Fears of resurgence of non-performing loans abound as many companies find themselves with tight liquidity following interest rate hikes
Many Zimbabwean companies may struggle to borrow working capital or repay existing loans after the Reserve Bank of Zimbabwe (RBZ) hiked interest rates in June, a move which could have serious repercussions on the wider economy, according to stockbroking firms.
Two months ago, RBZ increased its overnight lending rate to 50 percent from 15 percent to support the newly introduced local currency, after the Government scrapped the multicurrency system.
Finance and Economic Development Minister Mthuli Ncube, said the interest rates spike was meant to curb speculative borrowing, blamed for fueling parallel market exchange rate instability and driving inflation.
Zimbabwe’s wobbly economy means the imports dependent economy cannot generate sufficient foreign currency to support its external position and corporates resort to using the black market to access foreign currency.
But there are concerns that the interest rate spike may constrain affordability of borrowing for production as well as capacity to pay back loans.
And this comes as securities investment firm Morgan and Company, has warned Zimbabwe’s economic prospects may suffer from the crowding out effect of Government’s open market operations after it floated Treasury Bills to raise funding for public programmes.
All things being equal, low(er) interest rates tend to reduce the cost of borrowing and encourage credit-starved companies to borrow.
And industrial lobby group, the Confederation of Zimbabwe Industries (CZI), has previously said financial products for local industry should have low-interest rates and reasonable terms to match.
Economic analysts contend that a higher interest rate makes interest payments on loans more expensive, which has the undesirable effects of discouraging firms from borrowing; and default on loans for those who already have loans.
Says analysts at IH Securities in their 2019 Zimbabwe Banking Sector paper:
“Prior to the introduction of the local currency and the overnight window by the central bank, most banks have indicated the intention to increase lending to export oriented businesses.
“However, with the RBZ adjustment of the overnight window upwards from 15 percent to 50 percent per annum in line with inflation trends, this will likely result in depressed demand for lines of credit,” said the analysts.
“We anticipate loan book growth to significantly decline as consumers and the productive sectors will not be able to service debt at current elevated interest rates given that they are operating in an already depressed economic environment.”
“We are naturally concerned about a potential spike in non-performing loans (NPLs).”
The RBZ has targeted NPL levels of 5 percent, but sectorial average NPLs increased from 7,08 percent in 2017 to 8,25 percent in 2018. The NPS had reached alarming levels of 20.45 percent, resulting in the Central Bank creating the Zimbabwe Asset Management Corporation (ZAMCO) to hive off at least over US$1 billion debt from local banks.
However, due to the increased interest rates, it is likely that the NPL levels will increase in the intervening period, although some banks have recorded progress in reducing their NPL ratios.
For instance, ZB Financial Holdings chief executive Ron Mutandagayi, told analysts earlier this month that the group had made significant headway in reducing its NPL ratio to just 1,2 percent as at June 30, 2019 from an NPL ratio of 4,6 percent as at December 31, 2018.
Generally, the trend for local banks’ lending has been pointing southwards over the past several years.
Official figures show that lending within the banking sector has been on a considerable decline, sliding from peak loan-to-deposit ratio of 84,8 percent in 2011 to 40 percent as at the end of last year, which analysts attribute to Government instruments (Treasury Bills, to be particular) crowding out private sector lending.
The above notwithstanding, observers say there has also been a clear strategy to de-risk within the banking sector and a greater focus on transactional banking and value add services. Minister Ncube is, however, on record saying that he expected the interest rate hike to impact on short term interest rates, but not long term borrowing.
The Treasury chief also maintains that even at 50 percent the interest regime remains negative given the level of annual inflation, last reported at 176 percent for June 2019.
Further, concerns over dim growth prospects due to the impact of the interest rate hike come after he said his austerity measures were contractionary, as he bid to rebalance the economy.
In fact, Minister Ncube projected in his mid-term budget statement early this month that the economy would not grow by 3,1 percent, as initially expected, but contract 2 percent.
‘That Government paper’
Other market watchers are, however, cautious about the market being flooded by the TBs, especially in view of the two TBs auctions held so far.
“The RBZ has floated TBs of $60 million, barely a month after it auctioned $30 million worth of the same instrument and the rationale being to finance various Government programmes…Government is perpetuating a crowding out effect,” said analysts at Morgan & Co.
“A crowding out effect occurs when rising public sector spending drives down or even eliminates private sector spending. This is because the high and continuous Government borrowings tend to absorb all the lending capacity and liquidity in the economy.”
Treasury has, however, reiterated that TBs issuance will be closely monitored and will only be on a ‘need to’ basis.