While there are increasing signs of stability in the financial sector, risks remain amid growing signs of weakness in the economy. Challenges such as depressed commodity prices, drought conditions and the collapse of the manufacturing sector, are likely to put pressure on the banking sector in 2016.
Non-performing loans (NPLs) have declined from 18,5% in June 2014 to 10,9% in December 2015. This is commendable and is largely attributable to the success of Zimbabwe Asset Management Company (Zamco).
Presenting the Monetary Policy Statement for 2016 last week, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya highlighted the importance of shifting from a consumptive or supermarket-based economy to a productive one. He also raised concern over the high incidence of capital flight and the externalisation of export proceeds.
According to the RBZ governor, around US$1,8 billion is externalised each year by individuals and corporates. He acknowledged the deflationary risk facing the economy and that economic transformation and rebalancing of the economy is critical to success. He raised significant concerns around “illicit financial flows” that continue to hamper growth in the economy.
According to Mangudya: “Illicit financial flows (IFFs) and other capital flight remittances constitute a major constraint to development financing in Africa. IFFs, which include trade mispricing and bulk cash movement cause heavy loses in government revenues, foregone investment, financial fragility and lost output.
“In the case of Zimbabwe, the financial haemorrhage from capital flight is exacerbated by the openness of the economy which is susceptible to regional disruptive arbitrage activities (as businesses in the region scramble to get access to US dollars from a dollarised Zimbabwe)”.
Unfortunately, rebalancing the economy is not easy. Over the last two decades, we have systematically destroyed our productive capacity. While Zimbabwe was competitive in the 1980s and 1990s and had a thriving manufacturing sector, the hyperinflationary environment in the late 2000s destroyed the balance sheets of most manufacturers and made it impossible for companies to acquire new equipment.
Post-dollarisation, companies were forced to recapitalise their businesses with expensive US dollar debts. The high growth rates post-dollarisation meant that most corporates were able to support this debt. However, as growth slowed in 2013, a number of corporates started to default, hence the increase in NPLs.
Over the past year, the weakness in the South African rand against the US dollar has made us uncompetitive. Combined with our inflexible labour laws and high cost of doing business, it is difficult to see how we can become productive in the short-term.
Consumption, on the other hand, remains stubbornly high with most consumers sinking deeper into debt. The situation is certainly not sustainable, but the answer does not lie in curtailing consumption. Rather, we need to focus on boosting domestic production through investment and creating a conducive business environment for investors. Sadly, we seem divided on that.
On a positive note, there are growing signs of stability and growth in the financial sector when looking at key indicators:
The banking sector’s capitalisation levels continued to improve as reflected by the increase in the aggregate core capital base from US$811,2 million as at December 31 2014 to US$982,5 million as at December 31 2015. The increase was primarily underpinned by improved retention of earnings, as well as fresh capital injection at some banking institutions. CBZ Bank and CABS had already surpassed the US$100 million minimum capital requirement for the tier one strategic group, which is effective in 2020, while three, Stanbic, BancABC and Standard Chartered, had capital levels above US$50 million.
The banking sector remained profitable with a reported aggregate net profit of US$127,47 million for the year ended December 31 2015. A total of 15 out of 18 operating banking institutions recorded profits.
As at December 31 2015, total banking sector deposits grew by 11,2% to US$5,6 billion while loans amounted to US$3,9 billion. Against the background of the sluggish growth in credit, the loan-to-deposit ratio declined from 78,4% as at December 31 2014 to 68,8% by the end of December 2015.
Banking sector deposits are dominated by demand and time deposits, which accounted for 46,2% and 33,8% of total deposits, respectively, as at December 31 2015. The tenure of deposits has generally improved and largely stabilised over the past year, allowing banks to plan their funding arrangements and credit extension around a higher level of core deposits.
The ratio of non-performing loans to total loans declined markedly from a peak of 20,45% as at September 30 2014 to 10,87% at December 31 2015.
Over the last 12 months, Zamco acquired and restructured a total of US$357 million in NPLs from a number of banking institutions. Zamco has acquired and restructured loans for distressed companies that have good turnaround prospects. These companies are in critical sectors of the economy such as mining, agro-processing and manufacturing. The restructuring involved extending the loan repayment period (typically 5-7 years), grace periods for capital repayment and reducing interest rates (6%-9%)and in some instances converting debt to equity. While the sharp decline in NPLs is commendable, it is imperative that government put in place strict measures to ensure that we do not repeat the mistakes of the past.
The distribution of the banking sector lending to the various sectors remains largely constrained in meeting the long-term funding requirements of capital-intensive sectors such as construction and mining. Of concern is the exposure to individuals (24,3%), manufacturing (24,3%) and agriculture (16,4%), which account for around two-thirds of total credit exposure. The economic slowdown combined with drought is likely to have a negative impact on these sectors of the economy.
Despite the numerous challenges, the financial sector appears to be stable with most indicators pointing in the right direction. Of grave concern is the IFFs that continue to starve the economy of much-needed capital. In most cases, “capital flight” reflects a lack of investor confidence in a country. Perhaps, we need to focus on restoring investor confidence and creating a conducive business environment. Restrictive measures will only serve to distort the market and place a premium on US dollars in Zimbabwe.
Our policies need to focus on restoring business and investor confidence and opening our borders to inward investment. While there are significant leakages from our porous borders and some measures need to be put in place to curtail this, we should be careful not to deter investment by imposing excessive exchange controls. Let us rather focus on attracting investment and restoring investor confidence.