4 September 2014

Zimbabwe: Impairments Rise As Economy Nosedives

THE recently announced monetary policy statement (MPS) indicated that nonperforming loans (NPLs) in the banking sector had risen from 15,9 percent at the close of 2013 to 18,5 percent at the end of June 2014. This is more than three times the global standard of five percent. Bank results published for the period to June 30, 2014 confirm this position as most banks recorded significant jumps in impairment losses. A sample of nine banks which have published their half year results to June 2014 indicate that their total charge for impairments increased by 18 percent between June 2013 and June 2014.

As a result, total profitability for the nine banks decreased by 11 percent during the same period. The impact of the rising NPLs has also been felt on the lending side where banks have slowed down on issuing new loans and advances. Although figures from the Reserve Bank of Zimbabwe are conflicting, with the June 2014 monthly report indicating loans and advances declined from US$3,65 billion in December 2013 to US$3,6 billion and the MPS indicating loans and advances actually increased from US$3,7 billion to US$3,81 billion, the overall picture shown is that of loans growing more slowly compared to the growth in deposits. During the same period bank deposits (including interbank) increased by 4,86 percent to US$4,96 billion from US$4,73 billion.

Although the root cause of the NPLs was the funding mismatch between long term industry requirements and the short term bank loans, the situation has been worsened by the economic stagnation. Borrowers have increasingly found it difficult to repay as demand for their goods and services has continued to sag owing to low incomes, rising unemployment and stiff competition from cheaper imports.

Corporate revenues are not growing and most of it is tied up in debtors, thereby making loan repayments extremely difficult. In worst cases some companies have found the going tough and opted to close shop rather than continue incurring losses. In an apparent attempt to deal with the NPL scourge, an SPV named Zimbabwe Asset Management Corporation (Pvt) Ltd (ZAMCO) has been formed and will purchase NPLs at commercial rates from banks.

The SPV is supposed to be funded by combination of non-funded lines of credit, new inflows, long term bonds and treasury bills. It is not clear what 'non-funded lines of credit' are but the other sources of funding indicate that banks may receive negotiable instruments, as opposed to liquid cash in exchange for the NPLs and the ceded security.

If the economy continues to weaken, the essence of the SPV will be lost as most NPLs will have a low probability of being recovered and the accompanying security will have a low market value. This will make the discount applied on the NPLs to be high and as such the expected balance sheet and liquidity benefits to banks will be minimal.

A long term solution to the banks plight is the rejuvenation of the economy to ensure there is effective demand for goods and services and also to ensure that corporates are profitable. As highlighted in the MPS it is imperative that the government aligns local policies with investor requirements. At this point in time it is critical that the country attracts FDI and portfolio investments to shore up local liquidity. This requires significant concessions on some of our policies, especially the indigenisation regulations which have proven unpopular with foreign investors.

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