, 23 tweets, 9 min read Read on Twitter
1. A #thread on #Zimbabwe:
- Its currency arrangements;
- The suggestion to allow its currency to float, and;
- The potential impact that this suggestion may have on its banking system:
2. In the appended Twitter Moment, I talked about #Zimbabwe's currency arrangements. I focused primarily on the role that the Reserve Bank of Zimbabwe (RBZ) plays, and; the issues that the RBZ creates: twitter.com/i/moments/1094…
3. To recap:
i) The Reserve Bank of Zimbabwe printed 66%—i.e. the majority—of Zimbabwe's Money Supply (M2). Because of this fact, I argued that Zimbabwe already has "its own currency".
ii) The Reserve Bank of #Zimbabwe's money printing is responsible for Zimbabwe's inflation.
4. I also showed how #Zimbabwe's pegged exchange rate regime:
i) Prejudices exporters of ~78% of the value they surrender to its central bank.
ii) Awards anyone who can access forex from #Zimbabwe's official channels a subsidy which is analogous to a 357% return on investment.
5. Further, I also stated that this state of affairs was unsustainable and that, at some point, this system WOULD or WILL unravel. I also argued that the only solution would be to allow Zimbabwe's currency to float:
6. In this #thread, I will focus on the impact of allowing #Zimbabwe's currency to float. Particular focus will be paid to its banking system:
7. The best place to start would be #Zimbabwe's banking system balance sheet:
8. The Assets of #Zimbabwe's banking system:
9. (Contingent Assets are highlighted. They shouldn't be included on a balance sheet; i.e. unless their realization is "highly certain". #Zimbabwe's unstable political economy implies that highly certain events do not exist. This may imply an asset shortfall of $611 million).
10. The Liabilities of #Zimbabwe's banking system:
11. The following assumptions will be used to revalue the Assets of #Zimbabwe's banking system. The free market exchange rate that would be used is the Old Mutual Implied Exchange Rate:
12. By applying the assumptions in 11., the asset side of the balance sheet of #Zimbabwe's banking system shrinks by 63% (or 65% when you exclude Contingent Assets):
13. Now, to the liabilities: The following assumptions will be used to revalue the liabilities of #Zimbabwe's banking system:
14. By applying the assumptions in 13., the liabilities side of the balance sheet of #Zimbabwe's banking shrinks by 65%:
15. What does this imply?
16. #Zimbabwe's banking system has 13 commercial banks that are supposed to have minimum capital of USD100 million each. This means that the Zimbabwean banking system is supposed to have a collective of at least USD1.3 Billion in capital.
17. If the #Zimbabwean currency floats, the banking system of Zimbabwe will go from having an excess of the prescribed minimum capital (106%) to a capital deficit of USD823 million:
18. This implies that a revaluation of Zimbabwe's currency has to coincide with:
i) Zimbabwe's 13 banks collectively raising capital of USD823 million, or;
ii) Zimbabwe's 13 banks merging into 4 banks (freeing them from having to raise capital), or;
iii) A combination of i) & ii)
19. (In December of 2017, only 2 banks—CBZ Bank and Stanbic Bank—had capitalization levels that exceeded or equaled the new prescribed minimum capital levels)
20. The only Basel II-III ratios that can be calculated from the data in the available consolidated balance sheets of the Zimbabwean banking system are those that do not include risk weighted capital.
21. One such ratio is the banking system leverage ratio. With revaluation, it falls from 15% to 9%—which is above the 4% threshold. This suggests that a revaluation of Zimbabwe's currency would not pose system-wide life threatening risks to #Zimbabwean banks:
22. To sum-up. The proposal to allow the Zimbabwe's currency to float will erode the capital of Zimbabwean banks. This means that they will have to either raise fresh capital—something Zimbabwe's political risk weighting may not permit—or merge into maximum of 4 banks.
23. [A Caveat: The analyses that I have presented:
i) Do not factor in non-performing loans, or stress-test various crisis scenarios.
ii) Use July 2018 data; i.e. data from when the ZWD-USD Old Mutual Implied Exchange rate was USD0.35; it now stands at USD0.17]
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