Hopewell Chin’ono: What does the Standard and Poor Zimbabwe Junk downgrade mean?

By Hopewell Chin’ono

I am not an economist but I will do my best to explain what the Standard and Poor (S & P) down grade of Zimbabwe to Junk Status really means to us as Zimbabweans.

Very little has been said about this down grade in the mainstream media because our papers nowadays seem to go for headlines whilst shying away from issues that require nuance.

So global institutional funding has to be deployed through what they call Fiduciary Obligations in indices that include our very own Zimbabwe Stock Exchange (ZSE) listed companies.

Funds and investments will flow into Zimbabwe through the ZSE with investors buying and selling shares on that bourse.

American companies make up around 70% of foreign currency investments through the ZSE at the moment.

Most of these companies are through the index obligations that are referenced on the S & P note which is attached below.

The global investment world understanding would be that investors could trade In and Out of these indices at any given time without any local complications like the Bond Note is equivalent to US$1 nor any such comical declarations.

The ridiculous idea that a Cow is equivalent to a Goat narrative that has been sold by the RBZ and the Finance Minister, Mthuli Ncube is what this S & P Note has ridiculed.

Mthuli Ncube had a different attitude towards fixing this problem when he was campaigning for the Finance Minister job, he said at the time that the Bond Note was not equivalent to the greenback and then changed tune after he got the job.

He feared that floating the Bond Note would ruin all pension funds, insurance companies, bank balance sheets and shock the entire economic system.

In other words, Accounting for all businesses will suddenly change when the Bond is floated.

However retaining the fictitious parity between the Bond Note and the US Dollar has its own tragic consequential economic shocks, it means that investors will stay away because they can’t repatriate their dividends from Zimbabwean based investments.

This is how liquid capital markets operate, you can’t command them with slogans or delusionary aspirations that are not backed up with robust action.

So if Zimbabwean companies are removed from the S & P indices as has happened now, foreign exchange inflows and investments in our capital markets will be reduced significantly as we shall soon see.

That reduction will have an immediate horrible effect on foreign currency inflows into the country and to you and me, it simply means price hikes as you have seen lately caused by the expensive cost of buying the US Dollar on the black market since we are now importing more than we are exporting including tooth picks.

It is very difficult to get back into those indices once we have been kicked out as has happened now.

Historically, countries have taken decades to be included back on those indices.

This will probably be the most negative endorsement of our capital markets and the hemorrhaging of opportunities will soon be self evident when the citizen is hard up for cash, Bond, RTGS or Greenback.

It means the cost of doing business in Zimbabwe is now painful and with it, will come the disappearing hope of creating jobs or restarting the moribund and at times cobwebbed industries.

In other words, the international investors we have been talking about and expecting to fly into our country will look at the S & P note and say, NOPE.

The downgrade also means that the cost of borrowing for Zimbabwe as a country has materially shot up, that will translate into high prices when the products made in Zimbabwe finally find their way to the international market.

We will not be competitive against our neighbours and beyond because we will be trying to recoup enough to pay for interests on borrowed capital forcing us to price our goods higher than we had borrowed cheap money.

These are issues of reality and can’t be spun with state media propaganda, we need to start talking about real solutions!

If our leaders and political elites were serious, they would not be sleeping after this S & P note came out, they should take this deepening crisis seriously and stop politicking!

The S & P downgrade is the unfortunate confirmation note that our economy is now in the Intensive Care Unit.

So what are the right questions that you and I as citizens and our MEDIA should be asking the rulers of our country, now that we are in this never ending mess?

If you remember at the start of this Bond Note journey in 2016, we were sold a narrative that Bond Notes were backed up by real money from Afrexim Bank.

This declaration was a statement that the bank never acknowledged publicly nor refuted, in my view, it means we are not backed by anything at all at the moment.

It is likely that we have since passed the agreed Afrexim Bank backing threshold, meaning that we are trading on truly empty pockets.

We have been drawing on this Afrexim Bank US$600 Million facility to buy fuel at 75 cents and selling it at 35 cents, something that is not economically viable because we are producing very little to cover and support such an uneconomic subsidy.

Afrexim Bank is not a large Santa Claus that can carry on supporting Zimbabwe, it is only worth US$10 Billion as an institution.

Our risk rating must be off the scale for S & P to issue such a damning condemnation of our economy, which as I said earlier, will take years to undo.

The rate of inflation must be so volatile that it is difficult to put an accurate value on our stocks at the moment.

This announcement by S & P is an investor No Confidence vote on our economy and we must immediately work on undoing that national headache instead of the current political Punch and Judy shows.

We should brace up for further investor flight including our beloved Chinese all weather friends, they also use rating agencies when doing business.

Being associated with a Zimbabwean domiciled company will have a knock on effect on ratings of foreign-based companies too.

This is as bad as being blacklisted, I asked a former classmate who is now working for a hedge fund in the UK what this really meant, “…we are going to have to rely on the likes of Wicknell and Ginimbi to stay afloat,” she jokingly said.

Although that is a dark joke, that is really scary and we should all worry about the prospects of economic hardships because they have a political connotation!

Nigeria is on B status and we are now on Junk status! It simply means that we can’t borrow money and where we can, the interests rates will be unsustainable.

We will have to rely on loan sharks from those dodgy places like Belarus leveraging against our natural resources, those much talked about minerals!

But is that what will transform the lives of our people or will they be better transformed by proper investments?

That is why I have been harping on about the need for urgent political and economic reforms that can help us reengage with the rest of the world.

Many people knew that this is what would happen if we talked more without acting on our rhetoric.

Unfortunately, what I was saying all year has now happened, it is that moment where I hate to be proved right.

Getting out of this is very hard because there is no easy short-term quick fix.

It’s a long-term game with a lot of pain, a real arduous road but one that needs to be traveled non-the less.

This is mainly because Zimbabwe’s problems are hinged on lack of production.

We don’t produce enough, so our imports are more than what we export and this drains the little foreign exchange that we get from tobacco, diaspora remittances and foreign direct investments.

So if our journalists and newspapers fully understood economics, this would have been a leading story on every front page not the Mickey Mouse stories we are reading!

Hopewell Chin’ono is an award winning Zimbabwean international Journalist and Documentary Filmmaker.

He is a Harvard University Nieman Fellow and a CNN African Journalist of the year. He is also a Fellow at the University of Oxford’s Africa leadership Institute.

Hopewell has a new documentary film looking at mental illness in Zimbabwe called State of Mind, which was launched to critical acclaim.

You can watch the documentary trailer below. Hopewell can be contacted at [email protected] or on Twitter @daddyhope