Zimbabwe banks holding significant amounts of Treasury Bills must restructure their balance sheets before they can access lines of credit as lenders have little idea of the real value of the financial institutions following currency changes this year, analysts have said.
Banks invested significantly in the billions of US dollar denominated marketable Government securities, issued when Zimbabwe was still under a multicurrency regime adopted in February 2009.
As at June last year, a total US$4 billion Treasury Bills were taken by the country's 17 financial institutions with half the amount maturing this year, but a significant amount has since been rolled over to maturities of between 3 and 6 years to control money supply.
A weak balance sheet has significant effects on a firm's borrowing and investment. Firms undergoing a negative shock due to currency depreciation experience a decrease in their borrowing in foreign currency.
A paper prepared by investment advisory platform and private Equity management firm CDF Trust Consulting managing partner Caleb Dengu, titled "Zimbabwe Future 2030 Policy Priorities", says Zimbabwean banks that hold significant amounts of Treasury Bills need to restructure their balance sheets to be able to attract fresh credit.
"The assets for banks holding Treasury Bills have been reduced in real terms. Financial institutions have to restructure their balance sheets before they can access lines of credit because lenders have no idea of the real value of any bank in Zimbabwe, as we speak," Mr Dengu said.
Harare economist Brains Muchemwa said the currency reforms instituted by Finance and Economic Development Minister Mthuli Ncube have devalued the local currency by a factor of 17 and this has hit banks and other financial institutions the hardest.
"The stock of Government domestic debt that at one time was about US$9 billion, and sitting on balance sheets of financial institutions, is now worth about US$150 million when marked to (interbank forex) market.
"Hence, the holders of issued marketable securities have significantly taken a knock in value, largely banking on earlier assurances from the RBZ that the 1 to 1 was guaranteed by Afreximbank," Mr Muchemwa said.
A highly placed treasury official concurred with this assertion that banks had their assets base debased following the currency changes that started in February, which resulted in Zimbabwe converting previously US dollar based assets into local currency.
This was after adoption of a free floating exchange rate policy and introduction of an interbank foreign exchange market, which saw the local currency starting off at a rate of 2,5 to the United States dollar.
The RTGS dollar currency, renamed Zimbabwean dollar in June this year, has however continued to depreciate against major currencies, including the greenback and now trades at around 15,5 to the US dollar and marginally higher on the parallel market.
Prior to the currency changes that started in February this year, Zimbabwe used a basket of foreign currencies including the British pound, South African rand, Botswana pula and Chinese Yuan, but the currency regime was largely dominated by the US dollar, which was also the country's currency of account.
"Two years ago banks have total balance sheets valued at about US$2,5 billion, but if you take the balance sheets and apply the interbank rate, it means their balance sheets have been debased by the factor, in US dollar terms," said official in Zimbabwe's Ministry of Finance who requested not to be named, adding that after the currency changes, "Everyone's balance sheet has been debased, it is the reality of the situation."
The Treasury source said the erosion of value due to inflation in Zimbabwe, which is under pressure of an unstable exchange rate amid US dollar liquidity crunch, explained why suddenly Zimbabwe's Stock Exchange valuation had skipped from about US$7,5 billion two years ago to $40 billion Zimbabwean dollars.
"This is because of speculative value between the US dollar and Zimbabwean dollar. The minister is right when he says the exchange rate should be somewhere around ZWL$6 to 1 US, that is based on scientific reasons, but we under value our balance sheets as a country because we do not want to accept the reality that we have new economic policies and people want to hold on to the past and impose huge premiums on the currency.
"It's a psychological game, which we are losing because we are on the wrong side of that game. Our assets are, as a result, undervalued because people are applying unreasonable discounts to the Zimbabwean dollar.
Zimbabwe has instated currency reforms as part of broad reforms targeted under the Transitional Stabilisation Programme (TSP), which seeks to realign economic fundamentals for faster, sustainable economic growth.
But crisis of confidence, following decades of economic volatility, an acute shortage of foreign currency against high imports appetite and low productivity across virtually all the country's economic sectors have all conspired to weigh on the value of the domestic unit.