FX risk imperils local companies

JUST when some were thinking the economic situation can’t get any worse, currency volatility and exchange rate fluctuations have struck a deadly blow on local companies’ balance sheets, while ballooning their foreign currency liabilities.
The exchange rate risk, sometimes referred to as foreign exchange or FX risk, has dramatically increased companies’ foreign debt, while also disfiguring their balance sheets. Many companies are now saddled with foreign liabilities which have burgeoned since government abandoned its unsustainable US$1:1RTGS$.
Government last month jettisoned the fixed exchange rate and adopted a managed floating system initially pegged at US$1:2,5 RTGS$ 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.
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 result 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 reintroduced via the interbank market. The parallel market rate is US$1:4RTGS$. 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.
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.
The other source of risk is where the businesses’ loans are 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 United States dollar has also had other negative consequences for companies. The exchange rate movements increase 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 has increased 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 worsening the broad economic situation.