Zim sovereign risk rears ugly head

..…as political tensions and social unrest mount

PHILIMON MHLANGA

Zimbabwe’s fragile sovereign risk is likely to deteriorate further this year after the Reserve Bank of Zimbabwe (RBZ) rejected US$861m legacy debt claims.

The claims were rejected for lack of supporting documents and double-dipping despite earlier promises to do so.

Last year the central bank committed to take over nearly US$2 billion in legacy debts which were accrued after government abandoned the multicurrency system.

The apex bank promised to issue financial instruments to local companies with foreign obligations, it emerged this week.

Experts have also warned that social unrest in the country could also worsen the sovereign risk and prospects of economic recovery.

Last night scores of opposition supporters took to the street demanding an end to the worsening economic environment.

This would certainly be a worrying development for local companies who are already in a quagmire amid revelations that offshore suppliers of the critical raw materials have cut off Zimbabwe.

In the event that they were willing to supply, they are now demanding pre-payments, according to several business executives who spoke to Business Times this week.

In the absence of an efficient interbank market in Zimbabwe, the situation has forced many companies to source the much required foreign currency from the black market where premiums are higher.

Companies are forced to pass the costs to consumers. The crisis has spooked investors because of heightened sovereign risk, several analysts said this week.

Reserve Bank of Zimbabwe admitted that there was a crisis.

“In 2019, there was a sharp decline of 21% in the value of foreign loans for private companies,” Mangudya said.

“Companies could only access just over US$1 billion, down from US$1.2 billion in 2018.

Agriculture got 79.1% of the loans, up from 62.48% in 2018, as loans to other sectors shrunk. Contract tobacco takes up the bulk of those offshore farm loans.

The country’s ability to attract offshore lines of credit has remained curtailed due to the perceived country risk,” Mangudya added.

Several analysts said Zimbabwe’s looming struggles to repay hefty amounts of debt will haunt the economy.

“At the centre of our risk is the issue of currency reforms, which we have failed to handle well,” economist Moses Chundu told Business Times yesterday.

“Most risk is around currency. Business and international funders were expecting closure from the RBZ governor, John Mangudya, this week when he announced his 2020 monetary statement.

But, he didn’t say much this time around. There was, however, one message which came from the statement to say we are going to take five years to de-dollarise the economy.

That killed it.

Capital doesn’t like that.”

Renowned financial analyst, Itai Chirume said government should remove barriers that are impending FDI into the country.

“We have been declared a risky nation by virtue of failing to honour obligations,” Chirume said.

“It’s clear that government doesn’t have the capacity to honour obligations.

With the system failing to make remittances, potential investors are likely to stay out of Zimbabwe until there is an enabling environment.

It will impact negatively on the economy.

This will heighten risk.”

Chirume added: “The pronouncement by the governor of the Reserve Bank of Zimbabwe (John Mangudya) this week in his 2020 Monetary Statement was just some form of admission that government will not be able to honour obligations anytime soon.

This means, there is likely going to be serious exposure because of uncertainty.

You don’t need anyone to tell you that things are not well in this environment.”

Zimbabwe is currently without balance of payment support from multilateral and bilateral financial institutions and donors due to huge debt arrears.

The country remains unable to access resources because the institutions said only a strong track record of maintaining macroeconomic stability and implementing reforms, together with a comprehensive arrears clearance strategy supported by development partners, would allow Zimbabwe to resolve its crisis.

The country suffered a cumulative economic decline of more than 50% since 2000, after the country embarked on land reform programme which resulted in Western countries slapping the country with sanctions.

Investment, which is a critical component of growth in any economy, suffered a heavy knock.

Analysts said Zimbabwe urgently needs international capital to recover but has failed to attract meaningful foreign direct investment.

Many have blamed government’s policy inconsistencies and market instability.

For example, just a day after Mangudya announced in his 2019 Monetary Policy Statement that government was not going back on dedollarisation, the same government granted Zuva Petroleum a licence to sell its fuel in foreign currency.

Other formal businesses and the informal sector, which constitute more than 60% have also dollarised.

In a statement, Zuva said: “For your convenience, we are excited to announce eight service stations that will be accepting foreign currency payments across the country.”

The central bank last year directed all companies to register their legacy debts , also known as blocked funds, with the RBZ at 1:1 following the declaration of the Zimbabwe dollar as the sole legal tender through Statutory Instrument 142 of 2019 in June last year.

The legacy debts continued to weaken companies’ balance sheets.

The central bank had promised to issue financial instruments to local companies to cover for unsettled foreign exchange liabilities to allow firms to balance their books.

The bank committed to then make arrangements to liquidate the toxic foreign debt burden on behalf of the troubled local companies.

The legacy debts are aggravating already ailing companies.

The viability of several companies is under serious threat as a result of legacy debts, denominated in foreign currency following far-reaching currency reforms by government last year.

To worsen the situation, the debt burden has spooked business and companies, which are now finding it difficult to borrow from offshore creditors and financiers, according to several business executives who spoke Business Times this week.

They said most lenders across the world have now become risk averse when dealing with Zimbabwean companies.

“We haven’t changed our minds,” RBZ governor, Mangudya, told Business Times this week.

We have some financial instruments like the US$ Savings bonds which we can use and this will help when auditors and shareholders look at it, they will be satisfied that it’s a good transaction.

Some of them (companies) might not need financial instruments because their claims are small.

But, yes we are going to do it (issue financial instruments).”

Mangudya said blocked funds amounting to US$1.2bn have been processed and validated so far.

This was from 730 applications out of 1 080 requests. The validated blocked funds exclude the legacy foreign exchange obligations of US$361m under the RBZ Debt Assumption Act.

However, 299 transactions with a value of US$861m were rejected for double-dipping and lack of supporting documents.

Mangudya further said the balance of transactions with a value of US$457m “are being processed for finalisation by February 29, 2020”.

The validation of blocked funds and the proposed issuance of financial instruments to cover unsettled foreign liabilities comes at a time when companies are increasingly finding it difficult to continue getting supply of critical raw materials on credit because offshore suppliers are now demanding pre-payments until the legacy debts have been settled.

Most financial results for local companies, published recently, show that delays in settling foreign obligations were weighing down the operations of firms that have lodged their applications for relief with the central bank.

This has seen companies with significant foreign debts sinking deeper into dire straits due to currency volatility and exchange rate fluctuations, with their balance sheets being increasingly eroded and foreign currency liabilities ballooning.

This has left most companies technically insolvent and on the brink of bankruptcy.

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