Rates ring death knell for companies

Shakeman Mugari


THE massive increase in interest rates threatens the viability and balance sheets of most companies whose ability to repay loans has been stretched to the limit. 

The interests have added to the instability in the market characterised

by hyperinflation and foreign currency shortages.

If sustained, experts say, the current interest rate regime could lead to company closures with many already showing signs of serious cashflow problems.

It would also have a ripple effect on the whole economy.

This week the overnight accommodation rate for banks to borrow from central bank was at 750% while the inter-bank rate (banks lending to each other) was at 731,3%. 

Banks were this week charging an average 500% on commercial lending, used mostly by companies and individuals for loans.

The Reserve Bank of Zimbabwe has been cranking up interest rates to mop up excess liquidity in the market, strap inflation and stem speculative activities.
To market watchers though, such a measure has failed to clamp down inflation as government keeps running the printers to sustain its expenditure.

The effect of the high rates will ripple through the whole economy with disastrous effects, experts say.

The banking sector, which is yet to fully recover from the liquidity crisis of 2004, has already started feeling the crunch of the high interest rates.

The rates have started eating into their earnings and balance sheets.

“They are bleeding and so are most companies and the whole economy is not sustainable,” said economist James Jowa.

He said while banks were picking money at between 731-750% on the market, their return on investments like Treasury Bills (TBs) was significantly lower.
 
Most banks were sitting with 1-2 year bills which were yielding between 120 -170%, Jowa said.

“That gap is not being covered and therefore represents losses.”

The interest rate squeeze has worsened anguish for banks currently battling to raise funds to meet the US$10 million ($1 billion) capital requirements set by the central bank.

Their plight is made worse by the fact that they are all scrambling for a shrinking pie in the form of deposits and customers in a market where the savings culture has been wiped out by high inflation.

The impact of the rates cuts fell across the whole economy. The hardest-hit are the heavily geared companies who are now servicing their loans at high rates.

Analysts say some heavily borrowed companies might be forced to scale down, retrench or close altogether. 

Economist Blessing Sakupwanya said there was a danger that many companies might be forced to shut down.

“It’s unsustainable for companies and many are suffering.

They might close,” Sakupwanya said.

For instance companies that borrowed at 165% in June last year are now being forced to service their debts at 500%.

“The result is that their balance sheets are eroded as their liabilities begin to eat into their assets,” said Sakupwanya.
 
Even companies that were not heavily geared are under threat.

The interest rates will scare them away from borrowing for capital projects.

They will also shy away from borrowing for other essential services for fear of falling into a debt trap.

For the man on the street, the high interests are a double-edged sword. Companies strangled by the rates will scale down operations, throwing workers out of their jobs.

“When they scale down there will be a massive shortage of products which will lead to more inflation.

The government is in a Catch-22 situation,” said Sakupwanya.

The interest rates have become the latest challenge for companies that are already under siege from a plethora of economic problems.

Apart from the soaring interest rates, the companies are failing to cope with inflation, foreign currency and fuel shortages.

They are constantly under threat from government policies which include price controls.

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