The “walking dead” on the ZSE


The word “Zombie” is mostly associated with “the walking dead” in horror movies but is defined as a willless and speechless human (as in voodoo belief and in fictional stories) held to have died and been supernaturally reanimated.

In business and economics, zombie firms are not a new phenomenon.

These are companies that need bailouts in order to operate or are indebted to such an extent that they can only repay the interest on debts but not the principal.

The term “zombie company” was first applied to Japanese firms that were supported by Japanese banks after the collapse of the Japanese asset price bubble in 1990.

More recently, there is a global concern that Covid-19 led bailout packages and drastic policy response from central banks has produced a horde of zombie companies that are neither profitable nor condemned to liquidation or takeover.

 Research has also showed that if there are no significant barriers for companies to obtain credit and if interest rates are particularly low, there are conditions that allow companies without economic viability and with sub-optimal productivity to remain on the market.

While most definitions of zombie firms are anchored on debt repayments, an important aspect are the characteristics of such firms.

They tend to have low valuations, moribund prospects, do not have excess cash or capacity and are stagnant.

The airline industry in America is a good example of a sector that has witnessed the zombie phenomenon.

Major airlines’ costs exceed revenues and they can neither cut costs nor raise fares enough to turn a profit.

Looking at the Zimbabwean context, the set-up of the Zimbabwe Asset Management Corporation (ZAMCO) by the Reserve Bank of Zimbabwe in 2014 as a result of rising non-performing loans (NPLs) undoubtedly created life support for a number of zombie firms.

Further, a change in the monetary regime meant that all local US-dollar denominated debts due on or before 22 February 2019 were now convertible to local currency at the command rate of one to-one.

Clearly, the indebted zombie firms emerged as the winners!

But here is the problem; these companies are proving to be too weak to invest, grow or remain competitive in the marketplace.

A good case-study is Turnall Holdings.

The construction materials company benefited from ZAMCO as well as the shift in the monetary regime.

While residential housing in the country has proved to be resilient on the back of diaspora remittances, Turnall Holdings continues to face competitive pressures.

There has been a growing preference for alternative roofing materials that is lighter and cheaper amid high construction costs and constrained disposable incomes.

There has also been a similar substitution effect in its concrete piping products, which are losing market share to PVC pipes.

The company also risks losing market share in the future considering the changing preferences to cheaper construction materials being produced by new Chinese entrants that have garnered market share.

There is a need for a comprehensive re-tooling and mechanization exercise to boost efficiencies and competitiveness at Turnall Holdings.

A major concern is that Zombie companies are “uncompetitive survivors” and a barrier to productive growth given that the survival of weak companies contributes to lowering the average overall productivity.

Such companies are detrimental to the economy as they take up market share and lock up talent that should be available to more successful and dynamic companies.

By continuing to operate in an environment where they should have been winnowed out, they squeeze out more productive rivals, thus preventing new technologies from boosting multifactor productivity across the economy.

Overall, there is some evidence that zombie firms have been a factor in Japan’s economic stagnation since the 1990s.

Researchers have found notably slow productivity growth in the non-traded-goods sectors of Japan’s economy.

However, they also note that this potential can be tapped only if the most inefficient firms in these industries close down or undergo substantial restructuring and the remaining firms work to improve performance.

The Zimbabwean corporate world is littered with zombie companies – the most popular being the parastatals that the Government has been failing to either partially or outrightly sell.

That said, the good news is that it is easier for one to get rid of the listed ones.

The advice is straight forward. If you do not have the capacity to restructure or turnaround a zombie company and you are invested on the ZSE, SELL Turnall Holdings, General Beltings, Star Africa, MedTech and Zeco.

Author – Batanai Matsika Head of Research – Morgan & Co +263 78 358 4745

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