Business dumps overpriced ZWL loans
LISTED entities that are reporting financials for the full year to December 31, 2022, have confirmed the shift away from exorbitant ZWL loans following the hike of interest rates by the central bank in June last year.
The year 2022 was characterised by high inflation, volatile foreign exchange rates, and speculative trading, presenting major challenges to businesses across all sectors.
The instability prompted the fiscal and monetary authorities to implement measures targeted to curtail the volatility in the market.
On its part, the Reserve Bank of Zimbabwe raised the Bank Policy Rate from 80 percent to 200 percent in June 2022 as part of a slew of steps to combat runaway inflation, speculative borrowing and exchange rate volatility.
The Government, on the other hand, made several changes to its fiscal expenditure procedures in order to assist monetary authorities in their efforts to stabilise money and capital markets.
These initiatives resulted in positive outcomes, as evidenced by a slowing of inflation, a decrease in speculative trading and a decrease in foreign exchange rate premiums. Year-on-year inflation fell from a peak of 285 percent in August 2022 to 244 percent at the end of the year.
However, these contractionary policy measures had other unintended consequences in the form of reduced borrowing in local currency, subsequently impacting aggregate demand.
There was also a significant shift from ZWL debt into USD borrowings.
National Foods is one such company that had to shift from ZWL loans to US dollar debt.
In a statement accompanying its half-year to December 31, 2022 results, National Foods said it incurred significant interest costs as it moved to replace its ZWL debt with cheaper USD debt following the increase in interest rates. At the end of the period net debt stood at US$ 0.69 million.
At parent company Innscor, interest charges for the six months to December 31, 2022 amounted to US$9.091 million, with the majority of this incurred in the first quarter of the current financial year following the sharp increase in interest rates on ZWL-denominated borrowings.
The Group was forced to restructure “ZWL denominated borrowings during the course of the second quarter, significantly reducing the interest charges”.
At TSL Limited, finance costs increased by 162 percent on the prior year largely attributable to interest rate hikes by the Monetary Authorities.
“Consequently the Group moved to extinguish its ZWL-denominated facilities to take advantage of more sustainable financing.
“Gearing level remained low with adequate interest cover after reduction of ZWL loan exposures that had unsustainably high-interest rates,” said chairman Anthony Mandiwanza in a statement accompanying results for the year ended December 31, 2022.
The apparent shift has also been confirmed by financial institutions.
In a statement accompanying its results for the period under review, FBC Holdings said growth in its loan book was driven by an increase in the lending portfolio on the back of “increased lending in foreign currency by the banking subsidiaries”.
Old Mutual Zimbabwe’s banking unit, CABS, saw a similar shift with 80 percent of loans to December 2022 in US dollars.
Group chief executive officer Samuel Matsekete, said ZWL lending was constrained by the level of interest rates with both retail and business segments increasing preference to borrow in USD.
“Overall, of the loan book in the banking business lines of the Group as at end of 2022, 80 percent was USD,” said Matsekete.
In a presentation at its analysts’ briefing, Old Mutual said it had recorded “significant growth in the foreign currency denominated loan book supported by both lines of credit and USD deposits”.
“The higher interest income reflects higher weight of foreign currency denominated loans,” reads part of the presentation.
First Capital Bank had a similar experience with management saying; “For the banking sector local currency asset creation slowed down considerably as borrowers reassessed their operations in relation to the new cost model”.
“At the same time an increase in the demand for US$ denominated products also became evident,” reads part of the statement accompanying financials.
The banking group said the 85 percent increase in the loan book reflected an increase in credit appetite.
However, for many borrowers, the credit appetite “was constrained by reduced absorption capacity when interest rates were reviewed upwards”, according to FCB.
Economic analyst, Farai Mutambanegwe, said the shift to USD loans is entrenching dollarisation of the economy with the ZWL being pushed out.
He said there is now less and less utility for the ZWL with only a few formal businesses still accepting the local currency.
Mutambanengwe, however, highlighted the risks of increased dollarisation as the country does not have enough USD for the economy to function.
There is not much USD to circulate in the formal economy and this might lead to depressed economic activity, said Mutambanengwe.
He said what the economy is going through is mainly cash dollarisation and this increases the risks of crime and robberies.
RBZ governor Dr John Mangudya, is also not in favour of the growing USD loan book.
Speaking at a recent breakfast meeting in Harare, Mangudya said loans that are being taken up by businesses at 15 percent are expensive and would be difficult to repay given falling margins.
“Where are you going to get a 15 percent markup to pay the loan?
“Mark-ups have fallen in this economy, so it means that this issue around dollarisation is a wrong discussion because what we need to say is: Do we have capacity to continue with dollarisation?
“What I am trying to paint as a picture is that we have no capacity,” he said.
Mangudya said with margins falling firms would struggle to “pay those loans.”
“They are going to cause non-performing loans so the banking sector instability will come in.”
Mangudya said borrowing in foreign currency without a plan for repayment could lead to a loss of assets and economic recession.