Financial experts have warned that several companies could fold this year due to uncertainty around the country’s new monetary reforms.
In June, Zimbabwe re-introduced its local currency, 10 years after adopting the multi-currency system which was adopted to tame runaway inflation. But critics said the decision to bring back the local dollar was hurried due to the absence of key benchmarks which stabilise the currency.
The economy is battling rising inflation, less than one month import cover, power outages and erratic fuel supplies.
The experts said although companies made huge profits, the notes show that this picture flattered companies’ real financial position. They added that the investments was unlikely to generate enough money to pay off their debts, rendering them technically insolvent on a balance sheet basis. Auditors also gave adverse positions on many financial reports means they dont represnt a true picture.
According to the Companies Act, financially distressed companies, are unlikely to be able able to deal with all their debts as they fall due and payable within the immediately ensuring six months. Due to currency reforms, several companies are regarded as technically insolvent and thus financially distressed because their liabilities in real terms exceeds the assets. Not what is shown on the unreliable financial statements of companies in Zimbabwe at the moment.
The emergence of SI 142 of 2019 has amplified risks, they highlighted. This is likely to see NPLs skyrocketing again. Some highlighted that government need to fix the economy with correct “yield curves’.
In real sense, several financial experts believe liabilities of companies exceeds assets.
Institute of Chartered Accountants of Zimbabwe (ICAZ) chief executive officer, Gloria Zvaravanhu said the big issue for Zimbabwe is that it went legal instead of substance.
“There is need for valuation of assets, if you don’t its meaningless in companies balance sheets,” Zvaravanu said.
“The International Reporting Standards (IFRS) requires that assets revaluations need to be done by professional to reflect the correct value not just to follow exchange rate.”
She added: “The is also the issue of qualification of accounts. Accounts could not be determined and they have all be qualified because they could comply with international reporting standards or the law. It takes a three year period to clean out adverse reports. It’s not a good situation to be in at the moment because on one can place reliance on these accounts. The issue of legacy debts is another elephant in the room. It’s not clear at the moment whether they have been assumed or not. Unless there is written confirmation or letters of credit, we have to revalue balances at prevailing rate.”
Chartered Accountants Academy chief executive Anesu Daka concurred with Zvaravanhu saying Zimbabwe went for legal form and not substance.
“Companies are bleeding and there are now questions on their going concerns,” Daka said.
“You will notice that companies made a lot of profits in this whole story. But am worried and its scary some shareholders are going to demand dividends on profits which are not real, inflationary.
“ The issue of legacy debts is a big issue. RBZ directed companies through their banks to transfer balances to it at 1:1. The rate is about 1;9. Who is going to be responsible for the different of 8. What it means is that liability is different from RBZ assumption. Companies take the responsibility because the credit has nothing to do with internal arrangement with the central bank,”
“There is also the big issue of deferred tax. Tax laws are not connected with the currency changes. So we have implications on the gains and losses. This is a fundamental issue because we are talking of different currencies meaning your base cost is different inUS dollars. So there is uncertainty tax position,” Daka added.
Banc ABC Asset Management managing director and chairman of the Association of Asset Managers, Jubelah Magutakuona said the currency reforms amplified the emergence of several risks.
“Several risks have been amplified by the emergence of SI 142 of 2019,” Magutakuona said.
“ These include inflation, compliance, price, interest, liquidity risks. The market sees it already in hyperinflation. In the past 36 months, the cumulative inflation is about 185%, well beyond the stipulated 100%. January to June this year, the cumulative inflation was 94,5%. So, unless we are going to have a negative inflation by year end it looks like we are going to struggle on the issue of inflation. There is volatility in the market in terms of –pricing risks. The current pricing regime is and will be dollar denominated. How would you forget the US dollar? We test tested it. We also have the interest rate risk,which will continue skyrocketing. There is also liquidity risk and credit risk. The market liquidity has been kept very tight. We expect NPLs to be a big problem again going forward because of liquidity and credit conditions.”
Douglous Hoto, an actuary by profession and chief executive officer of First Mutual Holdings said the economy has ‘lost value and in reality hyperinflation has serious consequences”.
“What we need is proper economy with correct yield curves. That’s the only way companies can survive,’ Hoto said.
Muving and Mugadza Legal Practitioners lawyer Nobert Phiri said Zimbabwe unstable currency posed a risk to local firms.
“There is a lot of uncertainty. We have learnt nothing and forget everything. Currency is the number one risk,” Phiri said.
“We are going to have a legal minefield because of likely United States denominated claims. We have a grey area of the law. There is uncertainty. Assets at the moment are in Zimbabwe dollar but liabilities could be in US dollars, meaning Zimbabwe companies are technically insolvent. It’s a nightmare or should I say a legal minefield,’ Phiri added.
Already a land mark ruling has been made by Justice Isaac Muzenda of the High Court of Zimbabwe in his ruling this week on London listed Cambria Africa PLC, vs Breastplate Services trading as Nemchem International over payment of outstanding shares obligation in United States dollars under the legal agreement signed by the two parties.