- More companies unlikely to reopen after festive season
- Revenues suffer as impairments grow
PHILLIMON MHLANGA
Zimbabwe’s economy lurched into a crisis in 2019 resulting in the collapse of businesses and consumer spending power.
Confidence has nosedived despite earlier projections that the economy would grow by 3%.
By this time next week, President Emmerson Mnangagwa’s administration expects the economy to contract by 6.5%. The International Monetary Fund and the World Bank expect the embattled economy to recede by more than 7%, providing the strongest indication yet of the troubled state of the economy.
The difficulties are glaring in the embattled economy: cash shortages, power outages, curtailed net capital flows, declining investor confidence, rising unemployment, rising prices and dented sentiments.
Zimbabwe, since May this year, endured the worst power cuts in three years. A reliable and affordable electricity supply is a key enabler in the productive sector. Companies are losing significant amounts of dollars due to power cuts alone. Last month, ZESA upgraded power cuts to a punitive Stage 2 of load shedding, where consumers are subjected to more than 18 hours without electricity because of a dwindling water level at the Kariba Dam.
The situation has been worsened by inefficiencies at ageing thermal power plants at Hwange, Munyati, Bulawayo and Harare. Zimbabwe requires about 1800 megawatts of electricity at peak periods daily, but, generates less than 600MW.
This is hitting industries hard. Consequently, company closures in 2019 became the order of the day, throwing thousands of workers onto the streets as the country’s economy spirals downwards while the liquidity crunch continues to bite.
Most companies have resorted to retrenchments in order to reduce costs.
The cost of production in various sectors of the economy has become more expensive, forcing most companies to downsize or close. Companies tend to lay off staff in tough economic times as demand for products and services weaken.
So dire is the situation that the Employers’ Confederation of Zimbabwe (EMCOZ) warned that more companies could shut down and those still operating would throw many more workers on the streets. Most companies are operating well below 40% of capacity utilisation and are hard hit by economic difficulties.
The volatility, EMCOZ said, was ravaging companies who have recorded disappointing sales figures, spiralling costs and high inflation which is rated among the highest in Africa. The demise has been accelerated by policy inconsistencies, which have scared away foreign capital. Foreign currency shortages have also rocked the country, pushing the already ailing companies into paralysis.
EMCOZ president Israel Murefu told Business Times that most business risked falling off the wagon.
He said further potential job cuts were inevitable, as companies step up restructuring efforts because they have run out of steam. The outlook, he added, remained challenging given the economic collapse. Fuel prices have gone up from ZWL$1.32 per litre of petrol in January this year to ZWL$17.44 per litre, while diesel that sold at ZWL$1.24 per litre in January is selling this week at ZWL$17.90 per litre.
Fuel prices have been going up every week. The relentless fuel price increases are one of the biggest cost drivers that trigger even higher production costs for companies, that eventually is passed on to consumers. This results in low demand of products, meaning it makes it harder than ever for companies to make meaningful profits.
Further workforce layoffs are inevitable as several companies grapple with the punitive realities of high inflation, exchange rate-induced losses, a debilitating liquidity crunch, and low productivity.
“It’s clearly a critical juncture for companies at the moment,” Murefu told Business Times.
“We are battling a serious crisis of power calamity where we have more hours without electricity on a daily basis, a situation which seriously affects production.
Fuel is also scarce, which is a big problem that we are battling with. To worsen the situation, the fuel price changes almost weekly or even shorter.”
Hyperinflation has also piled misery on workers after earnings were significantly eroded. Even behemoths such as Old Mutual Zimbabwe, the country’s largest financial services provider, announced recently plans to retrench as the group reels under the worsening economic environment.
Other companies across industries have retrenched. This was meant to cut costs in a difficult operating environment. Several banks have closed branches across the country.
According to the Zimbabwe Banks and Allied Workers Union, more than 1 000 workers in the financial services sector have been retrenched in the last four months alone as a result of the steep economic decline. More workers are expected to lose their jobs as more companies are expected to close after the festive season.
Business Times can report that more than 100companies are said to have applied to the Retrenchment Board to be exempted from paying retrenchment packages in January 2020, according to the Zimbabwe Congress of Trade Union (ZCTU) and Confederation of Zimbabwe Industries.
Also, more retrenchment processes in various companies are being dealt without approaching the retrenchment board. According to the amended Labour Act, workers who are retrenched are entitled to two weeks’ salary for a year served and other terminal packages.
The company closures and increasing applications by employers to be exempted from paying retrenchment packages is the result of a debilitating liquidity crunch, low capacity utilisation, power and fuel challenges.
The closure of companies has also had a devastating impact on government’s coffers as the Zimbabwe Revenue Authority has constantly missed out on potential revenue.
The crisis has inflicted pain on Zimbabwe’s restless citizens, who are now likely to find this year’s Christmas and the New Year subdued as they struggle to make ends meet.
Peter Mutasa, ZCTU president, blamed the government’s policies, saying workers have been reduced to “paupers” and now planning street protests.
“The government has once again stolen our happiness,” Mutasa said, adding that, “Workers have been reduced to paupers and have nothing in their pockets or bank accounts to finance any festivities. This is going to be a sad Christmas.”
A glance at most companies’ half year and full year financial results, published recently, show that many companies recorded receding volumes and low profits. Several companies’ gearing ratios, a measurement of firms’ financial leverage, which is one of the most popular methods of evaluating a company’s financial fitness, were high.
According to recent financial results, most companies had more than 60% gearing ratio, meaning that companies are using debt to pay for their continuing operations.
Such companies may have difficulties in meeting their repayment schedules, according to financial experts who spoke to Business Times this week. Lenders are particularly concerned about the gearing ratio, since a high gearing ratio will put their loans at risk of not being paid.
Even heavyweights or conglomerates are battling to extricate themselves from the mess. The uncertainty harms industries. Output has also shrunk significantly across sectors. Annual inflation soared to over 500%, according to independent economists.
Publication of official annual inflation data was banned by Finance Minister Mthuli Ncube when it reached 176% in June this year. Month on month inflation also rocketed to about 39% in October from about 18% in September. In November, month on month inflation receded to about 17%.
It is expected to soar again in December due to accelerating prices of goods and services being experienced in the economy.
Skyrocketing prices of goods and services, frequent power outages and foreign currency shortages eroded sentiments.
These give company executives a major headache. The Zimbabwe dollar plummeted from ZWL$2.5 in February to US$1, to ZWL$16:US$1 on the interbank market yesterday. Following monetary and fiscal reforms this year, almost all companies’ financial results received adverse audit opinions, meaning they were distorted and no one can trust them.
This resulted in investors, who take financial statements seriously and engage aggressively with every detail, shying away from Zimbabwe mainly because of financial statements that do not reflect the true state of affairs. Investors fear the worsening economic conditions. Consumers are also feeling the pressure from all angles.
The short-term outlook for the Zimbabwean economy is similarly sombre amid an environment of weak aggregate demand.
Real spending has decelerated because of a barrage of adverse developments, and these have now further dented consumer confidence.
Overstretched Zimbabweans have cut back on spending, hit by higher prices and tighter credit. Most Zimbabweans are failing to pay back their debts for more than three consecutive months this year, prompting banks to reign in lending, according to bank industry sources that preferred anonymity.
A weaker Zimbabwe dollar has also fuelled inflation and higher petrol and diesel prices. This means pressure on consumers is increasing and it seems to be related to rising energy inflation and unsecured lending, which is now being pulled back. Retailers such as Truworths and Edgars, who thought they would cash in on inflated prices in a hyperinflation environment, warned in November of slowing consumer spending when reporting trade updates for the third quarter.
They said Christmas season shopping was unlikely to give sales a major boost. Companies do not expect a short term recovery in demand. As a result, they are taking drastic action to cut costs and rationalise their operations, including closing units and eliminating jobs, throwing thousands of workers onto the streets.
Companies are also taking several impairments and oneoff costs this year, including the provision for slow-moving inventory.
The quality of revenue, especially in retail banking, have deteriorated in the past 12 months as rising impairments have led to muted headline earnings.
There has been a sharp increase in impaired loans this year, stroking downward pressure on headline earnings.
Given the weak economic environment, further impairments are expected, said Ron Mutandagayi, the ZB Financial Holdings chief executive officer.
“We may well see headline earnings shrink further as pressure from impairments will continue and the loan book, especially unsecured lending, grows while the economic situation is a bit sluggish.”
While net interest income, derived from interest on loans, has gone down this year, nonintrusive income, derived from transaction and commission fees, grew slower.
This means that the loan book by definition carries more risk than the other parts of the banking business.
So, the quality of the revenues has significantly decreased. A closer look at local companies’ financial results, and cash flows from operating activities for many are also dipping.
The extent of the fall and the extraordinarily low level of confidence point to a marked deceleration in growth in household expenditure.
The real consumer spending is unlikely to grow anytime soon, analysts said. During the year, several companies quietly shelved expansion plans, reduced staff numbers as part of efforts to arrest spiralling costs.
On the outlook, many company executives who spoke to Business Times this week said it was time they stopped pinning their hopes on promises by Finance Minister Mthuli Ncube and began having a more honest conversation about their situation with President Mnangagwa.
