Cablegate: Zimbabwe's Looming Default Crisis

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS HARARE 000960

SIPDIS

SENSITIVE

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
PASS USTR FLORIZELLE LISER
TREASURY FOR ED BARBER AND C WILKINSON
STATE PASS USAID FOR MARJORIE COPSON

E. O. 12958: N/A
TAGS: ECON ETRD EINV PGOV ZI
SUBJECT: Zimbabwe's Looming Default Crisis

1. (SBU) Summary: Once this - or a future - GOZ
eliminates negative real interest rates, local bankers
expect borrowers to default en masse. The coming default
crisis underlines how difficult it will be to rationalize
Zimbabwe's distortion-laden economy. End Summary.

Only Decent Investment is Red Ink
---------------------------------
2. (SBU) In real terms, interest rates are a whopping 200
percent negative (subtracting 250 percent inflation from
a 50 percent nominal interest rate). One of the few good
investments in this collapsing economy has been
borrowing, then converting to hard currency. (The
Zimdollar has fallen from Z$ 346 to 2100:US$ 1 in exactly
one year.) Someday a GOZ will recognize the downsides of
negative rates and allow them to rise above inflation.
At that point, the President of the Zimbabwe Bankers
Association believes few businesses or homeowners will be
able to service debts (almost all carry variable rates).
He expects massive foreclosures.

3. (SBU) How could the GOZ allow interest rates to get so
out of sync with inflation? To some extent, it has
relied on misguided economic counsel. Samuel Undenge, a
rare economist in GOZ good graces, is frequently touted
as an economic expert in the official press. He is such
an evangelical believer in low borrowing rates that he
took out newspaper advertisements in July 2002 arguing
"it is lending rates which will stimulate the economy."
He still insists the GOZ could turn this near-comatose
economy around by dropping lending rates from 75 to 25
percent.

Comment
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4. (SBU) No need to recite elementary economic theory
here. Suffice it to say the economy has already milked
any growth benefits from cheap financing. Now it is
suffering the more damaging consequences of: a) capital
flight to safe investment venues (banks in neighbor South
Africa offer some of the world's highest real interest
rates), b) resource diversion to unproductive activities,
c) GOZ addiction to low-interest debt and d) depletion of
Zimbabwe's once enviable savings rate. In sum, negative
real interest rates have been a major cause of the
plummeting Zimdollar. Sadly, it is unclear whether a
post-Mugabe GOZ will be able to float interest rates
upward while protecting vulnerable companies and
homeowners.

Whitehead

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