Zimbabwe’s creditor engagement positive, yuan use a partial fillip – Moody’s

Zimbabwe’s creditor engagement positive, yuan use a partial fillip – Moody’s

HARARE, January 28 (The Source) – Zimbabwe’s re-engagement with international creditors is credit-positive while its planned increased use of China’s yuan will provide a limited boost through increased trade and investment from the world number two economy, global rating agency Moody’s said on Thursday.

Zimbabwe abandoned its inflation-ravaged currency in 2009 and adopted a basket of currencies, largely anchored by the US dollar, managing to tame hyperinflation. However, the country still faces growth and competitiveness challenges that stem partly from persistent currency overvaluation.

In December, Zimbabwe announced it would encourage the use of the yuan, especially for bilateral trade with China.

The currency move, however, would not on its own spur overall investor confidence and Zimbabwe’s external competitiveness, Moody’s said in two rare but detailed reports on the southern African nation.

While Moody’s made it clear its reports did not constitute credit rating actions, its interest in Zimbabwe follows President Robert Mugabe’s government’s moves to re-engage with international capital.

In 2013, Zimbabwe embarked on a staff-monitored programme with the International Monetary Fund (IMF) – one of its major creditors – and agreed to a debt-clearance strategy with the World Bank, IMF and the African Development Bank (AfDB) in Lima last October.

In December, Zimbabwe also announced that China had agreed to cancel $40 million in public debt due in 2015.

“Debt forgiveness, thawing relations with international creditors, and the prospect of unlocking much-needed technical and financial assistance are credit positive for Zimbabwe,” Moody’s said.

“Although the $40 million in cancelled debt from China amounts to less than 1 percent of Zimbabwe’s total public and publicly guaranteed external debt (and arrears) at the end of 2015, improving relations with the international community have positive credit implications because re-engagement would imply renewed access to official donor financing for the government; regained access at a lower cost (from IFC, EIB, etc.) for the private sector; and its eventual catch up with regional peers already fully integrated in international capital markets at lower premiums.”

In terms of the debt clearance programme agreed with the three international creditors, Zimbabwe has undertaken to clear $1,8 billion in arrears by the first half of 2016. The IMF has indicated that this key step could open up fresh capital for Zimbabwe, which has not been eligible for funding by the creditors fpr almost two decades.

Moody’s said Zimbabwe’s announcement that it would encourage the use of the yuan in bilateral trade with China as well as in local transactions was likely to facilitate greater levels of foreign direct investment (FDI) from, and bilateral trade with, China by reducing transaction costs and exchange rate risk.

“However, a change in currency regime on its own is not sufficient to strengthen investor confidence and improve Zimbabwe’s external competitiveness,” said Moody’s.

“Overall, unclear property rights, a rigid business environment, limited access to credit, low capacity utilization, irregular supply of energy and high electricity tariffs, shortages of skilled labor, infrastructure deficits and weak governance are key factors constraining growth and hence sovereign credit quality.”