Zimbabwe: High Interest Rates, Mortgage Cancellations Retard Turnall's Debt Plan

High interest rates and mortgage cancellations are reversing the gains of Turnall Holdings Ltd's debt restructuring plan.

This comes after the central bank in June hiked interest rates on its overnight window to 50% from 15% per annum in a bid to tame inflationary pressures alongside other measures meant to buttress the strength of the local currency.

The effect of high interest rates has seen industry rates moving from 10% to 25%, making borrowing very expensive.

Last year, Turnall successfully concluded payment arrangements with key creditors (banks) it owed US$29 million in both current and non-current debts.

The company's bank debts were taken over by the Zimbabwe Asset Management Company (Zamco) with the rest of the debts (mainly trade creditors) being retired from trading cash flows. The restructuring has seen the group's finance costs drop to ZW$293 000 from ZW$371 000 in the half-year ending June 30 2019 comparable same period last year.

However, Turnall MD Roslyn Chisveto says these gains could deteriorate further in the future and have an adverse effect on production, limiting the lending and borrowing activities on the market.

"We are starting to realise the gains of the debt restructuring. But what this increase on the RBZ overnight window has done is no one is willing to borrow or lend anymore due to the risks involved. You will realise in the construction sector it had become very expensive to undertake projects, especially when someone is borrowing at the prevailing rates I have indicated," she said. "We have seen a number of mortgages on our portfolio being cancelled as contractors fail to secure the finance to procure the necessary raw materials. The lending rates are no longer friendly. Who can afford to do business at those absurd rates?"

Before the upward review of the RBZ overnight window, the cost of borrowing had dropped to below 15% under the US dollar-dominated multi-currency regime

However, speculative parallel market behaviour has seen a drastic spike in inflationary pressures as the local RTGS dollar lost value against major currencies.

Liquidity constraints, which are surfacing in the economy, are also expected to have an adverse impact on demand for the group's products with marginal growth of volumes expected in the second half relative to the first half.

While the group is now focussing on regional markets and export to south Africa and Mozambique in order to generate foreign currency, Chisveto said the group was also employing other strategies that will enable survival against the hostile effects of the interest rates on the business.

"Management's focus is to ensure that under these depressed demand levels, products and services will remain top priority. Protecting and defending the company's market position will be a strong key focus area for revenue and cash flow generation," she said. "As prices are going up, pressure on salary increases is expected to rise. Management will continue to explore ways to balance the interest of the employees and business capacity."

The group's sales volumes declined by 26% due to the depressed economic environment. Profit from operations was ZW$6,8 million compared to ZW$2,5 million in the prior comparable period while profit before tax was ZW$6,5 million compared to ZW$2,1 million in the previous comparable period. The group continued to utilise accumulated tax losses from previous periods.

Meanwhile, economist Prosper Chitambara also concurred that interest rates by the RBZ have a punitive effect on companies.

"The overnight interest rate of 50% needs to be looked at as it is affecting the productive sectors of the economy," Chitambara said.

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