Exchange rate risk ravages companies

LOCAL companies with significant foreign debts are sinking deeper into dire straits due to currency volatility and exchange rate fluctuations, with their balance sheets being increasingly eroded and foreign currency liabilities ballooning. This has left some companies technically insolvent and facing bankruptcy.

By Kudzai Kuwaza

The new crisis to hit companies follows the devaluation of the official exchange rate from US$1:1RTGS$ to US$1:2,5RTGS$ in the aftermath of the Reserve Bank of Zimbabwe (RBZ)’s monetary policy statement on February 20.

Although the monetary policy measure was widely welcome by the market, its downside is that it has dramatically eroded companies’ balance sheets and savings in local quasi-currencies, while snowballing their foreign currency liabilities.

The exchange rate risk, sometimes referred to as foreign exchange or FX risk, has pushed many companies to the brink.

Government last month jettisoned the fixed exchange rate and adopted a managed floating system initially pegged at US$1:2,5RTGS$ after the official devaluation. However, the exchange rate has been depreciating due to market forces as it sought to find equilibrium between the official and the parallel market rates.

Yesterday the official exchange rate was US$1:3RTGS$. The parallel market rate was US$1:4RTGS$.

Speaking at an Employers’ Confederation of Zimbabwe human resources indaba in Kariba, business consultant Simon Kayereka said local companies with foreign debt could close shop if the exchange continues to shift higher.

“I am very worried that the adjustment of the exchange rate increases liability of local companies that have foreign debt,” Kayereka said. “So if you take TelOne debt for instance, which is US$384 million, of which I would like to think about 90% is owed to foreign companies; if they had gone to the bank six months ago they would have paid US$384 million at 1:1. But now they are going to pay that US$384 million two-and-a-half times over.

“You can imagine a small company which has a foreign debt; they can no longer get it (forex) at a 1:1 rate. They will even be lucky to get it at 1:2,5 and if they get it at 1:3 or more, then they are finished. For those companies which trade with foreign companies, they might be sitting on top of a lot of liabilities that have now almost tripled or quadrupled.”

Economist Godfrey Kanyenze said while exchange rate adjustment was welcome, it would have an adverse impact on companies which could result in closures and job losses.

“It has become more difficult for those companies with foreign debt, particularly on issues around solvency, survival and employment. The situation is not getting any better at all,” Kanyenze said. “It is an issue of supply and demand. There is no forex on the interbank platform which means companies have to go to the black market.”

The black market is trading at US$1:4RTGS$.

Kayereka said the new exchange rate will also have a huge negative impact on the insurance sector as insurance companies will have to fork out three or four times more without getting premiums commensurate to what they are paying out. He said reinsurers outside Zimbabwe are now reluctant to do business with local companies because there is no guarantee they will get back their money.

The threat of company closures and job losses due to the adjusted exchange rate comes amid revelations by the Master of the High Court’s office that 55 companies were granted a provisional order to be liquidated from November 2017 to December 2018 leaving thousands more jobless in an economy now dominated by the informal sector.

While tobacco forex inflows are expected to improve the supply side and stabilise the market and exchange rate, Zimbabwe’s negative balance of trade and the resultant current account deficit will erode the gains.

The country is also expected to import 900 000 metric tonnes of grain to cover a deficit exacerbated by weather extremes: drought and Cyclone Idai floods. The floods have devastated Malawi, Mozambique and Zimbabwe.

Yesterday the official exchange rate was US$1:3RTGS$, reaching a new low since the managed forex market was re-introduced via the interbank market. Having breached the US$1:3RTGS$ mark with 0,0013 percentage points, the exchange rate is likely to further depreciate as the supply side fails to match or exceed high demand.

Resultantly, firms are significantly exposed to exchange rate fluctuations, but the exposure varies by company size, with medium-sized and bigger firms more exposed, and by sector.

The main source of the exposure for local companies has been at the level of international sales and foreign currency liabilities. Companies that rely heavily on international sales are significantly protected against exchange rate movements than firms that rely primarily on domestic sales.

The other sources of foreign exchange risk and vulnerability include imports or exports; other costs, such as capital expenditure, denominated in foreign currency, revenue from exports received in foreign currency and where other income, such as royalties, interest or dividends, is received in forex.

Vulnerability also comes from businesses’ loans denominated (and therefore payable) in foreign currency and where a business has offshore assets such as operations or subsidiaries that are valued in a foreign currency, or forex deposits.

The continued fall of the RTGS$ against the US dollar has also had other negative consequences for companies. It increases costs for importers, thus reducing profitability. This has also led to a decrease in dividends, which in turn can lead to a fall in the market value of businesses.

Further, the situation increases the cost of capital expenditure where such outlays require, for example, importation of capital equipment. But the biggest impacted has been on company balance sheets structures and the cost of servicing foreign currency debt has ballooned, over and above deteriorating broad economic situation.

The Confederation of Zimbabwe Industries has given a dim view of the interbank market, saying it was “not performing to the expected levels”. Olivine Industries has also complained about the weak performance of the interbank market pointing out that they cannot access forex on the platform. Only US$45 million was traded on the interbank market in the past three weeks.

Employers have since raised alarm over this issue which could result in massive company closures and resultant job losses.
Kanyenze said the problem was that the official rate was not reflecting the reality on the ground.

“We keep on repeating mistakes from the issue of bond notes, the issue of 1:1 and now the interbank rate,” Kanyenze said. “The problem is that we are papering over the cracks without addressing the fundamental structural issues. We have to go deeper and grapple with the real issues.”

CEO Africa Roundtable chairman Oswell Binha, an economist, said the unavailability of foreign currency on the interbank platform poses a serious dilemma for companies desperately looking for forex.

“Foreign currency on the interbank is not available, but for companies to go on the parallel market do so with a noose around their necks as that will attract a 10 year jail term. So companies will have to either sink or be forced to break the law,” Binha said. “I feel sorry for companies such as TelOne because as a result their ability to compete is curtailed and if TelOne has problems then companies relying on them will also be affected; it is a vicious circle.”