HomeBusiness DigestNo Borrowings, yet Still Unattractive to Lenders

No Borrowings, yet Still Unattractive to Lenders

IN good economic times, it is normal to be in debt.  This is true for businesses as it is for governments and individuals.

However, in difficult times borrowings can be a heavy burden as shown by the recent events in the US and in other rich countries. The current global financial crisis is a result of excessive debt.

In Zimbabwe, just like in many developing countries, the global credit crisis did not have a direct impact because the financial markets are not interrelated to those in the West in any way.

The effects are, nonetheless, being felt indirectly through reduced assistance from international aid organisations that are funded by Western countries. The debt market in the country has not been very active since the economy got into a hyperinflation mode.

During hyperinflation it was not viable to borrow given the punitive rates that were always benchmarked to central bank overnight lending. In addition, many suppliers had started demanding payment in stable currencies which made the Zimbabwe dollar unusable for procuring raw materials.

Instead, businesses were forced to quickly convert their Zimbabwe dollar receipts into foreign currency and other assets. Buying shares also became a fashionable venture for companies that were generating lots of cash in their attempts to retain value.

Credit to households was also minimal because of perceived default risk. Building societies were not giving mortgage loans, and even when they did, the preconditions were deterring. Prospective mortgagees were being asked to pay large deposits. The regular installments were also unaffordable to many.

Concurrently, all credit shops suspended facilities such as lay-bye and hire purchase because installments were quickly getting eroded by inflation. Only the government had significant borrowings, estimated at $59 sextillion in the latest central bank report.  

All this money was accessed from the local market through issuance of mainly 1-year treasury bills at 340% per annum. Banks were being compelled to take up this instrument to avoid a more punitive zero coupon paper that was being given to institutions with surplus end of day balances.

Local funding was the only available option to the government because international institutions had ceased supporting the country because of arrears and governance issues.

The switch from using Zimbabwe dollars to multiple currencies had the effect of indefinitely deferring the settlement of domestic debt, if at all it would be paid off.

The best case is that the Zim dollar balances will be converted into usable currency at some point while the worst could be an indefinite suspension, if not a cancellation of the balances. It is without a doubt that the borrowers, especially the government which is the major debtor, have benefited from the switch while the lenders are worse off.

Nevertheless, the majority of the private sector and individuals in the country are currently, almost, debt free except for the few that have secured loans after dollarisation. Most, if not all, of the local companies require hard currency financing for them to restart meaningful production.

Theoretically, it should be much easier for them to attract funding given their clean balance sheets. Their counterparts in developed countries continue to receive funding –– both debt and equity –– despite being already heavily indebted.

Sadly for the local companies, political risk, albeit improving, remains a deterrent to would-be financiers. Foreign investors and banks, which have the capacity to provide funding, expect more political and economic reforms before they start dishing out money.

The high credit demand in the economy should have been good news to local banks, but that has not been the case. The lack of liquidity in the country is hampering lending operations.

Several companies have loan facilities with domestic banks; however, the draw downs have been few and spaced because of unavailability of funds. This has given impetus to loan sharking, or chimbadzo in local lingo, where holders of hard currency are lending it out at very high interest rates. In such transactions, the probability of defaulting is high. Margins for most business are already squeezed and as result some might fail to pay off these high interest obligations.

Recent reports of credit lines coming from such institutions as the African Development Bank and African Export Import bank are encouraging although not all companies are going to be financed.

These facilities will reduce funding pressure on local banks and possibly prompt other offshore institutions to avail more loans to industry. Debt financing seems to be the most feasible way of raising capital for local companies presently.

Very few, if any, local companies can successfully raise money through rights issues or any scheme that involves shareholders. This is because most local shareholders are not liquid. Companies with foreign shareholders may possibly get financial and technical support from corporate parents.

Maybe, it is time local entrepreneurs seriously start looking for partners who can inject equity capital into their businesses. This entails losing majority control of the company but the advantage is the expansion in the business. As the Deputy Prime Minister Arthur Mutambara correctly put it recently, “It is better to own 10% of an elephant than 100% of a rat because with 10% you will have a bigger share.’’

Ranga Makwata

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