Zimbabwe: Liquidity Crunch Forces Companies to Borrow

Local companies are battling from interest rate obligations arising from expesive loans they acquired on the local money market, analysts said this week.

As a result of the liquidity challenges the economy continues to face, it has been extremely complex for local companies to access funding at a reasonable cost, forcing them to borrow short dated and expensive money on the local money market.

According to Kingdom Stock Brokers (KSB) sovereign risk that the nation carries has also rendered it almost impossible for companies to access lines from external financiers, who are sensitive to the credit rating of the borrowing nation.

In their financial results for year ending December 31 2009, Cairns Holdings Ltd disclosed that in the absence of direct capital injection, its management sustained production through borrowings at punitive rates from the local money market, a development that resulted in the company realising a loss of US$1,9 million.

A high interest rate bill on its US$3,8 million debt at an average cost of 35% chewed up the bulk of the company's operating profit in only four months to December 2009. Cairns disclosed that it is paying around US$200 000 a month in interest payments as a result of the debt.

African Sun also disclosed that the cost of its borrowing currently stands at 29%, with that of 2009 standing at 38% resulting in the company incurring finance costs totaling US$431 948 for the period between April to September 2009.

African Sun chief executive Shingi Munyeza said the company "had to bank on expensive short term debt finance to enhance unutilised capacity, whilst working on a rights issue of US$7,5 million that was 61% subscribed".

KSB said the inability for companies to hold successful rights issues due to the prohibiting liquidity environment as well as high related costs to carry out such a fund-raising exercise has forced most companies to resort to debt financing in order to lift up their capacity utilisation.

"With sales remaining subdued due to depressed demand on the economy, companies have continued to face working capital challenges which are negating their earnings generating potential," KSB said.

The liquidity crunch that came with the adoption of the multiple currencies has lasted for over a year now, and there are no signs that the crunch would ease any sooner.

Although, bank deposits have grown by over 500% since then, to over $1,2 billion as of January 31, demand for credit has continued to rise.

Economist Brains Muchemwa said a steep scarcity premium had been borne out of the crunch, and those controlling the levers of liquidity are benefiting from the lucrative returns on cash.

"The aftermath of the global liquidity crunch has continued to haunt capital flows to perceived high risk destinations, and amid tradition and history clear on the high risks associated with countries saddled with high debt, attracting significant lines of credit is a big hurdle that Zimbabwe faces today," Muchemwa said.

The liquidity crunch in Zimbabwe's money markets has seen the cash investment asset portfolio taking a leading position in the investment models of many pension funds and fund managers, taking away the glitter from the Zimbabwe Stock Exchange.

Muchemwa said with cash portfolios yielding between 27% and 43% on annualised basis because of the scarcity, most portfolios were being re-constructed to mirror these market fundamentals.

The issue of the sustainability of these returns over the long term is what might be the stickying point, but the basic fundamentals of the risk-reward trade-off will continue to see more flows into the cash portfolios as long as yields are above 20%, more so in a country that is having negative inflation in real US$ terms.

"Although it's a boon for those with cash, the liquidity crunch has wider negative effects for the economy. It is not very uncommon to find money being lent at between 3% and 5% flat per month in Zimbabwe today, and when compounded, the effective annual cost of borrowing for the majority of companies that badly need working capital is between 43% and 80% respectively," he said.

Lending rates around 10% flat per month are existing in the market for others, and the effective annual compounded cost of credit at 214% distorts the market further. "The few lucky established companies that are accessing credit around 20% are getting it at favorable cost," he said.

Analysts said high cost of credit was inhibiting credit creation, and with the stiff competition coming from global producers, Zimbabwean companies are now faced with serious competitiveness challenges.

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