GLOBAL rating agency, Global Credit Rating Company (GCR), has placed Zimbabwe’s financial institutions on a rating watch and abandoned short-term r
atings due to a highly volatile economic environment.
“All long-term ratings have been placed on a rating watch due to escalating volatility in the Zimbabwean economy and the impact that this will have on profitability across the sector,” GCR said in a note to financial institutions under its portfolio in Zimbabwe.
The Reserve Bank has made credit ratings by international rating firms compulsory for all financial institutions following a liquidity crunch that resulted in the closure or placement under curatorship of at least 15 banking institutions since 2004.
The placement of a rating watch on financial institutions’ long-term ratings means that GCR can call for a review of its rating on a financial institution more regularly than before, a GCR official said from the company’s Johannesburg offices yesterday.
“This is standard practice under a volatile environment,” said Dave King, speaking on telephone from South Africa.
Zimbabwe is currently going through its worst economic crisis characterised by runaway inflation and food, fuel and foreign currency shortages that have disrupted normal economic activities in the country.
The ailing economy has suffered a cumulative gross domestic product decline of more than 30% between 1999 and 2005.
This year, GDP is projected to decline by 5,1%, and by a further 4,7% next year, according to International Monetary Fund forecasts.
The IMF has also projected average inflation of 4 278,8% in 2007, suggesting increased volatility that could prompt more regular rating reviews next year.
Inflation is currently at 1 070% year-on-year for October and will average 1 216% this year, according to IMF projections.
GCR said the six-year economic recession had subverted the intermediation role of Zimbabwe’s banking institutions, with negative real rates on deposits discouraging savings while lending had been constrained by the high credit risk posed by the economy and the exorbitant credit costs faced by a limited number of creditworthy borrowers.
As a result, banking institutions had shown a preference for low-risk, high yielding government securities which have enabled them to maintain nominal levels of profitability.