US embassy cable - 03HARARE960

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