Every June, for those with a huge passion for wildlife, is a beautiful time to watch the world’s biggest wildlife migration in Serengeti, Tanzania. There would be so much excitement among the animals, especially the 1.3 million Wildebeest, the 400,000 Gazelles and over 50,000 zebras, among the over 2 million herbivores that endure the 250 km journey. The Masai Mara, in South-Western Kenya, would be the coveted destination as the search for pastures will be generating the excitement and hope. But with the promised land so far with many dangers and pitfalls, not all will make it. The lions, leopards, cheetahs, hyenas and other predators wait for their turns as easy prey come along. The long hunting nights will be over, at least for a while. And indeed the Grumeti river crossing is the pinnacle of all. It will be beginning of the Crocodile Meat Festival. Crocodiles need not ambush the prey, but they just wait as prey comes trampling on them as the hordes of animals cross the Grumeti river, indeed the beginning of the festival.
The Great animal migration in Tanzania to Kenya and vice versa, the endless pilgrimage in water and pastures, reminisces the current journey Zimbabwe companies are taking from the hyper-inflation environment into the dollarized era. The folk-stories at Renaissance Bank, the travails of Lobels Bakeries, the humbling of Rio Zim, the troubles of Steelnet and the jetlegs at Air Zimbabwe, among many struggling companies, mirror the dangers of crossing the Grumeti river. The 5 years to 2008 that was characterized by high inflation created, unfortunately, a very poor breed of management among some corporates in Zimbabwe.
Institutional recklessness, which indeed was an important element for one to survive during high inflation, has unfortunately been carried over to the dollarized environment. And its claiming scalps! The many rivers of inflation that criss-crossed the Zimbabwe business environment, the blessed rivers of life then, would absolve all who cared to get baptism! And all bad decisions and debts would be washed away with the current! The government and all who borrowed in local currency before February 2009 were forgiven when the economy dollarized. They are all free today of their past ZW$ obligation, and the great migration, among pomp and fun-fare, started towards dollarisation. The promised land of dollarisation had adverts showing highways devoid of price control, exchange control regulation and with free access to foreign exchange! And indeed it was a good journey into the promised land.
Unfortunately crossing the Grumeti river has never been easy. Surviving a biting liquidity crunch has not been easy for AIG, Lehman Brothers, UBS, Northern Rock and many other EU and American companies. Governments in the EU and US fell over each other pumping billions of dollars to ease the crunch and save their economies. It therefore clear how much bleeding and disaster it is for Zimbabwean companies in taking debt dosages with interest rates above 20%,and at times over 35% per annum.
Crocodiles of bankruptcy now patrol these same debt rivers that once had the waters of salvation during hey days of inflation when borrowing was fashionable. Today all that carelessly go for a dip are mauled. Red Star, PG Industries, Steelnet, Lobels, Rio Zim, to name but a few giants, have not escaped the jaws of the debt crocodiles. The burden of interest cost on debt has compromised the strength of their cash flows. Many such troubled companies as Rio Zim may have solace and excitement in putting press statements about how conscious they are about their gearing position. But press statements, for what they are, are just statements. They don't change poor operating models and soon, corporate egos that could swim during inflation will find buoyancy the most difficult thing to maintain in the still waters of dollarisation that, unbeknown to those attempting to cross the Grumeti River, has huge undercurrents and crocodiles that will sweep them away.
Unfortunately the banking sector has no capacity to carry the excesses of sick companies, neither do creditors. Bankers are grappling with their own problems with regards non-performing loan, reported last recently above 30% of loan books. These are bad decision coming back to haunt otherwise good intentions by bankers that, in retrospect, were recklessly implemented. But as always, bankers get blamed for all bad debts, whilst the borrowers get very little remorse. When a debt goes bad, it’s the banker that made a bad decision, not the borrower! And indeed many borrowers in Zimbabwe still court the hyper-inflation mentality of yester-year where they borrow recklessly with no intention or repaying back the money. This is over-trading with criminal connotations! And indeed the recent press reports by some policy makers making gestures that seem to condone the behaviour that encourages borrowers not to repay their debts is very regrettable.
The market mechanism is very clear in dealing with the weak and inefficient. Even the natural animal habitat has a very efficient way of regulating the numbers, including that all human beings die at some stage. We can’t live forever, save for our souls. Its time therefore that policy makers and entrepreneurs contend with the possibilities and indeed realities of companies going under, no-matter how big. But bankers will always be at the centre of most storms in crises because the notion, an erroneous one, will always exist that they have to give everyone money. And considering the small balance sheets and tight capital positions with most banks in Zimbabwe, bankers are better off shunning big deals. It’s very unfortunate that the big companies need big monies to restructure, but when they collapse, they go down with the banks that would have stepped in to assist. And indeed the market and jury will be right to pass a verdict condemning the banker for having lacked prudence and oversight.
But that is however not the desirable path for Zimbabwe that has unemployment rate above 60% and desperately needing a vibrant middle class to pull the economy up. Although Italy and Germany would have economies centered on small companies, Zimbabwe desperately needs a handful of big companies that make a huge difference in employment number. Unfortunately globalization has come and its there to stay. A chat with Republicans in America will reveal how much they don't like the Chinese for having stolen millions of American jobs by providing cheap goods that have driven hundreds of big US companies out of business. Many companies such global brands as Motorola, BMW, Apple, Nokia etc now outsource and at times set up plants in low-cost production zones around the world. Terry Gou’s Hon Hai company, the biggest contract manufacturer of electronics in the world with its biggest plant in Shenzhen, China, exports over $50 billion worth of goods to such companies as Apple, Nokia, Sony, Dell and a host of others. The competitive issue therefore nowadays is not really about cost and availability of capital alone as many in Zimbabwe companies believe. It’s much broader, encompassing supply chain efficiencies, productivity, technology, labour and everything that affects the final total cost and quality of products. Why would a men's suit cost $20 retail in China and yet a poor quality one cost $90 in Express Stores? A tie would cost $0.30 in China whilst getting one locally in Enbee for a school kid is around $5! Don't we export the cotton to China? Would the huge price differential be explained by the high cost of capital alone?
Definitely capital is important to set up the machinery and secure all important production elements, but there is much more that needs to gel with capital availability to make a producer very competitive, the very reason why even countries with cheap and available capital such as the US have been seeing companies relocating to China and other low cost countries. And the problems confronting Zimbabwean companies seem to be converging in huge numbers: inefficient and expensive labour, poor infrastructure, energy challenges, weak domestic market and of course lack of capital. Indeed the road towards bankruptcy is still very wide, and many more companies, inasmuch as it hurts, are taking their steps towards their destiny. It’s a way the market operates, and as others close, new ones get born. The major temptation that is hastening the whole bankruptcy dilemma is overtrading – thus borrowing more than what the balance sheet can sustain and accruing creditors at a very fast rate with only but hope that probably a miracle will happen to correct the situation. And unfortunately miracles of such nature have since gone with inflation.
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