BARBARIANS AT THE GATE!!

The year is coming to a close and most things are indeed counting down to 31 December, from financial year ends to calendars and so on. But in the business world, so much remains unclear and unresolved. A huge number of big companies in Zimbabwe still suffer from high gearing levels, and there is no indication that the cost of borrowing will climb down significantly in the new year. The debt burden will most likely increase and indeed worsen for some corporates whose business models have not been generating sufficient cash to service the big loans sitting on their balance sheets. The flow of credit has significantly improved in the economy, but that has not translated to ameliorated risks in the economy.

Banks were sitting on $1.6 billion worth of loans in January and that has increased significantly to about $2.7 billion currently. A casual analysis of these statistics will indeed conclude that more credit has been flowing into the economy and that should have seen a massive decrease in cost of credit and ameliorating wider economic risks. But alas, the cost of credit has remained pricey, in extremes of 60% per annum whilst economy-wide risks have been amplifying as big companies such as RioZim struggle to remain afloat, whilst some of the flag-bearers of yester-year such as African Sun continue to post huge losses. Therefore a closer analysis of the huge piles of debts sitting on corporate balance sheets and the obtaining high cost of credit will reveal that indeed the build-up in the quantum of loans to $2.7 billion is, to some significant extent, a result of ‘interest’ cost build up other than the real flows of fresh money into the credit markets.

The stock market, which to some extent is a market that measures the pulse of the economy, has concluded already this year that earnings are poor and there is no need for optimism. From a replacement cost valuation perspective, most of the companies on the Zimbabwe stock exchange will appear to be trading at a huge discount. African Sun for example, with all its beautiful hotels constructed by brick and mortar and the ever smiling front office personnel, cannot be surely valued at $7 million by the market! That is not enough to build one 5-star hotel, moreso for a hotel group with some good brand and unquestionable goodwill? But a closer analysis of its liabilities and net cash-flows tells a completely different story about its ability to generate positive earnings. And in the ensuing guesswork, the market cannot be faulted for valuing African Sun at just $7 million, a hotel group that has posted cumulative losses of $17.6 million since 2009 and with no clear sign of when it will return to profitability.

Indeed that adjustment mechanism to the normal environment has been very difficult for African Sun whose balance sheet, like those of many of big corporates in Zimbabwe, continue to struggle with high costs of funding and stubborn operating costs. The high cost of funding and runaway operating costs are indeed the barbarians manning the gates to profitability for most companies in Zimbabwe.

Low inflation, a misleading achievement

Although inflation has averaged less than 5% per annum, and will likely remain subdued in the coming year, the challenges pertaining to operating costs increasing much faster than revenue for the majority of corporates remain the biggest headache in running businesses in Zimbabwe. Dollarisation has brought sanity in the consumer goods market to the satisfaction of policy makers, but it has not safeguarded the real costs of doing business, the real dilemma facing companies today in striking the balance to increase revenue whilst remaining profitable. The real costs of doing business have been ballooning, from labour to energy costs. Gone are the days in 2008 and before when real wages averaged $8 per month whilst energy and all other costs were indirectly subsidised by the government through the excessive printing of money to cover the huge budget deficits.

The ever increasing minimum wages and the very difficult labour laws pertaining to retrenchments means that companies will continue to carry excess staff at a time capacity utilisation and productivity levels do not warrant such staff numbers. Funding options available to undertake retrenchments remain very narrow and dangerous, more so when the credit markets are tight and corporate profitability still very low. Even parastatals such as NRZ and Air Zimbabwe have hit very difficult times being saddled with excessive staff levels that are not doing anything but still getting paid.

The airline industry is a troubled one globally, with American Airlines, one of the biggest in the world, having filed for bankruptcy two weeks ago to seek protection from its own employees and creditors. All network carriers in the US have been hopping in and out of chapter 11 bankruptcy to remain afloat. Air Zimbabwe has over $1,300 employees manning just 5 planes, half of which are rarely up and running always. Filing for bankruptcy could indeed be the only way out for Air Zimbabwe so that it starts on a good plate unless the government and new technical partners marshal massive resources for its bailout.

With elections looming and civil servants not having been accommodated for a pay-rise in next year’s budget, the complete resuscitation of the national airline may find sympathisers, but the money may not just be available. Evaluating all these huge operational challenges and inefficiencies bedevilling companies reveal a sad picture that indeed inflation in Zimbabwe could be among the lowest in Africa, coupled with prudent fiscal policies and very stable exchange rate regime, but still running profitable companies remains the biggest challenge in this country.