling political temperatures and a restive population facing desperation and destitution – is eager for a different narrative and to win a few friends internationally.

Spirited efforts to rekindle international engagements have so far yielded little and the country’s circumstances haven’t changed. Zimbabwe can hardly pay decent wages for essential services such as in the health sector. It is in no position to raise the contribution required for the US$3.5 billion, even with a partial and staggered payment structure.

The land reform programme was at the core of international disengagement 20 years ago. The administration is hoping the latest move will carry favour with western governments and lead to a better reception of Zimbabwe from international financial markets. Finance Minister Mthuli Ncube announced that government would be setting up a fundraising team comprising his ministry and the commercial farmers to go on an international junket to raise the committed funds.

But Zimbabwe is already deep in debt due to long-term bonds and is unlikely to attract more bonds from the international community. The country owes about US$8 billion to creditors, including the World Bank and African Development Bank. Financial institutions will reasonably be hesitant to lend money to Zimbabwe under such circumstances.

However, the compensation journey is far from over. Zimbabwe is in an economic tailspin and the country’s international credit worthiness is such that no key international finance houses would risk lending it money. Paying white farmers billions of dollars that it doesn’t have won’t resolve Zimbabwe’s economic and political crisis – and is certainly not a priority considering the country’s pressing needs in the face of a global pandemic.^[3]

References