Research firm warns Zimbabwe

Failure to hold free, fair and credible election next month will drive away investors, a leading research firm has warned.

Zimbabwe will hold a make or break harmonised elections on July 30, with President Emmerson Mnangagwa and MDC Alliance leader Nelson Chamisa emerging as the two strong candidates out of a cast of 23.

Giving her presentation at the Zimbabwe National Chamber of Commerce annual congress yesterday in Victoria Falls, BMI Research senior operational risk analyst, Chiedza Madzima, said the holding of free and fair elections was key to economic growth.

"Investors want to see political stability. The elections would be a key test of the commitment to credibility for all political players. Failure to hold credible elections would drive social unrest, keep investors cautious and lead the country's coffers dry. In that context, no credibility, no confidence, no money," Madzima said.

"As things stand, we believe that liquidity risks and fiscal pressures in Zimbabwe will remain pronounced in the coming months amid high import reliance in particularly as spending is ramped up in the run up to elections at the end of July."

Mnangagwa has promised to deliver a free, fair and credible election. However, the opposition is unconvinced by the promise saying Mnangagwa was former President Robert Mugabe's enforcer during past disputed polls.

Madzima said commercial banks were heavily exposed to political risk particularly in the absence of alternative financial support mechanisms.

"In Zimbabwe and in the short run, particularly in the absence of alternative financial support mechanisms, the government will continue to rely on borrowing from domestic banks to finance a significant portion of the budget deficit which hovers around 10% of GDP," she said.

"These risks are compounded by low market confidence and hard currency leakages through the country's borders."

Madzima said there were also other key downsize risk outlooks such as if the presidential vote sees a second round, these pressures would remain pronounced.

"Secondly, any sign of serious electoral fraud will jeopardise the country's efforts towards re-engagement and spark further capital flight. Even after successful elections, international lines of credit will not instantly open," she said.

"Trust takes time and efforts to build and stiff fiscal consolidation will still be required for genuine re-engagement with international lenders."

In a post-election scenario, Madzima said the introduction of a local currency needed to be a transparent process, if the country was to mitigate the shock following the adoption of what would "be a weaker currency than what we are seeing with 1:1 with bond notes and US dollar."

Furthermore, she said, this new local currency should be backed by actual reserves boosted by multi-national support as well as debt restructuring, rate of exchange between the local unit and other major currencies would need to be truly reflective of actual supply-demand dynamics in the Zimbabwean market, that is, it needs to be allowed to float.

"Or else we will end up with the liquidity crisis as the country is going through now," Madzima said.